
Canadian Western Bank
TSX:CWB

Canadian Western Bank
Canadian Western Bank (CWB), headquartered in Edmonton, Alberta, finds its niche in the vibrant financial ecosystem of Canada, specializing in business and personal banking that caters predominantly to Western Canada. Since its establishment in 1984, CWB has carved out a distinctive market position by focusing on small to medium-sized enterprises, commercial real estate, and specialized financial services. This focus allows CWB to maintain deep-rooted relationships with its clients, facilitating tailored financial solutions that larger banks might overlook. Its strategy rests on a unique combination of regional market knowledge with a personalized approach to banking, thus fostering a steadfast customer base that elevates its reputation and growth prospects in a concentrated geographical segment of the Canadian banking sector.
Enterprising and pragmatic, CWB's revenue model pivots around core banking services, including credit products, deposits, and cash management solutions, augmented by wealth management and trust services through its subsidiary arms. The bank generates income through interest on loans and charges on various financial products, deftly balancing traditional banking with niche offerings such as equipment financing and construction loans. By leveraging a rigorous risk management framework and a prudent lending strategy, CWB adapts to economic shifts within its operational regions, ensuring steady performance even amidst market fluctuations. This meticulous approach has not only cemented its reputation as a reliable financial partner for businesses and individuals but also secures its position as a resilient contender in the competitive landscape of Canadian banking.
Earnings Calls
Canadian Western Bank (CWB) reported a 6% revenue increase year-over-year, driven by targeted loan growth and improved net interest margins. However, elevated provisions for credit losses impacted adjusted EPS, which decreased $0.27 year-over-year amid challenging economic conditions. The net interest margin remained stable with a sequential increase in deposits by 5%, primarily in term deposits. Management anticipates continued growth in 2025, with adjusted earnings expected to rise due to improvements in margins and disciplined expense management, despite forecasted elevated credit losses gradually declining. A dividend of $0.36 per share was declared, up $0.02 from last year.
Good morning. My name is Jodi, and I will be your conference operator today. At this time, I would like to welcome everyone to CWB's Fourth Quarter 2024 Financial Results Conference Call and Webcast. [Operator Instructions]
I would now like to turn the call over to Chris Williams, Assistant Vice President, Investor Relations. Please go ahead, Chris.
Good morning, and welcome to our fourth quarter 2024 financial results conference call. We'll begin this morning's presentation with opening remarks from Chris Fowler, President and Chief Executive Officer; followed by Matt Rudd, Chief Financial Officer; and Carolina Parra, Chief Risk Officer. Also present today are Stephen Murphy, Group Head, Commercial, Personal and Wealth; and Jeff Wright, Group Head, Find Solutions and Specialty businesses. After our prepared remarks, they will all be available to take your questions.
As noted on Slide 2, statements may be made on this call that are forward-looking in nature, which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements. I would also remind listeners, we use non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance.
I will now turn the call over to Chris Fowler, who will begin his discussion on Slide 4.
Thank you, Chris, and good morning, everyone. Before we begin our review of the quarter, I want to address the reason behind the delay in the release of our fourth quarter earnings, as noted in our press release on December 7. Made in the process of finalizing our financial results, we've received a legal claim involving our subsidiary, CWB Maxium Financial. Upon receiving this claim, we immediately started an in-depth investigation. On the evening before the scheduled release of our fourth quarter financial results, new information came to light that necessitated we take additional steps to confirm that there was no material impact on our financial statements. As a result, we made the decision to delay our originally scheduled release.
As you've read, the claim relates to specific loans and includes allegations of unethical conduct by a sales agent of CWB Maxium. I want to emphasize that this individual had no lending approval authority and the specified loans were all processed through a rigorous credit approval framework, which includes a thorough review by an independent credit risk management function. The contract of the named sales agent has now been terminated.
We confirmed that the matters included in the claim have no impact on our financial statements and that no deficiencies in internal controls over financial reporting were identified related to this matter. Our external auditors have completed the required incremental audit procedures, and we published our Q4 2024 results and our annual audited financial statements earlier this morning. I appreciate your patience as we work through this matter.
With that context, we'll now turn to the quarter's financial and operational performance. This morning, we reported earnings that includes a 6% increase in revenue on a full year basis. Throughout the year, our team is focused on delivering targeted loan growth, and we optimized our funding to drive a significant improvement in our net interest margin. We also prudently managed expenses within the muted economy, which supported the delivery of an 8% increase in pretax pre-provision income and positive operating leverage on a full year basis.
