CWB Reports Solid Second Quarter Financial Results and Sound Credit Quality
(firmenpresse) - EDMONTON, ALBERTA -- (Marketwired) -- 06/04/15 -- Second Quarter 2015 Highlights from Combined Operations(1,2)
(compared to the same period in the prior year)
Canadian Western Bank (TSX: CWB) (CWB) today announced solid second quarter financial performance driven by strong year-over-year loan growth and ongoing sound credit quality.
Compared to the same quarter last year, common shareholders' net income from Combined Operations of $53.5 million was up 5%. Diluted earnings per common share of $0.67 increased 6% and adjusted cash earnings per common share of $0.68 was up 5%. Total revenues (teb) of $159.9 million were up 4%, primarily reflecting the positive impact of strong 11% loan growth, partially offset by slightly lower net interest margin and decreased non-interest income.
Common shareholders' net income was relatively consistent with last quarter, as the combined positive impacts of 2% loan growth and higher non-interest income were offset by three fewer revenue earning days and a small decrease in net interest margin. Diluted earnings per share was unchanged sequentially and adjusted cash earnings per common share was down 1%.
Year-to-date common shareholders' net income of $107.8 million increased 4%, as the positive impacts of strong loan growth and lower preferred share dividends were partially offset by higher non-interest expenses, lower non-interest income and a slight decrease in net interest margin. Year-to-date diluted earnings per common share of $1.34 increased 4% and adjusted cash earnings per share of $1.36 was up 4%.
"We are pleased with CWB Group's financial performance through the first half of the year. We have continued to deliver strong loan growth and maintained sound credit quality against an uncertain macroeconomic backdrop within Alberta and Saskatchewan," said Chris Fowler, President and CEO. "While the full impact of lower oil prices has yet to make its way through all facets of the economy, we continue to work proactively with our clients to address specific challenges as they emerge. We are confident that our secured lending business model and relationship-based approach to client service have us well-positioned to maintain our strong growth and thrive through a range of possible outcomes."
"We continue to pursue opportunities to redeploy the significant value generated by the recently closed transactions involving CDI and Valiant Trust," continued Mr. Fowler. "Redeployment initiatives will be aligned with our well-defined strategic direction and we are confident they will generate superior long-term returns for CWB shareholders."
Outlook for Combined Operations
The performance target ranges established for the 2015 fiscal year for Combined Operations together with CWB's year-to-date performance are presented in the table below:
Compared to the same quarter last year, growth in adjusted cash earnings per common share was constrained by marginally lower net interest margin (teb) and a decline in non-interest income resulting from decreased net gains on securities and lower contributions from Discontinued Operations.
Gains on sale from the transactions involving CDI and Valiant Trust will contribute approximately $1.38 of earnings per common share in the third quarter. As a result, growth in adjusted cash earnings per common share and performance compared to the target ranges for efficiency and key profitability ratios will surpass expectations at the start of the year. Recognizing the financial impacts of these gains and elimination of future earnings contributions from the divested businesses, management has determined that, with the exception of targets related to loan growth and credit quality, the performance target ranges established for the 2015 fiscal year are not meaningful for Continuing Operations.
Outlook for Continuing Operations
Amongst other macroeconomic factors, the outlook for the Canadian economy remains under the influence of low oil prices. Economic conditions within the oil-exporting provinces have weakened and Alberta and Saskatchewan are expected to underperform the rest of Canada in 2015. In Alberta, the economic outlook is characterized by significantly reduced expectations for job creation, lower expected in-migration, decreased housing market activity and lower overall GDP growth. The outlook for British Columbia, Manitoba and Ontario is positive, with consensus forecasts calling for stable economic conditions and modest growth this year. Notwithstanding the potential for slower growth in Alberta and Saskatchewan, lower interest rates and a weaker Canadian dollar are expected to have positive impacts on the overall domestic economy during the second half of the year.
