Mr. Chris Fowler reports
CWB REPORTS VERY STRONG LOAN GROWTH, SOUND CREDIT QUALITY AND SOLID FINANCIAL RESULTS
Canadian Western Bank (CWB) had a solid first quarter financial performance, including very strong 4-per-cent quarterly loan growth, sound credit quality and relatively stable net interest margin.
First quarter 2015 highlights from combined operations(1)(2) (compared with the same period in the prior year)
- Common shareholders' net income of $54.2-million, up 3 per cent;
- Diluted earnings per common share of 67 cents, and adjusted cash earnings
per common share of 69 cents, both up 3 per cent;
- Loan growth of 4 per cent in the quarter and 12 per cent over the past 12 months;
- Net interest margin of 2.60 per cent (taxable equivalent basis (teb)), compared with 2.64 per cent last year and
2.56 per cent in the previous quarter;
- Solid Basel III regulatory capital ratios using the standardized
approach for calculating risk-weighted assets of 7.9-per-cent common equity Tier
1 (CET1), 9.2-per-cent Tier 1 and 12.2-per-cent total ratio; Basel III leverage ratio of
7.7 per cent, compared with the regulatory minimum of 3 per cent;
- Provision for credit losses as a percentage of average loans of 16 basis
points, compared with 19 basis points last year and nine basis points in
the previous quarter;
- Subsequent to quarter-end, CWB announced refinements to its long-term
growth strategy with definitive agreements to sell its property and
casualty insurance subsidiary, Canadian Direct Insurance (CDI), and the stock
transfer business of its subsidiary, Valiant Trust Co., for combined
proceeds of $230-million in cash.
Notes:
- Highlights include certain non-IFRS (international financial reporting standards) measures.
- As a result of definitive agreements to sell CDI and the stock transfer business of Valiant, CWB has defined the contributions of both CDI and Valiant's stock transfer business as "discontinued operations," the remaining operations as "continuing operations," and the total continuing operations and discontinued operations as "combined operations."
Compared with the same quarter last year, common shareholders' net income of $54.2-million was up 3 per cent. Diluted earnings per common share of 67 cents and adjusted cash earnings per common share of 69 cents both increased 3 per cent. Total revenues (teb) of $159.9-million were up 4 per cent, primarily reflecting the positive effect of strong 12-per-cent loan growth, partially offset by lower net interest margin and non-interest income, with the latter attributed to reduced gains on the sale of securities and, within discontinued operations, elevated insurance claims expense.
Compared with last quarter, common shareholders' net income was 7 per cent lower, as the combined positive effects of very strong loan growth and higher net interest margin were more than offset by lower non-interest income, mainly reflecting the one-time gain on sale of CWB's former Edmonton main branch premises in the prior quarter. Adjusted cash earnings per common share were down 5 per cent.
"First quarter financial performance within our core businesses was excellent. Very strong loan growth, sound credit quality and solid overall results demonstrate the ongoing strength of our business model," said Chris Fowler, president and chief executive officer. "The expected benefits of our recently announced strategic divestitures will further strengthen CWB's competitive position and the outlook for growth from continuing operations.
"Credit quality remains consistent with our expectations and we are working proactively with our clients to assess the impacts on their businesses from dampened expectations for economic performance in parts of Western Canada. As we do so, we will continue to support clients as we always have, through responsive service and disciplined, secured credit underwriting. CWB Group has grown and thrived through past cycles of economic volatility and commodity price declines, and we believe we are better positioned to maintain this trend today than ever before.
"The sales of Canadian Direct Insurance and Valiant Trust's stock transfer business to leaders in their respective industries resulted from a purposeful strategic assessment initiated early last year," continued Mr. Fowler. "While these two businesses delivered meaningful contributions to CWB Group over the past decade, redeploying the significant value to be generated by these transactions into our faster-growing core businesses is strongly aligned with our well-defined strategic direction, and we believe it will generate superior returns for CWB shareholders."
On March 4, 2015, CWB's board of directors declared a cash dividend of 21 cents per common share, payable on March 26, 2015, to shareholders of record on March 16, 2015. This quarterly dividend was consistent with the prior quarter and 11 per cent (two cents) higher than the quarterly dividend declared one year ago. The board of directors also declared a cash dividend of 27.5 cents per Series 5 preferred share, payable on April 30, 2015, to shareholders of record on April 23, 2015.