In the fourth quarter, our teams remained focused on delivering a differentiated experience for business owners and their families, while supporting the integration planning process. We continue to retain deep relationships we have with our clients and the engagement of our teams remains strong.
Compared to the same quarter last year, our team delivered solid revenue performance. However, our pretax pre-provision income was consistent with the prior year as higher variable compensation costs partly offset our revenue growth. This year, our team has operated in an unusual operating environment and through their efforts, we continue to deliver our promise to our clients to meet the best bank for business owners. We've exited fiscal 2024 with a strong, resilient balance sheet and are well positioned to support prudent growth and solid financial results looking forward.
Our fourth quarter bottom line financial performance was also impacted by an elevated provisions for credit losses on impaired loans. The higher interest rate environment throughout 2024 has resulted in challenging conditions for Canadian businesses. While projected interest rate cuts will be constructive for credit outcomes, the prolonged higher interest rate environment resulted in an increase in gross-impaired formations in the fourth quarter above what we previously anticipated. We do, however, remain confident that our disciplined credit risk management and underwriting processes position us well in this stage of the credit cycle.
As we close out 2024, I'd like to sincerely thank all our team members for their significant efforts in a challenging operating environment this year. By leveraging their extensive knowledge of diverse Canadian industries and their ability to provide creative full-service financial solutions and customized advice, they continue to deliver the differentiated client experience to business owners we're known for. Through the efforts of our teams and the trust of our clients put in us to be their financial services partner, we have built a tremendously valuable franchise.
I'm excited about the future of Canadian Western Bank as we move to complete the acquisition of National Bank. The acquisition of CWB is aligned to National Bank's strategic plan to accelerate growth across all its lines of business, especially in Western Canada, and recognizes the embedded value of the bank we've built.
We're confident that the combination of our 2 banks will create incredible value for our clients, teams, communities and shareholders. We remain focused on completing the final step in the regulatory approval process and are confident we can close the transaction within previously announced timelines.
I'll now turn the call over to Matt who'll discuss our fourth quarter 2024 performance.
Thanks, Chris. Good morning, everyone. As shown on Slide 7, we delivered loan growth targeted to portfolios that provide full-service client opportunities. We delivered solid nationwide growth in our general commercial loan portfolio, which is up 4% on an annual basis. Our equipment financing and leasing portfolio also increased 4%, and our real estate project loans increased 7% from last year.
We've been signaling the expectation for stronger growth in the real estate project lending portfolio, and we're pleased with the strong performance this quarter, which was supported by strong new project starts and continued draws on projects from top-tier borrowers, primarily for low-rise multiunit housing and [indiscernible].
Limited new commercial mortgage lending opportunities met our risk-adjusted return expectations again this quarter as we maintain our disciplined lending approach in commercial real estate. Our commercial mortgage portfolio declined 7% compared to last year, driven by scheduled repayments and counts.
As shown on Slide 8, our teams grew franchise deposits by 5% on an annual basis, as demand and notice deposits remained at relatively consistent levels and term deposits increased by 14%. Demand notice deposits reflected new client growth, offset by declines in existing customer account balances over the past year as clients deployed asset savings. For clients that retained asset savings, we noted a continued preference for term deposits in the current interest rate environment.
With the solid growth in franchise deposits, we funded a lower volume of capital market and broker deposits, which declined 3% and 9%, respectively. These remain solid channels for us as part of our strategy to maintain diversified funding sources, but our preference is to raise franchise deposits, and our teams performed very well in this area over the last year.
Earnings performance compared to the same quarter last year is shown on Slide 9. In the current quarter, we incurred additional costs that were directly associated with the National Bank transaction, which had a $0.03 negative impact on diluted earnings per share. In the fourth quarter of 2023, we incurred noninterest expenses related to a reorganization of our operations, which had a $0.13 negative impact on diluted earnings per share. These expenses have been removed from our adjusted performance metrics in their respective quarters.
Adjusted EPS decreased $0.27 from the prior year, primarily driven by an elevated provision for credit losses in the current quarter. In the prior year, our total provision for credit losses of 11 basis points was well below our historical range of 18 to 23 basis points. Growth in revenue contributed $0.14 and outpaced the $0.13 EPS decline from the growth in adjusted noninterest expenses.
Within revenue, higher net interest income increased EPS by $0.10. That was primarily due to a 9 basis point increase in our net interest margin. Our noninterest income contributed $0.04. Higher noninterest expenses were primarily driven by an increase in variable and share-based employee compensation costs, an increase in deposit insurance costs and the continued investments to support our digital and technology capabilities.