Second quarter loan growth was driven by solid overall activity in spite of continued economic uncertainty, reinforcing our expectation for another year of double-digit growth in fiscal 2015. Growth compared to both the prior quarter and year-over-year was particularly strong in Alberta. While strong competition from domestic banks and other financial services firms is expected to persist, we continue to gain market share through the effective execution of our strategic plan. CWB's strategic direction emphasizes competitive advantages within our core business banking platform, complemented by strategically aligned offerings in personal banking, equipment finance and leasing, alternative mortgages, wealth management, and trust services. Strong, ongoing growth within each business line demonstrates our continued progress to be seen as crucial to our clients' futures.
Overall credit quality is consistent with expectations, supporting our view that the annual provision for credit losses is likely to fall between 17 and 22 basis points of average loans for the full year. We continue to carefully monitor the loan portfolio for signs of weakness resulting from the impacts of lower oil prices.
We remain confident that the combination of disciplined underwriting, our secured lending practices and active account management will mitigate the potential impacts on our portfolio from slower economic growth in the oil-exporting provinces.
Based on the current composition of the securities portfolio, net losses on securities may reduce second-half non-interest income compared to assumptions at the beginning of 2015 and the level achieved year-to-date.
Continued pressure on net interest margin is expected in view of the current very low interest rate environment, competitive factors and the relatively flat yield curve. We continue to mitigate the revenue impact of margin pressure through stronger relative growth in higher yielding loan portfolios with an acceptable risk profile, such as equipment financing and leasing, and Optimum Mortgage. We have also been successful in optimizing the overall cost of funds through prudent management of both the funding mix and balances of cash and securities. While pressure on net interest margin is expected to constrain revenue growth compared to expectations at the start of the year, we continue to make progress in the above-mentioned areas and prudently manage the growth of non-interest expenses while maintaining long-term investments in the infrastructure and technology necessary to support future business growth. On this basis, we expect the efficiency ratio to remain within a narrow range around 47% for the full year.
Based on the results of stress tests simulating severe, negative economic conditions in Alberta and Saskatchewan over a multi-year timeframe, and assuming CWB's historical peak loss rates across all lending segments were experienced simultaneously within those regions, we are confident CWB would continue to deliver profits for shareholders while maintaining strong financial stability. Overall, we expect CWB to deliver 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 and divisions, National Leasing, Optimum Mortgage, Canadian Direct Financial, Canadian Western Trust, 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. CWB's common shares and Series 5 preferred shares are listed on the Toronto Stock Exchange under the trading symbols "CWB" and "CWB.PR.B", respectively. Refer to for additional information.
Fiscal 2015 Second Quarter Results Conference Call
CWB's second quarter results conference call is scheduled for Thursday, June 4, 2015, at 1:30 p.m. ET (11:30 a.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:
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A replay of the conference call will be available until June 18, 2015, by dialing 416-621-4642 (Toronto) or 1-800-585-8367 (toll-free) and entering passcode 48139344.
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 June 3, 2015, should be read in conjunction with Canadian Western Bank's (CWB) unaudited condensed interim consolidated financial statements for the period ended April 30, 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
On May 1, 2015, CWB completed the previously disclosed divestitures 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 Continuing Operations are defined as "Combined Operations". In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, revenue and expenses associated with the businesses 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.
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, 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 expectations for performance from Combined Operations and 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.
Notwithstanding the increase in recent months, energy prices in the second quarter remained 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 economic growth in British Columbia, Manitoba and Ontario has improved with lower energy costs and a lower Canadian dollar. The persistent very low interest rate environment, reinforced by the Bank of Canada's January 2015 interest rate cut, has a negative impact on loan yields and is expected to continue to constrain improvement in net interest margin compared to expectations at the start of the year.
Overview of Combined Operations
CWB reported solid quarterly and year-to-date performance based on strong year-over-year loan growth and ongoing sound credit quality.
