Canadian Western Bank (Toronto: CWB) (OTC: CBWBF), unlike the large Canadian banks, is virtually a pure deposit and lending operation, explains Shawn Allen, contributing editor to Internet Wealth Builder.

Fully 88% of its revenues are from the net interest margin on lending and a further 4% is credit-related fees, for a total of 92% from lending. CWB primarily lends to commercial customers as opposed to individuals. The remaining revenue is from wealth management and trust operations.

Alberta and B.C. each account for about 32% of its loans and Ontario 24%. Saskatchewan and Manitoba together account for 8%, and the other provinces account for the remaining 4%.

The stock was hit hard by the pandemic last spring and ended 2020 down 10% to $28.82. But this year to date it has rallied 13%. Looking at the longer term, the stock remains down 22% from highs of about $42 reached back in 2014.

That’s despite the fact that earnings per share have grown 12% and book value per share is up 67% since the end of 2014. In 2014, CWB was trading at considerably higher multiples of earnings and book value.

As of its latest quarter, CWB appears to have come through the worst of the pandemic in very good shape and has resumed earnings growth as loan loss provisions have returned to normal levels.

In the first quarter of fiscal 2021, total loans grew 6% year-over-year, including 14% growth in Ontario. And its lower-cost, branch-raised deposits were up an impressive 20%.

After three quarters of earnings declines caused mostly by higher pandemic-related loan loss provisions, CWB’s earnings per share were up 10% year-over-year in its latest quarter. Revenues per share had continued to grow at an annual rate of 5% for most of 2020 but accelerated to 12% in the latest quarter.

On June 1, 2020, CWB closed the acquisition of iA Investment Counsel Inc., which operates under the brand names T.E. Wealth and Leon Frazer. This substantially increased its assets under wealth management from $2.3 billion to $8 billion, with offices in each of the six largest cities in the country.

A disappointing development is that its move to a more sophisticated and more advantageous method of calculating its risk-weighted assets and capital has been delayed until 2022.

The stock pays a quarterly dividend of $0.29 ($1.16 per year) to yield 3.6%. The dividend yield is reasonably attractive at 3.6%.

The trailing year adjusted return on equity (ROE) is good although not great at 9.5%. At my analysis price of $32.67, the price to book value ratio is quite attractive at 1.0. The trailing adjusted p/e is also quite attractive at 11.1.

CWB’s management notes its recent increased market share and states that the bank is growth-focused and positioned for accelerated growth. CWB’s share price could increase materially over the next year or two driven by both expected higher earnings and a potential return to higher trading multiples.

Bad loans are always a potential risk for CWB, but it has a strong track record in that regard. A weaker economy is also a risk, but its increasing geographic diversifications is lowering that risk.

Action now: Buy. CWB provides the opportunity to purchase a well-managed and growing small bank at book value.

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