A higher effective tax rate reduced EPS by $0.01 as we had a true-up to our tax provision to reflect the final proportion of our taxable income this year, subject to the 1.5% additional bank tax. Higher average diluted common shares had a $0.02 negative impact as continued increases in the CWB share price resulted in a larger impact from in-the-money stock options this quarter. Higher preferred share dividend distributions also reduced EPS by $0.01.
Prior quarter EPS comparison is shown on Slide 10. The increase in diluted EPS included a $0.12 benefit from lower costs related to the National Bank transaction in the current quarter. Adjusted EPS increased $0.07 from the prior quarter, primarily driven by lower credit losses on impaired loans. Some sequential growth in net interest income and higher noninterest income each contributed $0.04 to earnings per share. The EPS contribution from higher total revenue of $0.08 was offset by the impact of higher adjusted noninterest expenses.
The increase in the effective tax rate this quarter had a $0.02 negative impact on earnings per share and the usual increase in LRCN distributions between the third and fourth quarter, and the higher average balance of diluted common shares each reduced EPS by $0.01.
As shown on Slide 11, revenue was higher on a sequential basis that reflected a 2% increase in net interest income and a 16% increase in noninterest income. Higher noninterest income primarily reflected an increase in net gains on security sales, higher foreign exchange income and higher credit-related fees.
Our net interest margin was consistent with the prior quarter. NIM benefited from a 2 basis point impact from higher fixed rate asset yields, which continue to outpace the growth in funding costs. An improved funding mix provided a 1 basis point benefit to NIM, while higher average liquidity reduced our net interest margin by 3 basis points.
Drivers of our sequential CET1 improvements are shown on Slide 12. Our CET1 ratio increased 9 basis points to approximately 10.3% this quarter. Resiliency of our regulatory capital was demonstrated again this quarter as we absorbed elevated credit losses, while still building our CET1 ratio. The increase primarily reflected retained earnings growth and a continued increase in the fair value of debt securities in our liquidity portfolio, partially offset by risk-weighted asset growth.
Our Board declared a common share dividend of $0.36 per share on December 5, which is up $0.01 from the dividend declared last quarter and up $0.02 from the dividend declared last year.
I'll now turn the call over to Carolina, who will speak to our credit performance.
Thank you, Matt, and good morning, everyone. I will begin my remarks on Slide 14. Total gross impaired loans represented 134 basis points of gross loans, which is 10 basis points higher than last quarter. The increase in gross impaired loans was driven by new formations of impaired loans of $182 million this quarter, reflecting the continued impact of sustained higher interest rates and weaker overall economic condition. Higher gross impairments are reflected in both our general commercial and equipment financing portfolios in the industry's most susceptible to current macroeconomic challenges including manufacturing and transportation.
The credit performance in our commercial mortgage portfolio remains strong and reflects our prudent risk appetite and underwriting standards, that has supported a long history of strong through-the-cycle credit performance.
As shown on Slide 15, the performing loan allowance increased 3% sequentially, primarily reflecting the larger loan balance and higher variable rates and partially offset by a slight improvement in forecast economic conditions. We feel comfortable with the level of our performing loan allowance that have been prudently built in the last 10 quarters, reflecting the current macroeconomic environment.
The total provision for credit losses was 43 basis points. The current quarter impaired loan provisions for credit losses is 38 basis points, which represents a 19 basis point decrease sequentially. The prior quarter impaired loan provisions included the impact of 2 impaired loans where the circumstances which gave rise to the incurred loan provisions were unique to those exposures. This quarter's incurred loan provisions reflect the overall higher default rates and lower realization values.
We continue to expect our gross impaired loan formations and provision for credit losses to remain elevated and gradually decline in the second half of 2025. We have recognized prudent provisions for credit losses against our impaired loans, reflecting appropriately pessimistic recovery values that reflect the current challenging market conditions as we work to resolve these credits.
We remain confident that our proven credit risk management processes and portfolio diversification will continue to be effective in minimizing realized losses in the resolution of impairments as we continue to manage the portfolio through this challenging economic cycle.
I will now turn the call back to Chris Fowler to discuss our outlook and provide closing remarks.
Thank you, Carolina. Turning to Slide 16. Over the next fiscal year, we anticipate steady growth in Canadian economy with consistent levels of inflation within Bank of Canada's target range, supporting continued policy interest rate reductions. We remain mindful, though, of geopolitical risks that could create volatility in expected economic conditions.
As we progress towards the closing of the National Bank transaction, we remain focused on supporting our teams and continuing to provide a differentiated experience to our clients to maintain minimal attrition. Our resilient balance sheet remains well positioned to support prudent growth with the continued strategic focus on portfolios that provide full-service client opportunities. We expect solid revenue growth supported by continued net interest margin expansion and disciplined management of our noninterest expenses to deliver positive operating leverage on an annual basis.
