Stock pick: Canadian Western Bank (CWB) is small but mighty

Lending growth outpaces the Big Six

Chart showing trailing 12-month stock performance of Canadian Wester Bank

If you invest in the Canadian market, it’s highly likely that you own at least one or two banks, if not more. After all, the financial sector is one of out three main markets (energy and materials are the other two) and our banks have generally been good investments over the years.

However, just because you have to buy banks in our market, doesn’t mean you must own one of the big five. In fact, some investors may find a better opportunity in a lesser known, but faster-growing operation: Canadian Western Bank (TSX: CWB).

This Edmonton-based company is downright tiny compared to the brand name banks. It has a market-cap of just $3.2 billion compared to $101 billon for TD Bank and has only about 40 branches, all located in Western Canada. It also pays a 1.98% dividend, which is much lower than its big bank peers.

Why in the world would you want to buy this when the other banks have more size, a better dividend and decent returns? One word: Growth.

READ: Life after Larry: Can new CWB CEO Chris Fowler match his predecessor’s example? »

If you just look at loan growth, which is one of the major indicators of a bank’s health, Canadian Western Bank has seen its loans grow by about 7% year-to-date, compared to between 1.1% and 6.2% for the biggest six banks.

Its earnings per share have also grown faster than other banks. Basic earnings per share grew by 18.5% in Q2 2014 over the year before, according to S&P Capital IQ. By comparison, Scotiabank’s EPS grew by 13.8% year-over-year, while TD’s grew by about 17%.

Then there’s stock price appreciation. Over the last 12 months, Canadian Western Bank’s share price has jumped by nearly 40%. TD and CIBC’s are up 30%, BMO has climbed 27% and Scotiabank’s is up by 26%.

Part of the reason for the better results is that it’s growing off such a low base to start with. The big banks are so large that that growth is naturally harder to come by. However, CWB is also more exposed to Alberta’s incredible economic growth than the rest of the banks.

Ian Cooke, a portfolio manger with QV Investors, points out that over 80% of the company’s loans are in Western Canada, with 40% of those in Alberta. He also says that they don’t do a lot of lending to energy producers, but deal mostly with the commercial sector.

On that basis alone, the company should continue to grow, says Cooke. More people are moving to Alberta — some will open up accounts with the bank — and more businesses are coming to the province to take advantage of the province’s robust economy. They’ll need loans and many will come to CWB.

It is slightly more expensive on a price-to-earnings basis than the rest of the banks — it’s trading at about 16 times earnings — but that’s because it’s growing faster. As long as Alberta continues to expand — and most economists think it will — then this bank should be a good bet.