CWB Reports Very Strong Loan Growth, Sound Credit Quality and Solid Financial Results
(firmenpresse) - EDMONTON, ALBERTA -- (Marketwired) -- 03/04/15 -- First Quarter 2015 Highlights from Combined Operations1,2 (compared to the same period in the prior year)
((1)) Highlights include certain non-IFRS measures - refer to definitions following the table of Selected Financial Highlights on page 4. ((2)) As a result of definitive agreements to sell Canadian Direct Insurance (CDI) and the stock transfer business of Valiant Trust Company (Valiant), CWB has defined the contributions of both CDI and Valiant's stock transfer business as "Discontinued Operations", the remaining operations as "Continuing Operations", and the total Continuing Operations and Discontinued Operations as "Combined Operations".
Canadian Western Bank (TSX: CWB) (CWB) today announced solid first quarter financial performance, including very strong 4% quarterly loan growth, sound credit quality and relatively stable net interest margin.
Compared to the same quarter last year, common shareholders' net income of $54.2 million was up 3%. Diluted earnings per common share of $0.67 and adjusted cash earnings per common share of $0.69 both increased 3%. Total revenues (teb) of $159.9 million were up 4%, primarily reflecting the positive impact of strong 12% loan growth, partially offset by lower net interest margin and non-interest income, the latter attributed to reduced gains on the sale of securities and, within Discontinued Operations, elevated insurance claims expense.
Compared to last quarter, common shareholders' net income was 7% lower, as the combined positive impacts of very strong loan growth and higher net interest margin were more than offset by lower non-interest income, mainly reflecting the one-time gain on sale of CWB's former Edmonton Main Branch premises in the prior quarter. Adjusted cash earnings per common share was down 5%.
"First quarter financial performance within our core businesses was excellent. Very strong loan growth, sound credit quality and solid overall results demonstrate the ongoing strength of our business model," said Chris Fowler, President and CEO. "The expected benefits of our recently announced strategic divestitures will further strengthen CWB's competitive position and the outlook for growth from Continuing Operations."
"Credit quality remains consistent with our expectations and we are working proactively with our clients to assess the impacts on their businesses from dampened expectations for economic performance in parts of Western Canada. As we do so, we will continue to support clients as we always have, through responsive service and disciplined, secured credit underwriting. CWB Group has grown and thrived through past cycles of economic volatility and commodity price declines, and we believe we are better positioned to maintain this trend today than ever before."
"The sales of Canadian Direct Insurance and Valiant Trust's stock transfer business to leaders in their respective industries resulted from a purposeful strategic assessment initiated early last year," continued Mr. Fowler. "While these two businesses delivered meaningful contributions to CWB Group over the past decade, redeploying the significant value to be generated by these transactions into our faster-growing core businesses is strongly aligned with our well-defined strategic direction and we believe it will generate superior returns for CWB shareholders."
On March 4, 2015, CWB's Board of Directors declared a cash dividend of $0.21 per common share, payable on March 26, 2015 to shareholders of record on March 16, 2015. This quarterly dividend was consistent with the prior quarter and 11% ($0.02) higher than the quarterly dividend declared one year ago. The Board of Directors also declared a cash dividend of $0.275 per Series 5 Preferred Share payable on April 30, 2015 to shareholders of record on April 23, 2015.
Fiscal 2015 Performance Target Ranges
The performance target ranges established for the 2015 fiscal year together with CWB's year-to-date performance from Combined Operations are presented in the table below:
Very strong first quarter loan growth was driven by ongoing activity within our markets, reinforcing our expectation for another year of double-digit growth in fiscal 2015. Overall credit quality is consistent with expectations, supporting our view that the annual provision for credit losses will remain within the target range.
Compared to the same quarter last year, growth in adjusted cash earnings per common share was constrained by a four basis point decline in net interest margin (teb) and lower non-interest income, primarily resulting from lower net gains on securities and a decrease in net insurance revenues from higher claims expense this quarter. In the absence of increased insurance claims, growth in adjusted cash earnings per common share and key profitability ratios would all have been within our target ranges.
Continued pressure on net interest margin is expected in view of the current very low interest rate environment and the potential for further interest rate cuts by the Bank of Canada, along with competitive factors and lack of steepness in the yield curve. While pressure on this key metric is expected to constrain revenue growth compared to expectations at the start of the year, we plan to prudently manage the growth of non-interest expenses in view of planned investment necessary to support future business growth. On this basis, the efficiency ratio target of 47% or less is believed to be challenging but attainable. The first quarter efficiency ratio from Continuing Operations was 47.1%.
The expected gain on sales from the recently announced strategic transactions involving CDI and Valiant will contribute more than $1.25 of earnings per common share upon closing, which will drive considerable outperformance on a full-year basis relative to our published 2015 Combined Operations targets for growth in adjusted cash earnings per common share and key profitability ratios. We intend to redeploy this capital in due course for strategic and accretive opportunities that are consistent with our risk appetite. Our primary areas of interest for potential strategic acquisitions are centred on opportunities in equipment finance and leasing, and wealth management.
Outlook for Continuing Operations
The outlook for the Canadian economy has been affected by low oil prices, with a rebalancing of expectations for regional strength. While the outlook for oil-exporting provinces has moderated, expectations for the rest of the country, including British Columbia, Manitoba and Ontario, have improved. Consensus forecasts continue to call for stable economic conditions and modest growth throughout most of Canada in 2015, supported by expectations for a strengthening U.S. economy which could be further stimulated by the positive impact of low energy prices. The outlook for Alberta has weakened with reduced expectations for job creation, in-migration and GDP growth, while moderated levels of housing sector activity may persist in certain markets through the remainder of the year. However, the expected positive impacts of lower interest rates and a weaker Canadian dollar on the overall domestic economy support our expectation for ongoing profitable growth.