As the year progresses, we expect our provision for credit losses to gradually decline, supported by our proven credit risk management process and a lower interest rate environment. Presuming no significant average shifts in the macroeconomic environment, we expect to deliver strong annual growth of pretax pre-provision income and adjusted earnings per common share.
With that, operator, let's open the lines for Q&A.
[Operator Instructions] And your first question comes from the line of Meny Grauman with Scotiabank.
Wanted to talk about credit, specifically write-offs as a percentage of average loans. Seeing it tick up in Q4. So I wanted some guidance from you in terms of what to expect from here. I mean, typically, what we see at CWB over a long period of time is sometimes gross-impaired loans move up, but that loss ratio tends to remain very, very low. So I don't want to make too much of the uptick, but I wanted to understand, should we expect it to come back to kind of the historical average next quarter? How should we think about that?
Meny, I'll take that. So what we're seeing -- I agree with you, we tend to see higher impairments and lower losses over time. What we're seeing this time is the pressure we have on [indiscernible] in some of the assets that secure our portfolio. And so as we mentioned, we expect to see both the continued pressure in the first half of the year related to both impairments and provision levels with a very prudent approach. And that would translate into slightly higher losses as well when we look at the trend for the next year. And then we expect that to normalize towards -- not to normalize but trends towards the end of the 2025 to more normal levels in 2026.
Got it. And just in terms of understanding the dynamic here in terms of lower realized values, what exactly is going on? What's impacting this? Is it specific types of loans? Just a little bit more understanding of why that's happening.
So, yes, I'll speak a little bit of that, mostly, where we're seeing lower valuations, a lot of it is related to our equipment portfolio. And we see it specifically [indiscernible] transportation industry, evaluations continue to be affected by the increased inventory that has flooded the market with products from large players that dispose off their assets. So that has had a significant impact in the valuations across that industry.
On the general commercial portfolio, that is industry based -- like broader industry, so there's nothing specific to it. But overall, valuations were coming from a very high level, and we're seeing some impact coming down that we expect, with the trend in interest rates now down, will really improve valuation levels as we move forward, too.
And your next question comes from the line of Sohrab Movahedi with BMO Capital Markets.
I just wanted to go back to the Maxium situation, Chris. I mean this is an asset that, obviously, you said you had acquired. Can you give us a little bit more details as to whether or not the sales agent was someone you had actually acquired? Or is this someone that had been hired subsequent to the acquisition and what work you have done to get comfortable that this was an isolated situation?
Thank you, Sohrab. So this is an ongoing legal matter. So I can't give a lot of specifics with respect to this. Maxium is -- we acquired them in 2016. They're involved primarily in program finance, health services call and financing -- financial advisers. So it's kind of a broad portfolio that has been very strong. We've -- this particular situation, we are working with claims and so at this point, we can't give more detail on that.
I appreciate you can't give any more detail on the actual claim, but what work have you done to feel comfortable that it may not be pervasive?
Well, we've done a full review of all of our internal controls. All of our loans are approved through credit risk management. We have a very disciplined process for approval, for funding, for loan management. We've done all the steps required to ensure that our internal controls are sound. We did extra audit procedures as well so that the auditors can look at the process and say that they also are confident and they've signed off on the audited financial statements. So the issue that we're speaking to had no impact on our financial results, and we don't anticipate any impact as we move forward.
Okay. Just for clarity, when there is some resolution on this at some future date, would this be -- if to the extent there are payments to be made, would they be -- should we be anticipating them hitting which line item on the income statement? Is it going to be a contra revenue item? Is it going to be a loan loss item? Is it going to be a higher legal expense? Like where would the potential resolution and the impact of this at CWB transpire on your income statement?
Yes, Sohrab, I'll take this one. So as we said, it had no impact on our current-period financial statements, meaning, we didn't require any provisions, accruals, et cetera. That's based on our assessment that we believe there is a very low probability of any economic outflow related to this matter. Now to the extent we incur legal costs, investigative costs, et cetera, I mean, that will fall through our noninterest expenses in the other categories as appropriate, as incurred. But related to this matter, we're not anticipating any significant financial impact.
[Operator Instructions] And your next question comes from the line of Paul Holden with CIBC.
A couple of follow-up questions on credit because you've been given, I guess, very specific guidance or indications last quarter that you thought that was an isolated incident. So, I guess, first, the losses you took this quarter had nothing to do with the 2 loans from the prior quarter, correct?
