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FOR: CANADIAN WESTERN BANK
TSX SYMBOL: CWB
Date issue: June 01, 2017
Time in: 7:00 AM e
Attention:
Positive loan growth and strong growth of relationship-based branch-raised deposits
Higher net interest margin compared to last year and last quarter
Adjusted cash earnings per common share of $0.59
EDMONTON, ALBERTA--(Marketwired - June 1, 2017) - "Strong second quarter results from CWB Financial Group demonstrate continued success in executing our balanced growth strategy. Highlights this quarter include very strong annual earnings growth, positive loan growth and strong growth of stable, relationship-based branch-raised deposits. We continue to support our solid operating performance with a very strong capital position, and credit quality remains stable with loan impairments and provisions for credit losses consistent with expectations," said Chris Fowler, President and CEO. "We recently celebrated the one year anniversary of our successful core banking system implementation. I'm pleased to report we are starting to realize the benefits of this transformative investment in progress toward both improved client offerings and enhanced capital and liability management."
"We have clearly defined strategic objectives. They include balanced growth of both loans and funding sources, a more balanced geographic footprint and broader diversification within targeted sectors of Canada's banking industry," continued Mr. Fowler. "The growing contributions of our businesses in Ontario are very important in this respect. Strong performance within CWB Optimum Mortgage, National Leasing, CWB Maxium and the addition of CWB Franchise Finance contributed to a notable 42% increase in CWB's Ontario-based lending exposures over the past year, as well as our strategic industry diversification."
"CWB's focus is to deliver unique, full-service commercial and personal banking experiences to business owners. We are strategically diversifying outside of Western Canada to significantly expand our addressable market without compromising the competitive advantage conferred through our focused approach. Notwithstanding our purposeful expansion strategy, personal relationships tied to our network of 42 branches continue to represent the heart of our business. We are broadening these relationships with the help of our new core banking system to go beyond highly-valued lending solutions. Our client relationships increasingly incorporate flexible cash management and business savings arrangements, as well as the opportunity to provide complementary personal banking and wealth management solutions. Going forward, we will continue to execute on our strategy and capitalize on both our broader reach and the ongoing transformation of the financial services landscape. This will increasingly leverage our technology investments and related initiatives to deliver exceptional client experiences and build full banking relationships both within and beyond our branch footprint. Our dedicated, caring teams across the organization are excited about the future, and ready to help clients grow."
Second Quarter 2017 Highlights(1)(compared to the same period in the prior year)
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-- Strong operating performance, with pre-tax, pre-provision income (teb)
of $90.8 million, up 4% and common shareholders' net income of $47.6 million, up 48%; strong growth of net income partly reflects the impact of energy-related credit provisions last year. -- Diluted and adjusted cash earnings per common share of $0.54 and $0.59, up 35% and 44%, respectively, with changes reflecting factors noted above and the issuance of common shares in July 2016. -- Loan growth of 5%. Sequential loan growth was 2% and included increases in all provinces. -- Stable deposits, with strong, 9% growth of relationship-based branch- raised funding including a very strong 15% increase in lower-cost demand and notice deposits. -- Net interest margin (teb) of 2.55%, up eight basis points from both last year and last quarter. -- Provision for credit losses as a percentage of average loans of 25 basis points, down from 78 basis points last year and 27 basis points last quarter. -- Stable gross impaired loans as a percentage of total loans of 0.62%, compared to 0.68% last year and 0.57% last quarter. -- Very strong Basel III regulatory capital ratios under the Standardized approach for calculating risk-weighted assets of 9.6% common equity Tier 1 (CET1), 10.9% Tier 1 and 12.7% Total capital.1. Highlights include certain non-IFRS measures - refer to definitions
following the table of Selected Financial Highlights on page 22.
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Canadian Western Bank (TSX:CWB) (CWB) today announced strong second quarter financial performance including very strong earnings growth from the same quarter last year, positive loan growth, strong growth of relationship-based branch-raised deposits, higher net interest margin, stable credit quality and very strong regulatory capital ratios. Pre-tax, pre-provision income (teb) of $90.8 million was up 4% and common shareholders' net income of $47.6 million was 48% higher. The significant increase in net income was driven by a 67% decline in the provision for credit losses, primarily reflecting the impact of specific allowances recorded against energy loans last year. Growth of total revenues also contributed to the bottom line, with net interest income and non-interest income both up 5%. These factors were partially offset by increased non-interest expenses, acquisition-related fair value changes and higher preferred share dividends. Average loan balances were up 5% from the second quarter last year, and net interest margin (teb) of 2.55% was up eight basis points. Higher net interest margin partly reflects CWB's improved funding mix, including the benefit of very strong 15% growth of lower-cost demand and notice deposits within branch-raised funding. Diluted earnings per common share of $0.54 and adjusted cash earnings per common share of $0.59 were up 35% and 44%, respectively, with growth driven by the factors noted above, partially offset by the 2016 issuance of common shares.