About CWB Group
Canadian Western Bank offers a full range of business and personal banking services across the four western provinces and is the largest publicly traded Canadian bank headquartered in Western Canada. CWB, along with its operating affiliates, National Leasing, Canadian Western Trust, Valiant Trust, Canadian Direct Insurance, Canadian Western Financial, Adroit Investment Management, and McLean & Partners Wealth Management, collectively offer a diversified range of financial services across Canada and are together known as the CWB Group. The common shares of Canadian Western Bank are listed on the Toronto Stock Exchange under the trading symbol "CWB". CWB's Series 5 preferred shares trade on the Toronto Stock Exchange under the trading symbol "CWB.PR.B". Refer to for additional information.
Fiscal 2015 First Quarter Results Conference Call
CWB's first quarter results conference call is scheduled for Thursday, March 5, 2015 at 2:00 p.m. ET (12:00 p.m. MT). CWB's executives will comment on financial results and respond to questions from analysts and institutional investors.
The conference call may be accessed on a listen-only basis by dialing 647-788-4922 or toll-free 1-877-223-4471. The call will also be webcast live on CWB's website: .
A replay of the conference call will be available until March 29, 2015 by dialing 416-621-4642 (Toronto) or 1-800-585-8367 (toll-free) and entering passcode 88518597.
Selected Financial Highlights
Taxable Equivalent Basis (teb)
Most banks analyze revenue on a taxable equivalent basis to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the Consolidated Statement of Income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have a standardized meaning prescribed by International Financial Reporting Standards (IFRS) and, therefore, may not be comparable to similar measures presented by other financial institutions. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this quarterly report to shareholders.
Non-IFRS Measures
CWB uses a number of financial measures to assess its performance. These measures provide readers with an enhanced understanding of how management views the results. Non-IFRS measures may also provide readers the ability to analyze trends and provide comparisons with our competitors. Taxable equivalent basis, adjusted cash earnings per common share, return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, common equity Tier 1, Tier 1 and total capital adequacy ratios, and average balances do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other financial institutions.
Management's Discussion and Analysis
This management's discussion and analysis (MD&A), dated March 4, 2015, should be read in conjunction with Canadian Western Bank's (CWB) unaudited condensed interim consolidated financial statements for the period ended January 31, 2015, and the audited consolidated financial statements and MD&A for the year ended October 31, 2014, available on SEDAR at and CWB's website at .
Continuing and Discontinued Operations
Subsequent to quarter end, CWB announced the sales of its property and casualty insurance subsidiary, Canadian Direct Insurance (CDI), and the stock transfer business of its subsidiary, Valiant Trust Company (Valiant), ("Discontinued Operations") as described in Note 3 of the interim consolidated financial statements. The remaining operations are defined as "Continuing Operations" and the total Discontinued Operations and Continued Operations are defined as "Combined Operations". In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, income and expenses associated with the businesses to be sold have been classified as Discontinued Operations in CWB's interim consolidated statements of income for all periods presented. Associated assets and liabilities have been classified as held for sale in CWB's interim consolidated balance sheets prospectively from January 31, 2015 and comparative information has not been adjusted. Return on shareholders' equity reflects equity from Combined Operations. All other measures reflect either Continuing or Combined Operations as indicated. The results of the Discontinued Operations will continue to be included in CWB's combined results until the sale transactions close in mid-2015.
Forward-looking Statements
From time to time, CWB makes written and verbal forward-looking statements. Statements of this type are included in the Annual Report and reports to shareholders and may be included in filings with Canadian securities regulators or in other communications such as press releases and corporate presentations. Forward-looking statements include, but are not limited to, statements about CWB's objectives and strategies, targeted and expected financial results and the outlook for CWB's businesses or for the Canadian or U.S. economy. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "may increase", "may impact" and other similar expressions, or future or conditional verbs such as "will", "should", "would" and "could."
By their very nature, forward-looking statements involve numerous assumptions. A variety of factors, many of which are beyond CWB's control, may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These factors include, but are not limited to, general business and economic conditions in Canada including the volatility and lack of liquidity in financial markets, fluctuations in interest rates and currency values, changes in monetary policy, changes in economic and political conditions, regulatory and legal developments, the level of competition in CWB's markets, the occurrence of weather-related and other natural catastrophes, changes in accounting standards and policies, the accuracy of and completeness of information CWB receives about customers and counterparties, the ability to attract and retain key personnel, the ability to complete and integrate acquisitions, reliance on third parties to provide components of CWB's business infrastructure, changes in tax laws, technological developments, unexpected changes in consumer spending and saving habits, timely development and introduction of new products, and management's ability to anticipate and manage the risks associated with these factors. It is important to note that the preceding list is not exhaustive of possible factors.
These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause CWB's actual results to differ materially from the expectations expressed in such forward looking statements. Unless required by securities law, CWB does not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time by it or on its behalf.
Assumptions about the performance of the Canadian economy in 2015 and how it will affect CWB's businesses are material factors considered when setting organizational objectives and targets. Performance target ranges for fiscal 2015 considered the following management assumptions:
A number of potential risks that could have a material adverse impact on economic expectations and forecasts were identified, including a sustained period of materially lower energy and other commodity prices compared to average levels observed in fiscal 2014, a slowing rate of economic growth in the U.S., a significant and sustained deterioration in Canadian residential real estate prices, or a significant disruption in major global economies. Greater than expected pricing competition and/or disruptions in domestic or global financial markets that meaningfully impact loan yields and/or funding costs were also identified as risks which may contribute to adverse financial results compared to expectations.
Energy prices through the first quarter have fluctuated well below average levels observed last year. As a result, expectations for stronger relative economic performance in Alberta and Saskatchewan have been adjusted downward, elevating the risk of deterioration in residential real estate prices within these markets. However, moderate economic growth in Canada is still expected and the outlook for British Columbia, Manitoba and Ontario has improved.