Q2 2015 vs. Q2 2014
Common shareholders' net income of $53.5 million was up 5% as the benefits of strong 11% loan growth and lower preferred share dividends were partially offset by growth in non-interest expenses and a decrease in non-interest income. Non-interest income declined 16% ($4.8 million) primarily due to lower net gains on securities and, within Discontinued Operations, decreased trust services revenues. Diluted earnings per common share of $0.67 increased 6% 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, increased 5% to $0.68. Lower preferred share dividends reflect the second quarter 2014 issuance of $125 million of 4.40% Series 5 preferred shares and subsequent redemption of $209 million of 7.25% Series 3 preferred shares.
Q2 2015 vs. Q1 2015
Common shareholders' net income declined 1% as the revenue impact of 2% loan growth and slightly higher non-interest income was more than offset by three fewer revenue earning days and a modest decrease in net interest margin (teb).
YTD 2015 vs. YTD 2014
Common shareholders' net income of $107.8 million increased 4% as the benefits of strong loan growth and lower preferred share dividends were partially offset by higher non-interest expenses, decreased non-interest income and slightly lower net interest margin. The decrease in non-interest income reflects lower net gains on securities and, within Discontinued Operations, the impact of higher insurance claims expense this year and elevated depository interest income within Valiant Trust in the comparative period last year. Diluted earnings per common share of $1.34 and adjusted cash earnings per common share of $1.36 both increased 4%.
ROE and ROA
Second quarter return on common shareholders' equity (ROE) was 13.6%, compared to 14.4% last year and 13.5% last quarter. Year-to-date ROE of 13.6% compares to 14.6% last year. Return on assets (ROA) of 1.02% compares to 1.07% a year earlier and 1.03% last quarter. Year-to-date ROA of 1.03% was six basis points lower than last year.
Strategic Transactions
Subsequent to quarter end, CWB completed the previously disclosed divestitures of its property and casualty insurance subsidiary, CDI, for $197 million, and the stock transfer business of Valiant Trust for $33 million. These transactions resulted from a strategic assessment initiated early last year, and the combined gains on sale are expected to contribute approximately $1.38 of earnings per common share in the third quarter. Total sales proceeds represent approximately 15 times the combined normalized annual earnings contributions of divested operations.
CWB intends to deploy the capital generated from these transactions in due course for strategic and accretive opportunities that are better aligned with its strategic direction and management is actively pursuing opportunities for investment and/or acquisitions. CWB's primary areas of interest in this respect are equipment finance and leasing, and wealth management.
As a result of these transactions, 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 in Note 3 to the interim consolidated financial statements. The remainder of this Management's Discussion and Analysis, unless otherwise stated, refers to financial results of, and the outlook for, Continuing Operations.
Overview of Continuing Operations
Q2 2015 vs. Q2 2014
Common shareholders' net income of $51.5 million was up 10% mainly reflecting the benefit of strong 11% loan growth and lower preferred share dividends, partially offset by higher non-interest expenses, a decrease in non-interest income and slightly lower net interest margin (teb). Total non-interest income declined $2.2 million, primarily due to lower net gains on securities. Diluted earnings per common share and adjusted cash earnings per common share both increased 10% to $0.64 and $0.65, respectively.
Q2 2015 vs. Q1 2015
Common shareholders' net income declined 2% as the impact of 2% loan growth was more than offset by three fewer revenue earning days and a two basis point decrease in net interest margin. Both non-interest income and non-interest expenses were relatively unchanged.
YTD 2015 vs. YTD 2014
Common shareholders' net income was up 9%, reflecting factors similar to those discussed above in the comparison of year-to-date results for Combined Operations. The benefit of strong loan growth and lower preferred share dividends was partially offset by higher non-interest expenses, lower non-interest income and a four basis point decrease in net interest margin. Diluted earnings per common share and adjusted cash earnings per common share of $1.29 and $1.31, respectively, both increased 8%.
ROE and ROA
Second quarter return on common shareholders' equity (ROE) was 13.1%, unchanged from last year and the previous quarter. Return on assets (ROA) of 1.00% compares to 0.99% a year earlier and 1.01% last quarter. Year-to-date ROE and ROA of 13.1% and 1.00%, respectively, compare to ROE of 13.5% and ROA of 1.02% last year. Capital generated from the expected gains on sale related to the transactions involving CDI and Valiant Trust will increase shareholders' equity during the third quarter. Dependent upon the timing of subsequent capital deployment initiatives, the 2015 ROE and ROA from Continuing Operations are expected to be constrained compared to expectations at the start of the year. However, this higher capital level will position CWB to move quickly on strategic and accretive capital deployment opportunities as they materialize.