Compared to the prior quarter, pre-tax, pre-provision income and common shareholders' net income were both 4% lower. Net interest income (teb) was down 2% as the positive impacts of 1% growth of average loans and an eight basis point increase in net interest margin (teb) were more than offset by three fewer interest-earning days. Non-interest income was up 4% and the provision for credit losses was 12% lower. Non-interest expenses were up 2% during the quarter. Diluted earnings per common share and adjusted cash earnings per common share were down 4% and 3% on a sequential basis, respectively.
Year-to-date pre-tax, pre-provision income (teb) of $185.7 million was 8% higher and common shareholders' net income of $97.1 million was up 15% from last year. Both metrics benefitted from the 7% increase in net interest income and 17% higher non-interest income. Higher net interest income reflects 7% growth of average loans and a four basis point increase in net interest margin (teb). The higher growth rate of common shareholders' net income as compared to pre-tax, pre-provision income primarily reflects the 42% decrease in the provision for credit losses. These factors were partially offset within common shareholders' net income by increased non-interest expenses, acquisition-related fair value changes, and higher preferred share dividends. Diluted earnings per common share and adjusted cash earnings per common share of $1.10 and $1.20, respectively, were up 6% and 12%, from last year.
Positive loan growth with continued strategic diversification and strong growth of lower-cost, relationship-based branch-raised deposits
Total loans at April 30, 2017 were up 5% from the same period last year and 2% higher than the prior quarter. Of note, the sequential increase included positive growth across all provinces. The composition of year-over-year growth by portfolio segment and geography was in line with our expectations. Growth within personal loans and mortgages continued to be very strong with a 21% increase from a year ago driven by ongoing strong performance within CWB Optimum Mortgage. General commercial loans also delivered double-digit growth with a 10% year-over-year increase. This included contributions from CWB Maxium and the CWB Franchise Finance portfolio, both acquired in fiscal 2016. Growth within these categories contributed to a 42% annual increase in CWB's Ontario-based lending exposures and a greater proportion of total loans represented by our general commercial and personal mortgages segments.
These developments are fully aligned with the strategic diversification objectives embedded within CWB's balanced growth strategy. Along with ongoing strong growth of both loans and funding sources, our balanced growth objectives include further geographic and business sector diversification within targeted lending segments. We remain committed to delivering double-digit annual loan growth whenever prudent. Due to relatively moderate growth in the first half of the year, it will likely be challenging to deliver double digit growth on a consolidated basis in fiscal 2017. Net loan growth within Alberta and Saskatchewan is expected to remain moderate this year due to the lagging impact of the 2015 - 2016 regional recession. However, our pipeline of new lending opportunities in these provinces is expanding as the economic backdrop improves. On this basis, and with continued strong performance from CWB's business lines with a national footprint, we expect that overall loan growth will continue to accelerate in the second half of this year. Regardless of economic factors, we will continue to focus on growth of secured loans that offer an appropriate return and acceptable risk profile.
Another key strategic objective, supported by the capabilities of our new core banking system, is to increase the level of relationship-based branch-raised deposits. These core funding products are typically lower cost than non-branch-raised sources. Branch-raised deposit products include various business savings, cash management, and bare trustee accounts. With the exception of bare trustee accounts, these are tools which help our banking clients conveniently manage their business and personal finances.
We consider growth within these product categories to demonstrate success in strengthening key, full-service client relationships, primarily tied to our network of 42 branches within Western Canada. Second quarter branch-raised deposits were up 9% from the same period last year, and 3% higher than the prior quarter. The year-over-year and sequential increases in branch-raised deposits included very strong growth within lower-cost demand and notice deposits of 15% and 5%, respectively.
Ongoing enhancements to CWB's client experience in support of full-service client relationships
Implementation of the new banking system has enabled CWB to upgrade our client experience through a number of targeted initiatives. For example, we have improved our digital banking experience through strategic improvements to CWB Direct Online Banking. The updated design provides a more consistent visual experience across CWB's digital platforms and complements new financial and communication tools within CWB's mobile banking app. We also recently renewed our processing agreement with Everlink and expanded the scope of services to enable CWB to offer tap-enabled debit cards to our clients for the first time. The release of CWB PayHQ, in partnership with Payfirma, on May 1, 2017, represents the addition of a fully integrated, omni-channel payment technology platform to our growing portfolio of business services products, and another step forward to enhance CWB's full-service banking experience for business owners. We also launched Motive Financial, a new brand for CWB's on-line bank, with a focus on creating valuable savings opportunities for clients from coast-to-coast. Together these initiatives are expected to improve the convenience and overall user experience of our suite of business and personal banking tools, and support development of broader, multi-product client relationships.