The current very low interest rate environment and potential for further interest rate cuts by the Bank of Canada may have a negative impact on loan yields and constrain improvement in net interest margin compared to expectations at the start of the year.
Overview of Combined Operations
CWB reported solid quarterly performance led by very strong loan growth, ongoing sound credit quality and higher net interest margin compared to the prior quarter.
Q1 2015 vs. Q1 2014
Common shareholders' net income of $54.2 million was up 3% as the benefit of strong 12% loan growth was partially offset by slightly lower net interest margin (teb), growth in non-interest expenses and a decrease in non-interest income. Total non-interest income declined $5.1 million due to lower net gains on securities and decreased net insurance revenues resulting from higher claims expense within Discontinued Operations this quarter. Diluted earnings per common share and adjusted cash earnings per common share, which excludes the after-tax amortization of acquisition-related intangible assets and non-tax deductible changes in fair value of contingent consideration, were both up 3% to $0.67 and $0.69, respectively. Higher claims expense this quarter reduced adjusted cash earnings per common share by approximately $0.02.
Q1 2015 vs. Q4 2014
Common shareholders' net income declined 7% as the positive revenue impacts of very strong 4% loan growth and a four basis point increase in net interest margin (teb) were more than offset by a 13% decrease in non-interest income. Lower non-interest income primarily reflects the one-time gain on sale of CWB's former Edmonton Main Branch premises in the prior quarter, as well as lower net gains on securities.
ROE and ROA
First quarter return on common shareholders' equity (ROE) was 13.5%, compared to 14.8% last year and 15.0% last quarter. Return on assets (ROA) of 1.03% compares to 1.11% a year earlier and 1.12% last quarter.
Strategic Transactions
Subsequent to quarter end, CWB announced definitive agreements to sell its property and casualty insurance subsidiary, CDI, for $197 million, and to sell Valiant's stock transfer business for $33 million. These transactions resulted from a purposeful strategic assessment initiated early last year, and the combined gains on sale are expected to contribute at least $1.25 of earnings per common share upon closing. Total sales proceeds represent approximately 15 times the combined normalized earnings contributions of divested operations.
CWB intends to deploy the capital generated from these transactions in due course for strategic and accretive opportunities within faster growing business lines that are better aligned with its strategic direction. CWB's primary areas of interest for potential strategic acquisitions are centred on opportunities in equipment finance and leasing, and wealth management.
As a result of these agreements, which are subject to regulatory and other customary conditions of closing, CWB has defined the contributions of both CDI and Valiant's stock transfer business as "Discontinued Operations". Common shareholders' net income from Discontinued Operations for the current and prior periods is provided in the interim consolidated statements of income. Results of Continuing Operations have been restated to exclude Discontinued Operations for all periods. Assets and liabilities of Discontinued Operations, along with detailed financial results, are provided within Note 3 to the interim consolidated financial statements.
Overview of Continuing Operations
Q1 2015 vs. Q1 2014
Common shareholders' net income of $52.4 million was up 7% as the benefit of strong loan growth was partially offset by lower net interest margin (teb), growth in non-interest expenses and a decrease in non-interest income. Total non-interest income declined $2.6 million, primarily due to lower net gains on securities. Diluted earnings per common share was up 7% to $0.65, while adjusted cash earnings per common share increased 6% to $0.66.
Q1 2015 vs. Q4 2014
Common shareholders' net income declined 8% as the positive revenue impacts of very strong 4% loan growth and a four basis point increase in net interest margin were more than offset by $4.5 million lower non-interest income. Lower non-interest income primarily reflects the one-time gain on sale of CWB's former Edmonton Main Branch premises in the prior quarter, as well as lower net gains on securities.
ROE and ROA
First quarter return on common shareholders' equity (ROE) was 13.1% compared to 13.8% last year and 14.6% last quarter. Return on assets (ROA) of 1.01% compares to 1.05% a year earlier and 1.11% last quarter. Capital generated from the expected gains on sale related to the transactions involving CDI and Valiant Trust will result in an increase in shareholders' equity upon closing of the respective transactions. Dependent upon the timing of closing dates and subsequent capital deployment initiatives, the 2015 return on common shareholders' equity and return on assets from Continuing Operations are expected to be constrained at levels below the lower end of the 2015 target ranges for Combined Operations. However, this capital level will position CWB to move quickly on strategic and accretive capital deployment opportunities as they materialize.
Total Revenues (teb) from Continuing Operations
Total revenues of $152.4 million, comprised of both net interest income (teb) and non-interest income, grew 6% compared to the same quarter in 2014 and were relatively unchanged from the previous quarter.
Net Interest Income (teb)
Q1 2015 vs. Q1 2014
Net interest income of $134.4 million was up 9% ($10.9 million) as the revenue contribution from strong 12% loan growth was partially offset by a five basis point decline in net interest margin to 2.59%. The change in net interest margin mainly resulted from reduced loan yields, partially offset by lower average balances of cash and securities.
Q1 2015 vs. Q4 2014Net interest income was up 3% ($3.8 million) as the benefit of very strong 4% loan growth was augmented by a four basis
point improvement in net interest margin (teb). Higher net interest margin primarily resulted from lower average balances of cash and securities and extended duration within the securities portfolio.
Interest rate sensitivity
Note 13 to the unaudited interim consolidated financial statements summarizes CWB's exposure to interest rate risk as at January 31, 2015. The estimated sensitivity of net interest income to a change in interest rates is presented in the table below. The amounts represent the estimated change in net interest income that would result over the following twelve months from a one-percentage point change in interest rates. The estimates are based on a number of assumptions and factors, which include:
Management maintains the asset liability structure and interest rate sensitivity within CWB's established policies through pricing and product initiatives, as well as the use of interest rate swaps and other appropriate strategies.