Total Revenues (teb) from Continuing Operations
Second quarter total revenues of $151.2 million, comprised of both net interest income (teb) and non-interest income, grew 6% compared to the same quarter in 2014 and were 1% lower than the previous quarter. Year-to-date total revenues (teb) of $303.5 million were also up 6%.
Net Interest Income (teb)
Q2 2015 vs. Q2 2014
Net interest income of $131.6 million was up 9% ($11.1 million) as the revenue contribution from strong 11% loan growth was partially offset by a two basis point decline in net interest margin to 2.57%. The change in net interest margin mainly resulted from decreased loan yields, partially offset by a reduction in deposit costs and lower average balances of cash and securities. Lower loan yields reflect the combined impact of competitive factors and the Bank of Canada's January 2015 interest rate cut.
Q2 2015 vs. Q1 2015
Net interest income was down 1% ($1.3 million) as the benefit of 2% loan growth was more than offset by the impact of three fewer revenue earning days and a two basis point reduction in net interest margin (teb). Lower net interest margin primarily resulted from reduced loan yields, reflecting the factors discussed above, partially offset by lower deposit costs.
YTD 2015 vs. YTD 2014
Net interest income was up 9% ($22.4 million), reflecting the benefit of strong loan growth, partially offset by a four basis point decline in net interest margin to 2.58%. Lower net interest margin reflects factors similar to those described in the year-over-year comparison above.
Interest rate sensitivity
Note 13 to the unaudited interim consolidated financial statements summarizes CWB's exposure to interest rate risk as at April 30, 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:
The positive change in net interest income resulting from a decrease in interest rates reflects the impact of structural interest rate floors on certain floating rate loans, and the absence of such floors on the majority of floating rate deposits.
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 April 30, 2015 would increase unrealized losses 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 $50.7 million, net of tax (April 30, 2014 - $14.6 million). It is estimated that a one-percentage point decrease in all interest rates at April 30, 2015 would have the opposite effect, increasing other comprehensive income by approximately $51.2 million, net of tax (April 30, 2014 - $14.6 million).
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. Differences in the respective sensitivity of net interest income and other comprehensive income to changes in interest rates compared to the same quarter last year primarily reflects the increased use of interest rate swaps to maintain management's targeted asset liability structure and interest rate sensitivity.
Outlook for net interest margin (teb)
Second quarter net interest margin declined two basis points from both the previous quarter and the same period last year, while year-to-date net interest margin was down four basis points. Continued pressure on net interest margin is expected in view of the current low interest rate environment, competitive factors and the relatively flat yield curve. The Bank of Canada's January rate cut and the corresponding 15 basis point decrease in CWB's prime lending interest rate had a modest negative impact on net interest margin. 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 17 basis points, compared to16 basis points in both the previous quarter and the same period last year.
Based on the economic environment and current expectations for ongoing credit quality, management continues to expect the annual provision for credit losses to fall within a range of 17 to 22 basis points of average loans.
Non-interest Income from Continuing Operations
Q2 2015 vs. Q2 2014
Non-interest income of $18.1 million was down 11% ($2.2 million) as combined growth of $1.8 million in credit related fee income, fees for retail services, wealth management and trust services revenue was more than offset by a $4.0 million decrease in net gains on securities and lower 'other' non-interest income. The decrease in net gains on securities reflects ongoing management of the securities portfolio through less favourable market conditions in the current period and elevated gains realized in the second quarter of 2014. Within 'other' non-interest income, lower gains on the sale of residential mortgages were realized compared to the same quarter last year.
Q2 2015 vs. Q1 2015
Non-interest income was relatively unchanged as increases in 'other' non-interest income and fees for retail services were offset by lower net gains on securities and small declines in credit related fees and wealth management revenues. The increase in 'other' non-interest income mainly reflects the above-mentioned gain on sale of residential mortgages. Lower net gains on securities reflect the factors described above.