Fiscal 2015 performance target ranges
The performance target ranges established for the 2015 fiscal year, together with CWB's year-to-date performance from combined operations, are presented in the accompanying table.
2015 year-to-date 2015 target ranges
performance from for performance from
combined operations combined operations
Adjusted cash earnings per common
share growth(1)(2) 3% 5 to 8%
Loan growth(3) 12% 10 to 12%
Provision for credit losses as a
percentage of average loans(4) 0.16% 0.17 to 0.22%
Efficiency ratio (teb)(5) 48.0% 47% or less
Return on common shareholders'
equity(6) 13.5% 14.0 to 15.0%
Return on assets(7) 1.03% 1.07 to 1.12%
(1) Year-to-date performance for adjusted cash earnings per common share is the
current-year results over the same period in the prior year.
(2) Adjusted cash earnings per common share is calculated as diluted earnings per
common share excluding the after-tax amortization of acquisition-related
intangible assets and the non-tax deductible change in fair value of contingent
consideration (which represent non-cash charges that are not considered to be
indicative of continuing business performance).
(3) Loan growth is the increase over the past 12 months.
(4) Year-to-date provision for credit losses, annualized, divided by average total
loans.
(5) Efficiency ratio (teb) is calculated as non-interest expenses divided by total
revenues (teb) excluding the non-tax deductible change in fair value of
contingent consideration.
(6) Return on common shareholders' equity is calculated as annualized common
shareholders' net income divided by average common shareholders' equity.
(7) Return on assets is calculated as annualized common shareholders' net income
divided by average total assets.
Very strong first quarter loan growth was driven by continuing activity within CWB's markets, reinforcing its expectation for another year of double-digit growth in fiscal 2015. Overall credit quality is consistent with expectations, supporting CWB's view that the annual provision for credit losses will remain within the target range.
Compared with the same quarter last year, growth in adjusted cash earnings per common share was constrained by a four-basis-point decline in net interest margin (teb) and lower non-interest income, primarily resulting from lower net gains on securities and a decrease in net insurance revenues from higher claims expense this quarter. In the absence of increased insurance claims, growth in adjusted cash earnings per common share and key profitability ratios would all have been within CWB's target ranges.
Continued pressure on net interest margin is expected in view of the current very-low-interest-rate environment and the potential for further interest rate cuts by Bank of Canada, along with competitive factors and lack of steepness in the yield curve. While pressure on this key metric is expected to constrain revenue growth compared with expectations at the start of the year, CWB plans to prudently manage the growth of non-interest expenses in view of planned investment necessary to support future business growth. On this basis, the efficiency ratio target of 47 per cent or less is believed to be challenging but attainable. The first quarter efficiency ratio from continuing operations was 47.1 per cent.
The expected gain on sales from the recently announced strategic transactions involving CDI and Valiant will contribute more than $1.25 of earnings per common share upon closing, which will drive considerable outperformance on a full-year basis relative to CWB's published 2015 targets for combined operations for growth in adjusted cash earnings per common share and key profitability ratios. CWB intends to redeploy this capital in due course for strategic and accretive opportunities that are consistent with its risk appetite. CWB's primary areas of interest for potential strategic acquisitions are centred on opportunities in equipment finance and leasing, and wealth management.
Outlook for continuing operations
The outlook for the Canadian economy has been affected by low oil prices, with a rebalancing of expectations for regional strength. While the outlook for oil-exporting provinces has moderated, expectations for the rest of the country, including British Columbia, Manitoba and Ontario, have improved. Consensus forecasts continue to call for stable economic conditions and modest growth throughout most of Canada in 2015, supported by expectations for a strengthening U.S. economy, which could be further stimulated by the positive effect of low energy prices. The outlook for Alberta has weakened with reduced expectations for job creation, in-migration and GDP (gross domestic product) growth, while moderated levels of housing sector activity may persist in certain markets through the remainder of the year. However, the expected positive effects of lower interest rates and a weaker Canadian dollar on the overall domestic economy support CWB's expectation for continuing profitable growth.
Fiscal 2015 first quarter results conference call
CWB's first quarter results conference call is scheduled for Thursday, March 5, 2015, at 2 p.m. ET (12 p.m. MT). CWB's executives will comment on financial results and respond to questions from analysts and institutional investors.
The conference call may be accessed on a listen-only basis by dialling 647-788-4922 or toll-free 1-877-223-4471. The call will also be webcast live on CWB's website.