In addition to the projected changes in net interest income noted above, it is estimated that a one-percentage point increase in all interest rates at January 31, 2015 would decrease unrealized gains related to available-for-sale securities and the fair value of interest rate swaps designated as hedges, and result in a reduction in other comprehensive income of approximately $47.3 million, net of tax (January 31, 2014 - $13.0 million). It is estimated that a one-percentage point decrease in all interest rates at January 31, 2015 would have the opposite effect, increasing other comprehensive income by approximately $40.8 million, net of tax (January 31, 2014 - $13.0 million).
Outlook for net interest margin (teb)
Net interest margin improved four basis points from the previous quarter but was down five basis points compared to last year. Continued pressure on net interest margin is expected in view of the current low interest rate environment, competitive factors and lack of steepness in the yield curve. The Bank of Canada's January rate cut and the corresponding 15 basis point decrease in CWB's prime lending interest rate is not expected to have a material impact on net interest margin compared to expectations at the start of the year, however the potential for further cuts by the Bank of Canada within fiscal 2015 cannot be ruled out. CWB will maintain its strategic focus on mitigating the earnings impact of ongoing margin pressure through efforts to achieve stronger relative growth in higher yielding loan portfolios with an acceptable risk profile, managing the funding mix to optimize the overall cost of funds, and prudently managing balances of cash and securities.
Provision for Credit Losses
The quarterly provision for credit losses measured against average loans was 16 basis points, up from nine basis points in the previous quarter and down from 19 basis points last year. Based on the economic environment and current expectations for credit quality looking forward, management expects the annual provision for credit losses will fall within the target range of 17 to 22 basis points of average loans.
Non-interest Income from Continuing Operations
Q1 2015 vs. Q1 2014
Non-interest income of $18.0 million was down 12% ($2.6 million) as combined growth of $1.5 million in credit related fee income, fees for retail services, wealth management revenue and 'other' non-interest income was more than offset by a decrease of $3.8 million in net gains on securities and lower trust services fee income. The decrease in net gains on securities mainly resulted from less favourable market conditions in the current period and elevated gains realized in the first quarter of 2014. Lower trust services fee income reflects the realization of unusually high fee income within Canadian Western Trust last year.
Q1 2015 vs. Q4 2014
Non-interest income was down $4.5 million as growth in most categories was more than offset by a decrease in 'other' non-interest income and lower net gains on securities. 'Other' non-interest income was down $4.4 million compared to last quarter, reflecting the one-time gain on sale of CWB's former Edmonton Main Branch premises. The decrease in net gains on securities reflects the factors described above.
Outlook for non-interest income from Continuing Operations
The outlook for growth in banking-related fee income is relatively consistent with anticipated loan growth. Trust and wealth management services are also expected to continue to provide stable growth and consistent contributions. Based on the current composition of the securities portfolio, net losses on securities may lead to lower non-interest income compared to expectations at the beginning of 2015, although equity and bond market conditions are inherently unpredictable in the short-term. Management will continue to realize gains on the sale of non-core residential mortgage portfolios as opportunities become available. Such gains are anticipated to be a recurring, although periodic, source of non-interest income.
Non-interest Expenses from Continuing Operations
Q1 2015 vs. Q1 2014
Quarterly non-interest expenses of $71.9 million were up 11% ($7.4 million) primarily due to 10% ($4.4 million) higher salaries and benefits and a 19% ($1.9 million) increase in premises and equipment costs. The change in salaries and benefits mainly resulted from higher full-time salary expense associated with annual salary increments, a larger staff complement to support ongoing growth across all businesses and changes extending from a formal review of non-executive compensation completed last year. Higher premises and equipment expense primarily resulted from increases in direct computer costs and higher rent expense.
Q1 2015 vs. Q4 2014
Non-interest expenses were up 2% ($1.3 million). Increases in salaries and benefits and premises and equipment expense, reflecting the same factors discussed above, were partially offset by a decrease in general expenses. Lower general expenses primarily reflect seasonality in advertising and promotion.
Outlook for non-interest expenses from Continuing Operations
One of management's key priorities is to deliver strong long-term growth through strategic investment in people, technology, infrastructure and other areas while maintaining effective control of costs. This strategy is aligned with a commitment to maximize long-term shareholder value and is expected to provide material benefits in future periods. Compliance with an increasing level of regulatory rules and oversight for all Canadian banks requires the investment of both time and resources, which further contributes to higher non-interest expenses.
Work towards implementation of a new core banking system continues. Following completion of the analysis and design phases of the core banking system project during fiscal 2014, management established a revised capital budget of $62 million. System implementation is scheduled for early fiscal 2016 and progress this quarter was consistent with the current budget and timeline.
Upgrades and expansion of branch infrastructure are also ongoing, including the expected opening of an expanded branch location in Prince George, British Columbia, during the second quarter.
Efficiency ratio
The first quarter efficiency ratio (teb) from Continuing Operations, which measures non-interest expenses as a percentage of total revenues (teb), was 47.1%, compared to 44.7% last year and 46.1% in the previous quarter.
The increase compared to last year mainly reflects the fact that the positive impact on total revenues of very strong loan growth was more than offset by the decrease in net interest margin, lower non-interest income and higher expenses. The change compared to the prior quarter reflects similar factors, with the benefit of loan growth augmented by higher net interest margin.
Notwithstanding the sequential improvement in net interest margin this quarter, pressure on this key metric is expected to constrain revenue growth compared to expectations at the start of the year. However, management expects to prudently manage the growth of non-interest expenses in view of planned investment necessary to support future business growth and, on this basis, the efficiency ratio target of 47% or less is believed to be challenging but attainable.
Income Taxes
The first quarter effective income tax rate (teb) for Continuing Operations was 26.3%, compared to 26.1% in the same quarter last year and 25.3% in the previous quarter.
