A closer look at Canada’s ‘oiliest’ bank

If you’re looking for oil price forecasts, bank analysts probably aren’t your best bet. Robert Sedran at CIBC World Markets admits as much in a new report looking at the sector’s sensitivity to weaker energy prices.

But Canada’s “oiliest” bank, Canadian Western Bank, which is headquartered in Edmonton and has 42% of its loan book in Alberta, warrants a closer look.

Oil and gas production loans account for only 1% of CWB’s portfolio, and fell 6% on an annual basis in the first quarter of fiscal 2015. But Mr. Sedran isn’t all that worried about its direct exposure to the energy sector.

“More problematic is the indirect exposure (the one that flows through the economy), which cannot be quantified,” he told clients.

“Moreover, when so much of its balance sheet is deployed in that province, the line between the direct and indirect exposure becomes blurred and the distinction becomes far less meaningful.”

Mr. Sedran believes net interest income is the earnings driver investors should focus on most.

He’s pretty sure loan losses will rise, particularly since CWB’s are below average as a percentage of pre-tax income.

But the analyst also pointed out that higher loan losses are a bigger problem for Canada’s larger banks, with a 50% provision increase for CWB producing a 6% reduction in his earnings estimate, compared to an average cut of 8% for the bigger banks.

CWB’s revenues, however, are a different story since the bank relies on net interest income much more than its larger peers.

More than 80% of the bank’s revenue comes from this earnings driver.

Assuming loan growth is cut in half (yet remains positive) and CWB’s net interest margin falls by five basis points, Mr. Sedran expects his fiscal 2016 earnings estimate would fall by 12% — much more significantly than the larger banks.

“We are not prepared to get quite this aggressive with our estimates, but do feel it is appropriate to pull them back to reflect a stubbornly more challenging top-line outlook as we look beyond the current year,” he told clients, maintaining his 2015 EPS forecast of $2.70 and cutting his 2016 outlook to $2.85 from $2.90.