A replay of the conference call will be available until March 29, 2015, by dialling 416-621-4642 (Toronto) or 1-800-585-8367 (toll-free) and entering passcode 88518597.
SELECTED FINANCIAL HIGHLIGHTS
(in thousands of dollars, except per-share amounts)
For the three months ended
Jan. 31, 2015 Oct. 31, 2014 Jan. 31, 2014
Results from combined
operations(1)
Net interest income (teb --
see below) $ 136,442 $ 132,479 $ 125,239
Less teb adjustment 1,686 1,709 2,090
Net interest income 134,756 130,770 123,149
Non-interest income 23,422 27,057 28,531
Total revenues (teb) 159,864 159,536 153,770
Total revenues 158,178 157,827 151,680
Common shareholders' net
income 54,209 58,150 52,628
Earnings per common share
Basic(2) 0.67 0.72 0.66
Diluted(3) 0.67 0.72 0.65
Adjusted cash(4) 0.69 0.73 0.67
Return on common
shareholders' equity(5) 13.5% 15.0% 14.8%
Return on assets(7) 1.03 1.12 1.11
Efficiency ratio (teb)(8) 48.0 47.2 45.1
Efficiency ratio 48.5 47.7 45.7
Net interest margin
(teb)(9) 2.60 2.56 2.64
Net interest margin 2.57 2.53 2.60
Provision for credit losses
as a percentage of average
loans 0.16 0.09 0.19
Results from continuing
operations(1)
Net interest income (teb -
see below) $ 134,389 $ 130,563 $ 123,518
Less teb adjustment 1,468 1,505 1,842
Net interest income per
financial statements 132,921 129,058 121,676
Non-interest income 17,995 22,484 20,555
Total revenues (teb) 152,384 153,047 144,073
Total revenues 150,916 151,542 142,231
Common shareholders' net
income 52,405 56,883 49,066
Earnings per common share
Basic(2) 0.65 0.71 0.62
Diluted(3) 0.65 0.70 0.61
Adjusted cash(4) 0.66 0.71 0.62
Return on common
shareholders' equity(5) 13.1% 14.6% 13.8%
Return on assets(7) 1.01 1.11 1.05
Efficiency ratio (teb)(8) 47.1 46.1 44.7
Efficiency ratio 47.5 46.5 45.3
Net interest margin
(teb)(9) 2.59 2.55 2.64
Net interest margin 2.56 2.52 2.60
Results of discontinued
Operations(1)
Common shareholders' net
income $ 1,804 $ 1,267 $ 3,562
Earnings per common share
Basic(2) 0.02 0.01 0.04
Diluted(3) 0.02 0.02 0.04
Adjusted cash(4) 0.03 0.02 0.05
Per common share
Cash dividends $ 0.21 $ 0.20 $ 0.19
Book value 19.99 19.52 17.94
Closing market value 25.77 37.75 36.43
Capital adequacy(10)
Common equity Tier 1 ratio 7.9% 8.0% 8.0%
Tier 1 ratio 9.2 9.3 9.5
Total ratio 12.2 12.8 13.2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of dollars)
For the three months ended
Jan. 31, 2015 Jan. 31, 2014
Net income from continuing operations $ 54,183 $ 53,187
Common shareholders' net income from
discontinued operations 1,804 3,562
Net income 55,987 56,749
Other comprehensive income (loss), net of
tax
Available-for-sale securities
Gains (losses) from change in fair
value(1) (13,092) 2,058
Reclassification to net income(2) (462) (3,524)
----- -----
(13,554) (1,466)
Derivatives designated as cash flow
hedges
Gains from change in fair value(3) 9,151 1,804
Reclassification to net income(4) 3,412 (1,619)
----- -----
12,563 185
----- -----
(991) (1,281)
Comprehensive income for the period $ 54,996 $ 55,468
Comprehensive income for the period
attributable to
Shareholders of CWB $ 54,593 $ 55,132
Non-controlling interests 403 336
Comprehensive income for the period $ 54,996 $ 55,468
(1) Net of income tax of $4,923 (2014 -- $709).
(2) Net of income tax of $173 (2014 -- $1,129).
(3) Net of income tax of $3,091 (2014 -- $609).
(4) Net of income tax of $1,153 (2014 -- $547).
Items presented in other comprehensive income will be subsequently reclassified to the
consolidated statement of income when specific conditions are met.
We seek Safe Harbor.
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