Overview of Discontinued Operations
Detailed financial results for Discontinued Operations are provided within Note 3 to the interim consolidated financial statements.The components of net income from Discontinued Operations included in the interim consolidated statements of income, which are attributable entirely to CWB common shareholders, follow:
Q1 2015 vs. Q1 2014
Common shareholders' net income was down $1.8 million, primarily reflecting a $2.1 million decrease in net insurance revenues and lower trust services fee income, partially offset by higher net interest income. Lower net insurance revenues mainly resulted from a $2.9 million increase in claims expense.
Q1 2015 vs. Q4 2014
Common shareholders' net income increased $0.5 million as increases in net insurance revenues and net interest income more than offset lower trust services fee income. Within net insurance results, growth in net earned premiums and lower policy acquisition costs were partially offset by a $0.4 million increase in claims expense.
Comprehensive Income
Comprehensive income on a Combined Operations basis is comprised of shareholders' net income and other comprehensive income (OCI), all net of income taxes, and totaled $55.0 million for the first quarter, relatively unchanged from $55.5 million in the same period last year.
The small change in comprehensive income was mainly driven by lower net income from Discontinued Operations, primarily the result of lower net insurance revenues. OCI was consistent with last year, with higher unrealized losses, net of tax, on available-for-sale securities mostly offset by higher unrealized gains, net of tax, on derivatives designated as cash flow hedges.
The change in fair value of available-for-sale securities relates to changes in the market value of securities and/or the realization of gains or losses within CWB's portfolios of preferred and common equities. While the combined dollar investment in these portfolios is relatively small in relation to total liquid assets, it increases the potential for comparatively larger fluctuations in OCI.
Balance Sheet
Total assets increased 11% in the past year and 3% in the quarter to reach $21,265 million at January 31, 2015.
Cash and Securities
Cash and securities totaled $2,530 million at January 31, 2015, compared to $2,596 million a year earlier and, inclusive of $100 million of securities purchased under resale agreements, $2,697 million at the end of last quarter. The cash and securities portfolio is primarily comprised of high quality debt instruments, preferred shares and common equities that are not held for trading purposes and, where applicable, are typically held until maturity.
Net unrealized losses recorded on the balance sheet of $22.1 million compares to unrealized losses of $8.8 million last year and $3.4 million last quarter. Fluctuations in value are generally attributed to changes in interest rates, movements in market credit spreads and shifts in the interest rate curve. Volatility in equity markets also leads to fluctuations in value, particularly for common shares. Differences compared to both the prior quarter and last year primarily reflect a decrease in the market value of preferred shares, partially offset by an increase in the market value of interest-bearing securities. The lower market value of preferred shares was mainly due to changes in credit spreads. The higher market value of interest-bearing securities primarily resulted from changes in interest rates combined with an increased average duration of securities within this portfolio.
Net gains on securities from Continuing Operations in the first quarter of $0.6 million compares to $4.4 million in the same period last year and $1.4 million in the previous quarter. Based on the level of gains realized and current composition of the cash and securities portfolio, net losses on securities may lead to lower non-interest income compared to expectations at the beginning of 2015, although equity and bond market conditions are inherently unpredictable in the short-term.
Treasury Management
Average balances of cash and securities were lower than both the same quarter last year and the prior quarter. Management expects the ratio of average liquid assets to total assets to fluctuate above the current level through the remainder of the year.
The strategic transactions involving CDI and Valiant Trust are not expected to have a material impact on CWB's liquidity ratios. As at January 31, 2015, CWB was compliant with the Office of the Superintendent of Financial Institutions' (OSFI) Liquidity Adequacy Requirements Guideline which became effective this quarter.
Loans
Total loans excluding the allowance for credit losses grew 12% ($2,005 million) in the past twelve months and 4% ($637 million) in the quarter to reach $18,243 million. In dollar terms, year-over-year growth by lending sector was led by real estate project loans ($706 million) as CWB continued to identify opportunities to finance well-capitalized developers on the basis of sound loan structures and acceptable pre-sale/lease levels. Growth in equipment financing and leasing was also strong ($495 million), followed by corporate lending ($310 million), personal loans and mortgages ($304 million), and commercial mortgages ($145 million). The portfolio of general commercial loans grew $61 million while oil and gas production loans were down $16 million.
Real estate project loans also led growth by lending sector on a sequential basis with an increase of $253 million, followed by growth in corporate lending of $114 million and equipment financing and leasing of $107 million. Growth in personal loans and mortgages compared to the prior quarter was $65 million, while commercial mortgages and general commercial loans grew $46 million and $41 million, respectively. Oil and gas production loans were $11 million higher than last quarter.
Measured by geographic concentration, on a year-over-year basis, lending activity in Alberta showed the highest growth in dollar terms, followed by British Columbia, Ontario and Saskatchewan. Growth on a sequential basis in dollar terms generally followed the same order.
Optimum Mortgage
Total loans of $1,533 million within the broker-sourced residential mortgage business, Optimum Mortgage (Optimum), increased 17% ($227 million) year-over-year and 4% ($63 million) compared to the prior quarter, net of portfolio sales. Growth for the quarter was driven almost exclusively by alternative mortgages secured via first mortgages carrying a weighted average loan-to-value ratio at initiation of approximately 70%. The book value of alternative mortgages represented 86% of Optimum's total portfolio at quarter end, compared to 80% last year and 85% in the prior quarter. Ontario currently accounts for more than half of all new originations. At approximately 40% of the total, Ontario represents the largest geographic exposure within Optimum's portfolio, followed by Alberta at 32% and British Columbia at 17%. Optimum continues to deliver very strong performance with a good risk profile.
Securitization
Securitized leases are reported on-balance sheet with total loans. The gross amount of securitized leases at January 31, 2015 was $564 million, compared to $223 million one year ago and $465 million last quarter. Leases securitized in the first quarter totaled $151 million (2014 - $17 million).
