Canadian Western Bank cashes in on Home Capital’s woes and hikes its dividend

CALGARY – In its push to diversify away from oil and gas lending, Canadian Western Bank has grown its loan book in Ontario and British Columbia, where it has been able to capitalize on the troubles of competitor Home Capital Group Inc.

Edmonton-based CWB Financial Group released better than expected third quarter results Thursday, as it aimed to reduce exposure to the troubled markets of Alberta and Saskatchewan and sought growth in the Canadian housing market, especially in Ontario and B.C.

“We’ve managed down our energy exposure,” CWB president and CEO Chris Fowler said during an earnings call. The banks total outstanding loans to the oil and gas industry fell 49% to $131 million compared to the same period last year.

The bank’s residential lending unit, CWB Optimum, processed more mortgage applications “due to the challenges faced by its largest direct competitor and sequential growth accelerated moderately from the second quarter.”

CIBC Capital Markets analyst Robert Sedran said Home Capital’s troubles have allowed CWB to be pickier about mortgage approvals. “The most recent business that they’ve been getting has been higher quality because they’ve been able to be more selective because the supply of credit has been less plentiful than it had been,” Sedran said.

Embattled Home Capital has been heavily criticized for writing mortgages that misstated borrowers’ incomes, penalized by the Ontario Securities Commission, faced a funding crisis and announced it would sell off $1.5 billion in mortgages.

Meanwhile, CWB’s personal and mortgage loans were up 22 per cent in the quarter from the same period a year earlier as CWB beat financial analysts’ expectations.

The bank reported $56 million in net income in the third quarter, up 24 per cent from $45 million during the same period a year earlier. The bank also hiked its dividend four per cent to $0.24 per quarter, marking the first dividend increase since 2015 after West Texas Intermediate and global oil prices collapsed.

Both Alberta and Saskatchewan have suffered through prolonged recessions, which weighed on CWB’s overall loan growth. However, Fowler said both provinces are rebounding and CWB expects loan growth in the region to resume.

Fowler also addressed concerns over the cooling Toronto housing market, which he called “moderately negative but not significantly negative” for CWB. He said that only three per cent of the bank’s mortgages were for houses worth over $1 million and that CWB was focused on homes priced between $400,000 and $600,000.

The bank had also increased its business and equipment loans in the quarter, so while some of its growth came from mortgages the bank’s loans are diversified in other industries as well. General commercial loans were up 8 per cent from a year earlier, Sedran said.

“Our risk appetite is conservatively focused on affordably priced homes,” chief financial officer Carolyn Graham said, adding that CWB requires larger down payments on expensive homes and the bank is “selective” in approving mortgages.

Sedran also said the growth in CWB’s gross impaired loans – up to 0.74 per cent from 0.49 per cent – were understandable given challenges in Alberta and other parts of the economy. “While there will be losses when you have an economic downturn, and you have impaired loans surfacing, I think the pace of impaired loan formation may be a little faster or a little larger than actual losses.”

“Credit quality remains entirely consistent with our expectations,” Fowler said on the call.

Underscoring the benefits of greater diversification of Western Canada, Ontario remained a beacon of strength, with loan growth up 34 per cent year over year, Barclays Capital analyst Joseph Ng wrote in a note.

Ng said low oil prices continue to weigh on CWB’s growth in its home market. “The lasting impact from low WTI continues to resonate in the energy sensitive provinces, as loan growth in Alberta was down 5 per cent year over year… and down 2 per cent year over year in Saskatchewan,” he said.

Financial Post

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