Stable impaired loans and provision for credit losses consistent with expectations
Overall credit quality is consistent with expectations. Gross impaired loans totaled $137.8 million and represented 0.62% of total loans, compared to $145.0 million or 0.68% last year, and $124.4 million or 0.57% last quarter. The second quarter provision for credit losses of 25 basis points of average loans was at the low end of our expected full-year range of 25 to 35 basis points. This was down from 78 basis points in the same period last year and 27 basis points last quarter. On a year-to-date basis, the provision for credit losses as a percentage of average loans was 26 basis points, down from 48 basis points a year ago. Abnormally high second quarter and year-to-date provisions last year reflect specific allowances related to energy loans, as we took a proactive approach to resolve positions within CWB's small portfolio of loans to oil and gas producers. This portfolio now represents less than 1% of our total loans, and we do not expect material credit impacts related to remaining oil and gas loans.
We continue to carefully monitor the loan portfolio for signs of weakness resulting from the lagging impact of the 2015 - 2016 regional recession. While Alberta-based loans represent 35% of CWB's overall portfolio, gross impaired loans within Alberta of $64.7 million represent 47% of total impairments at April 30, 2017. The level of impaired loans in Alberta as a percentage of total impairments was down from 55% last year and up from 41% in the prior quarter.
Although we expect periodic increases in the balance of impaired loans across the portfolio, we remain confident that our combination of disciplined underwriting, secured lending practices and proactive account management will continue to mitigate the financial impacts of further increases in impairments. Loss rates on current and future impaired loans are expected to be consistent with CWB's prior experience, where write-offs have been low as a percentage of impaired loans.
Efficient operations and operating leverage
The second quarter efficiency ratio (teb) was 47.5%, up from 46.7% last year and 46.0% in the previous quarter. The year-to-date efficiency ratio (teb) was stable at 46.8%. Operating leverage, which is calculated as total revenue (teb) growth less non-interest expense growth, excluding the pre-tax amortization of acquisition-related intangible assets, over the past twelve months, was negative 2.0% as 5% year-over-year growth in total revenues (teb) compared a 7% increase in non-interest expenses. Expense growth compared to the first half of last year was partly attributable to implementation of our new core banking system, as well as expenses related to CWB Maxium and CWB Franchise Finance, both acquired in fiscal 2016. On a year-to-date basis, operating leverage was flat.
One of our key priorities is to deliver consistent increases in adjusted cash earnings per share through business growth and strategic investment while maintaining effective control of costs. CWB's ongoing investment in people, technology and infrastructure is expected to contribute to long-term shareholder value through improved financial performance in future periods. In view of the level of necessary future investment to facilitate ongoing implementation of our strategic direction, we expect CWB's efficiency ratio to fluctuate at levels moderately higher than the recent past. We are committed to disciplined control of all discretionary expenses, and we expect to deliver positive operating leverage over the medium-term.
Prudent capital management and dividends
At April 30, 2017, CWB's capital ratios were 9.6% CET1, 10.9% Tier 1 and 12.7% Total capital. With a very strong capital position under the more conservative Standardized approach for calculating risk-weighted assets, CWB is well-positioned to continue to execute against our balanced growth strategy. Ongoing support and development of each of CWB's core businesses will remain a key priority, and we will continue to evaluate potential strategic acquisitions.
We evaluate common share dividend increases every quarter against our dividend payout ratio target of approximately 30% of common shareholders' net income. This quarter's common share dividend of $0.23 per share is consistent with the second quarter last year and the prior quarter. The dividend payout ratio this quarter was approximately 42%, partly reflecting the impact of a higher share count on total dividends paid. The timing of future dividend increases will also be influenced by capital requirements under the Standardized approach to support ongoing strong and balanced asset growth.
Impacts of publicity related to challenges faced by a competitor to CWB Optimum Mortgage
Recent publicity related to challenges faced by the largest originator of Alt-A mortgages in Canada has resulted in both higher-than-normal mortgage application volumes for CWB Optimum Mortgage, and increased deposit pricing within the broker deposit funding channel.
Term deposits raised through the broker network represented 34% of our total funding at April 30, 2017, down from 38% last year. As discussed above, our strategic focus is to increase relationship-based branch-raised deposits, with particular emphasis on lower cost demand and notice deposits. Total branch-raised deposits increased to 57% of total deposits this quarter, up from 53% last year. Demand and notice deposits now comprise 39% of total deposits, up from 34% one year ago. The broker deposit network remains an efficient source for raising insured fixed term retail deposits and has proven to be a reliable and effective way to supplement core funding over a wide geographic base. Of note, we raise only fixed-term deposits through this funding channel, with terms to maturity between one and five years, and we do not offer a High Interest Savings Account (HISA) product.
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