Outlook for loans
Consensus forecasts for economic performance in Western Canada have been revised in recent months, primarily as a result of the anticipated impact of low oil prices. Alberta is no longer expected to outperform the rest of Canada, reflecting expectations for reduced capital investment and slower in-migration owing to a more conservative mid-term outlook for resource-related activity. However, low oil prices and a weaker Canadian dollar have combined to improve the outlook for Canada's non-oil exporting provinces, including British Columbia, Manitoba and Ontario. Combined with improving economic conditions in the U.S., this has resulted in consensus expectations for stable overall economic conditions in Canada this year. Most forecasters anticipate a moderate oil price recovery beginning in the second half of 2015, further supporting CWB's outlook for double-digit growth this year.
CWB's direct exposure to the energy industry is small relative to its overall portfolio at approximately 6% of total loans outstanding. This includes direct loans to energy producers of approximately 2%, and direct lending to service companies within the sector representing approximately 4% of total loans. Related growth opportunities in these areas are expected to continue to be limited in the near term by the low oil price environment.
Canadian residential real estate markets have been resilient and affordability in most geographic areas remains within historical ranges, largely reflecting very low interest rates. However, the combination of historically high price levels and sentiment related to potential economic headwinds caused by low energy prices could lead to moderated housing sector activity in certain markets.
While strong competition from domestic banks and other financial services firms is expected to persist, management believes CWB will continue to gain market share through a combination of several positive influences. These include an expanded market presence, increased brand awareness in core geographic markets, due in part to focused training initiatives and enhanced staffing in targeted areas, and the effective execution of CWB's strategic plan. During prior periods of economic volatility, CWB has gained market share as certain competitors shifted their focus away from CWB's core geographic footprint.
CWB's strategy continues to focus on enhancing existing competitive advantages within its core business banking platform while offering complementary financial services in personal banking, equipment finance and leasing, alternative mortgages, wealth management, and trust services.
Credit Quality
Overall credit quality reflects continued strong underwriting practices and relatively stable levels of economic activity within CWB's markets through the first quarter.
The dollar level of gross impaired loans at January 31, 2015 represented 0.44% of total loans at quarter end, compared to 0.35% last quarter and 0.33% one year ago. The level of gross impaired loans fluctuates as loans become impaired and are subsequently resolved, and does not directly reflect the dollar value of expected write-offs given tangible security held in support of lending exposures.
The increase in gross impaired loans compared to both the prior quarter and last year was partially offset by higher pay downs and loans returned to performing status, and is consistent with management expectations in view of the very low levels of impairments experienced in prior quarters. The total number of accounts classified as impaired fell 5% during the first quarter, from 120 to 114.
Specific allowances for expected write-offs are established through detailed analyses of both the overall quality and ultimate marketability of security held against impaired accounts. Despite the net increase in gross impaired loans, and higher specific provisions mainly related to a single account, actual credit losses are expected to remain within CWB's historical range of acceptable levels. As at January 31, 2015, the collective allowance for credit losses exceeded the balance of impaired loans, net of specific allowances.
The total allowance for credit losses (collective and specific) was $100.5 million at January 31, 2015, compared to $95.6 million last quarter and $91.4 million a year earlier. The total allowance for credit losses represented 126% of gross impaired loans at quarter end, compared to 154% last quarter and 169% one year ago.
Based on the economic environment and current expectations for credit quality looking forward, management expects the annual provision for credit losses will fall within the target range of 17 to 22 basis points of average loans.
Deposits
Total deposits were up 10% over the past year and 3% over the previous quarter. Total deposits by type and source are summarized below:
Personal deposits represented 58% of total deposits at January 31, 2015, down from 59% one year ago and up from 56% the prior quarter. Total branch-raised deposits, including trust services deposits, represented 54% of total deposits at January 31, 2015, consistent with one year ago and down from 55% at the previous quarter end. Demand and notice deposits were 34% of total deposits, up from 31% in the same period last year and 33% in the previous quarter. Term deposits raised through debt capital markets were $2,197 at quarter end, representing 12% of total deposits, up from 10% last year and down from 14% last quarter due to the redemption of certain deposit notes.
Outlook for deposits
One of management's long-term strategic objectives is to increase the level of deposits that are lower cost, provide associated transactional fee income and strengthen relationships by providing clients with relevant tools for managing their business and personal finances. Specific emphasis is placed on growing personal and business deposits raised within the branch network, trust services and Canadian Direct Financial, the Internet-based division of CWB.
Meaningful enhancements to CWB's cash management offerings for business clients continue to support this focus on growing branch-raised deposits, as do focused training programs and staffing enhancements. CWB's expanding market presence, including ongoing expansion and upgrades to existing branches, also supports the generation of branch-raised deposits.
Management remains committed to further enhance and diversify all funding sources to support growth, manage the impact of competitive factors and mitigate pressure on net interest margins. The deposit broker network remains a valued channel for raising insured fixed term retail deposits and has proven to be an effective and efficient way to access funding and liquidity over a wide geographic base. Selectively utilizing debt capital markets is also part of management's strategy to further diversify the funding base over time.
Other Assets and Other Liabilities
Other assets which, beginning this quarter, include assets held for sale, totaled $593 million at January 31, 2015, compared to $385 million one year ago and $401 million last quarter. Other liabilities, which include liabilities held for sale, were $491 million at quarter end, compared to $429 million a year earlier and $504 million the previous quarter.
Off-Balance Sheet
Off-balance sheet items include assets under administration and assets under management. Total assets under administration, which are comprised of trust assets and third-party leases under administration, as well as mortgages under service agreements, totaled $9,223 million at January 31, 2015, compared to $8,464 million one year ago and $10,102 million last quarter. Assets under management were $1,868 million at quarter end, compared to $1,684 million a year earlier and $1,796 million last quarter.
Other off-balance sheet items are comprised of standard industry credit instruments (guarantees, standby letters of credit and commitments to extend credit). CWB does not utilize, nor does it have exposure to, collateralized debt obligations or credit default swaps.