That's correct, Paul.
Okay. And it sounds like most of the losses this quarter were related to trucking. Is that correct, a majority of it? I appreciate it may not be all of it, but was it the majority of it was related to trucking?
Yes, it's a combination. Majority would be transportation, trucking and some of it on manufacturing as well.
Okay, okay. That's helpful. And there's a very publicly known trucking entity that has resulted in losses for other banks. Is it in any way related to that particular entity? Or is it more broad-based in terms of the industry challenges across the trucking sector?
So we don't have any direct exposure to that specific [indiscernible]. However, the fact that such a large player has disposed off so many assets in the market, it has really turned down the value. So, indirectly, it has really impacted on players, including ourselves in this matter.
Understand, understand. Okay. That makes sense. And then in terms of the guidance for sort of a slow normalization or really still elevated in the next 2 quarters, is that still really related to trucking and that's just it's going to take time to get off of these assets due to the excess inventory in light of flood of, I guess, trucks that are for sale in the secondary market, is that what it really relates to or is there something else?
I think like that is a good part of it. But as I mentioned, we expect this to continue in the first quarter. And I would say it's aligned with what we're seeing in Q4, in general, commercial and on the equipment side, as you just described. So it's the broad based and it's aligned with what we're seeing across all industries and what we're seeing in the market in general.
Okay. Okay. All right. I'll leave it there on credit. I do have a couple of questions on expenses as well because those came in higher than we expected. I think if I sort of back into where your Q4 guidance, EPS guidance was, I think expenses probably came in higher than you had probably originally been modeling. So maybe help us through that, some of the items where I see a big percentage increase year-over-year or like employee recruitment and training, staff relations and other expenses. So maybe, Matt, you can help us sort of figure out where expenses came in higher, I think, than you were originally forecasting and what that -- how that might or might not flow into 2025?
Yes. It's a good question. And there were a couple of areas like we were targeting neutral-ish operating leverage, and there's actually 2 sides to why we came in obviously lower than that. On the expenses, the -- I guess the -- if you want to call it a surprise, I'd call it outperformance that then resulted in an expense impact. We have certain elements of our variable compensation that are linked to total shareholder returns. And our total shareholder returns were extremely strong. And so we saw a tick up in variable comp related to that. So that's a bit of a good news for shareholders, but it was impactful to our expenses.
The other piece of it, we have certain elements of variable compensation related to sales incentive tied to franchise deposit growth, our growth in our equipment portfolio, our growth within our wealth management business. These businesses lines performed very strongly in fourth quarter. So that's another strong performance that had an expense impact.
So that -- the other elements of our -- and you've highlighted, that didn't surprise me. Those are areas that typically do tick up in the fourth quarter. But it was the variable compensation that I'd circle as the one element higher than expected.
On the revenue side, the area that we expected more from was our net interest margin. We had guided to an increase in NIM and we were flat. And in my remarks, I explained why, but that was the other side of it and kind of normalizing for those 2 things, if we delivered -- if we didn't have the 3 basis point drag from liquidity and our NIM was up, say, 3 basis points, and we didn't have this variable comp uptick, we would have been in range of new neutral-ish operating leverage.
Okay. Okay. And then maybe just one more question for me, if you don't mind. Just in terms of you mentioned the work you're going to do in 2025 to work towards customer retention, which is obviously on transaction closing. If I think about the loan growth achieved for the year, the franchise deposit growth achieved for the year, a bit below expectation set when the transaction was first announced, is that more of a product of the softer economy and just maybe softer demand for loans? Or is there any kind of customer retention challenges currently taking place across the franchise?
It's Stephen speaking. So I think there is, I think, an environmental effect. And I think what you've seen over recent quarters is a bit of a consistency in terms of the gross and net growth as we work through that. We see in a similar environment as we move forward. We're actually really pleased with -- on the customer retention side, actually, the feedback we get from our clients is very positively looking forward to the transaction with National Bank. And so -- but I would say it's -- where we do see a little bit more difficulty is on the [indiscernible] origination side. But that's been something as we look towards an integration, and that's been now for a few quarters.
And so I think when you look at the trajectory of our experience that I think there's some consistency there. And as we move through it and get to integration or you see kind of a firming up in the economy, we see some pivot points there. So we're pleased with the outlook.
And I'm showing no further questions at this time. I would like to turn it back to Mr. Chris Fowler for closing remarks.
Thank you, Jodi. Thank you all for joining us today. I'd like to take this opportunity to thank our shareholders for their continued commitment and support. And we wish you and your families a healthy and happy holiday season. Thank you.
Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.