For additional information regarding other off-balance sheet items refer to Note 11 of the unaudited interim consolidated financial statements for the period ended January 31, 2015, as well as Notes 11 and 21 of the audited consolidated financial statements in CWB's 2014 Annual Report.
Capital Management
OSFI requires Canadian financial institutions to manage and report regulatory capital in accordance with the Basel III capital management framework. CWB's required minimum regulatory capital ratios, including a 250 basis point capital conservation buffer, are 7.0% common equity Tier 1 (CET1), 8.5% Tier 1 and 10.5% total capital.
At January 31, 2015, CWB's capital ratios were 7.9% CET1, 9.2% Tier 1 and 12.2% total capital. The CET1 and Tier 1 ratios were down 10 basis points from the previous quarter, primarily reflecting an increase in unrealized losses within the securities portfolio, while the total capital ratio was down 60 basis points. The change in the total capital ratio was largely the result of the ongoing phase-out of CWB's non-Basel III qualifying capital instruments. The Basel III leverage ratio, effective this quarter, was 7.7%, compared to a regulatory minimum of 3%.
Impact of Divestitures
Upon the close of the transactions involving CDI and Valiant, management estimates the capital generated from the expected gains on sale and the related adjustment to risk-weighted assets will increase CWB's common equity Tier 1 capital ratio by more than 70 basis points. Management intends to redeploy this capital in due course for strategic and accretive opportunities that are consistent with CWB's strategic direction. This enhanced capital level positions CWB to move quickly on investment opportunities as they materialize.
Further details regarding CWB's regulatory capital and capital adequacy ratios are included in the following table:
Retention of earnings associated with anticipated 2015 performance from Continuing Operations is expected to support capital requirements above the targets established through CWB's Internal Capital Adequacy Assessment Process (ICAAP).
CWB currently reports its regulatory capital ratios using the Standardized approach for calculating risk-weighted assets, which requires CWB to carry significantly more capital for certain credit exposures compared to requirements under the Advanced Internal Ratings Based (AIRB) methodology. For this reason, regulatory capital ratios of banks that utilize the Standardized approach are not directly comparable with the large Canadian banks and others which utilize the AIRB methodology.
Required resources, costs and potential timelines related to CWB's possible multi-year transition to an AIRB methodology for managing credit risk and calculating risk-weighted assets continue to be evaluated. CWB's new core banking system, implementation of which is expected early in fiscal 2016, is a critical component for a number of requirements necessary for AIRB compliance, including the collection and analysis of certain types of data.
Further information relating to CWB's capital position is provided in Note 14 of the unaudited interim consolidated financial statements for the period ended January 31, 2015 as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2014.
Book value per common share at January 31, 2015 was $19.99, compared to $17.94 last year and $19.52 last quarter. The gain on sale from the strategic transactions involving CDI and Valiant is expected to add more than $1.25 to CWB's book value per share upon closing.
Common shareholders received a quarterly cash dividend of $0.21 per common share on January 8, 2015. On March 4, 2015, CWB's Board of Directors declared a cash dividend of $0.21 per common share, payable on March 26, 2015 to shareholders of record on March 16, 2015. This quarterly dividend was up 11% from the dividend declared one year ago.
Preferred shareholders received a quarterly cash dividend of $0.275 on January 31, 2015. On March 4, 2015, the Board of Directors also declared a cash dividend of $0.275 per Series 5 Preferred Share payable on April 30, 2015 to shareholders of record on April 23, 2015.
Significant Changes in Accounting Policies and Financial Statement Presentation
The unaudited interim consolidated financial statements for the quarter were prepared using the same accounting policies as the audited consolidated financial statements for the year ended October 31, 2014, except as noted below.
Held for Sale Classification and Discontinued Operations
Assets and liabilities subject to a plan of disposal are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is satisfied when a sale is highly probable and the assets are available for immediate sale in their present condition, subject only to terms that are usual and customary for sales of this nature. For a sale to be highly probable, management must be committed to sell the assets and liabilities within one year from the date of classification.
Assets and liabilities classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss is recognized as a reduction to the carrying amount of the assets held for sale.
Discontinued operations are presented if the operations and cash flows can be clearly distinguished operationally and financially from the rest of CWB, and if it represents a separate major line of business or geographic area of operations that either has been disposed of, is classified as held for sale, or is part of a single coordinated plan of disposal.
Subsequent to quarter end, CWB announced the sales of its property and casualty insurance subsidiary, CDI, and the stock transfer business of Valiant, as described in Note 3 of the interim consolidated financial statements. In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, the assets and liabilities of these businesses have been classified as held for sale in the interim consolidated balance sheets prospectively from January 31, 2015. No write downs to carrying amounts of the assets were required upon classification as held for sale. The interim consolidated statements of income have been restated to show the results of discontinued operations separately from continuing operations for all periods.
Future Accounting Changes
A number of standards and amendments have been issued by the International Accounting Standards Board (IASB) and are noted on page 70 of CWB's 2014 Annual Report. These standards and amendments may impact the presentation of financial statements in the future and management is currently reviewing these changes to determine the impact, if any.
During 2014, the IASB issued the complete version of IFRS 9 - Financial Instruments, which will be mandatorily effective for CWB's fiscal year beginning on November 1, 2018 with early adoption permitted. In January 2015, OSFI determined that Domestic Systemically Important Banks (D-SIBs) should adopt IFRS 9 for their annual periods beginning November 1, 2017, while early adoption is permitted but not required for all other federally regulated Canadian banks such as CWB. CWB has not yet determined if it will early adopt IFRS 9.
CWB continues to monitor the IASB's proposed changes to IFRS. Additional discussion on future accounting standard changes that may impact CWB's future financial statements is included in Note 1 of the audited consolidated financial statements within CWB's 2014 Annual Report.
Controls and Procedures
There were no changes in CWB's internal controls over financial reporting that occurred during the quarter ended January 31, 2015 that have materially affected, or are reasonably likely to materially affect, CWB's internal controls over financial reporting.
Prior to its release, this quarterly report to shareholders was reviewed by the Audit Committee and, on the Audit Committee's recommendation, approved by the Board of Directors of CWB.
Third-party Credit Ratings
DBRS Limited (DBRS) maintains published credit ratings on CWB's senior debt (deposits), short-term debt, subordinated debentures and First Preferred Shares Series 5 of "A (low)", "R1 (low)", "BBB (high)" and "Pfd-3", respectively, all with a stable outlook.
Credit ratings do not consider market price or address the suitability of any financial instrument for a particular investor and are not recommendations to purchase, sell or hold securities.
Ratings are subject to revision or withdrawal at any time by the rating organization. Management believes the ratings widen the base of clients and investors who can participate in CWB's offerings, while also lowering overall funding costs and the cost of capital.
Updated Share Information
As at February 25, 2015, there were 80,409,805 CWB common shares outstanding. Also outstanding were employee stock options, which are or will be exercisable for up to 4,674,743 common shares for maximum proceeds of $144 million.
Dividend Reinvestment Plan
CWB common shares (TSX: CWB) and preferred shares (TSX: CWB.PR.B) are deemed eligible to participate in CWB's dividend reinvestment plan (the Plan). The Plan provides holders of eligible shares of CWB the opportunity to direct cash dividends toward the purchase of CWB common shares. Further details for the Plan are available on CWB's website. For dividends declared commencing in December 2014, CWB has elected to issue common shares for the Plan from treasury with no discount from the average market price (as defined in the Plan).
Summary of Quarterly Financial Information
The financial results for each of the last eight quarters are summarized above. In general, CWB's performance reflects a relatively consistent trend, although the second quarter contains three fewer revenue-earning days.
CWB's quarterly financial results are subject to some fluctuation due to its exposure to property and casualty insurance. Insurance operations, which are primarily reflected in non-interest income, are subject to seasonal weather conditions, cyclical patterns of the industry and natural catastrophes.
Among other things, quarterly results can also fluctuate from the recognition of periodic income tax items.
For additional details on variations between the prior quarters, refer to the summary of quarterly results section of CWB's MD&A for the year ended October 31, 2014 and the individual quarterly reports to shareholders which are available on SEDAR at and on CWB's website at .
Taxable Equivalent Basis (teb)
Most banks analyze revenue on a taxable equivalent basis to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this quarterly report to shareholders.
Non-IFRS Measures
CWB uses a number of financial measures to assess its performance. These measures provide readers with an enhanced understanding of how management views the results. Non-IFRS measures may also provide readers the ability to analyze trends and provide comparisons with our competitors. Taxable equivalent basis, adjusted cash earnings per common share, return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, common equity Tier 1, Tier 1 and total capital adequacy ratios, and average balances do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other financial institutions. The non-IFRS measures used in this MD&A are calculated as follows:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flow
Notes to Interim Consolidated Financial Statements
(unaudited)
($ thousands, except per share amounts)
1. Basis of Presentation and Significant Accounting Policies
These unaudited condensed interim consolidated financial statements of Canadian Western Bank (CWB) have been prepared in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) using the same accounting policies as the audited consolidated financial statements for the year ended October 31, 2014, except as noted below. These interim consolidated financial statements of CWB, domiciled in Canada, have also been prepared in accordance with subsection 308 (4) of the Bank Act and the accounting requirements of the Office of the Superintendent of Financial Institutions Canada (OSFI). Under International Financial Reporting Standards (IFRS), additional disclosures are required in annual financial statements and accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2014 as set out on pages 62 to 102 of CWB's 2014 Annual Report.
The interim consolidated financial statements were authorized for issue by the Board of Directors on March 4, 2015.
Held for Sale Classification and Discontinued Operations
Assets and liabilities subject to a plan of disposal are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is satisfied when a sale is highly probable and the assets are available for immediate sale in their present condition, subject only to terms that are usual and customary for sales of this nature. For a sale to be highly probable, management must be committed to sell the assets and liabilities within one year from the date of classification.
Assets and liabilities classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss is recognized as a reduction to the carrying amount of the assets held for sale.
Discontinued operations are presented if the operations and cash flows can be clearly distinguished operationally and financially from the rest of CWB, and if it represents a separate major line of business or geographic area of operations that either has been disposed of, is classified as held for sale, or is part of a single coordinated plan of disposal.
2. Future Accounting Changes
CWB continues to monitor the IASB's proposed changes to accounting standards. Although not expected to materially impact CWB's 2015 consolidated financial statements, these proposed changes may have a significant impact on future financial statements. Additional discussion on certain accounting standards that may impact CWB is included in the audited consolidated financial statements within CWB's 2014 Annual Report.
IFRS 9 - Financial Instruments
During 2014, the IASB issued the complete version of IFRS 9, which will be mandatorily effective for CWB's fiscal year beginning on November 1 2018 with early adoption permitted. In January 2015, OSFI determined that Domestic Systemically Important Banks (D-SIBs) will adopt IFRS 9 for their annual periods beginning November 1, 2017, while early adoption is permitted but not required for all other federally regulated Canadian banks such as CWB. CWB has not yet determined if it will early adopt IFRS 9.
3. Strategic Transactions
Subsequent to quarter end, CWB announced the sales of its property and casualty insurance subsidiary, Canadian Direct Insurance (CDI), and the stock transfer business of its subsidiary, Valiant Trust Company, for combined cash proceeds of $230 million. The transactions are subject to customary closing conditions, including regulatory approvals, and are expected to close in mid-2015.
In accordance with IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations, the assets and liabilities of these businesses have been classified as held for sale in the interim consolidated balance sheets prospectively beginning in Q1 2015. No write downs to ca
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Datum: 05.03.2015 - 00:55 Uhr
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