YTD 2015 vs. YTD 2014
Non-interest income of $36.1 million was 12% ($4.8 million) lower, as gains in most categories were more than offset by a $7.6 million decrease in net gains on securities. Lower year-to-date net gains on securities also reflect 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 reduce second-half fiscal 2015 non-interest income compared to assumptions at the beginning of 2015 and the level achieved year-to-date, although equity and bond market conditions are inherently unpredictable in the short-term. Management will continue to realize gains on the sale of residential mortgage portfolios as opportunities become available. Such gains are anticipated to be a recurring, although sporadic, source of non-interest income.
Non-interest Expenses from Continuing Operations
Q2 2015 vs. Q2 2014
Quarterly non-interest expenses of $71.4 million were up 9% ($5.7 million) primarily due to 8% ($3.6 million) higher salaries and benefits, a 10% ($1.1 million) increase in 'other' expenses, and 9% ($1.0 million) higher premises and equipment costs. The change in salaries and benefits mainly resulted from a larger staff complement to support ongoing growth across all businesses and annual salary increments, as well as the implementation this year of a short-term incentive plan for non-executive employees. Higher 'other' expenses this year mainly reflect an operating loss recovery in the second quarter last year, as well as higher regulatory costs, and employee recruitment expenses in the current period. The increase in premises and equipment expense primarily resulted from increases in direct computer costs and higher rent expense, with the latter mainly related to the new Edmonton Main branch location.
Q2 2015 vs. Q1 2015
Non-interest expenses were down 1% ($0.5 million), primarily reflecting lower direct computer costs and maintenance expense.
YTD 2015 vs. YTD 2014
Non-interest expenses increased 10% ($13.1 million), mainly due to the factors discussed above in the comparison of second quarter results to the same period last year.
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. System implementation is scheduled for early fiscal 2016 and year-to-date progress is consistent with the $62 million capital budget and planned timeline.
Upgrades and expansion of branch infrastructure are also ongoing. An expanded branch location in Prince George, British Columbia, was opened during the second quarter, and work is underway on expanded premises in Medicine Hat, Alberta.
Efficiency ratio
The second quarter efficiency ratio (teb), which measures non-interest expenses as a percentage of total revenues (teb), was 47.1%, unchanged from the previous quarter and up from 46.0% in the same period last year. Compared to the second quarter last year, the positive impact on total revenues of strong loan growth was more than offset by higher expenses, lower non-interest income and the decrease in net interest margin. The year-to-date efficiency ratio was also 47.1%, up from 45.4% last year, reflecting the same factors described above.
Outlook for the efficiency ratio
Ongoing pressure on net interest margin and lower net gains on securities are expected to constrain revenue growth compared to expectations at the start of the year. However, management will continue to prudently manage the growth of non-interest expenses while maintaining long-term investments in the infrastructure and technology necessary to support future business growth. On this basis, the efficiency ratio is expected to remain within a narrow range around 47.0% for the full year.
Income Taxes
The second quarter effective income tax rate (teb) for Continuing Operations was 26.4%, compared to 26.3% last year. The year-to-date effective income tax rate (teb) for Continuing Operations was 26.4% compared to 26.2% last year.
Outlook for income taxes
With the change in Alberta's provincial government subsequent to quarter end, an increase in the corporate income tax rate may be included in the next provincial budget. The magnitude of the potential increase, should it occur, will not be known until the budget is tabled in the fall of 2015.
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:
Q2 2015 vs. Q2 2014
Common shareholders' net income was down $2.5 million mainly reflecting a $1.3 million decrease in trust services revenues, $1.1 million higher non-interest expenses, and $1.0 million lower net gains on securities. The decrease in trust services revenues reflects elevated depository interest income within Valiant Trust last year, driven by client funds temporarily on hand related to a large corporate action. Lower net insurance revenues mainly resulted from increased policy acquisition costs and higher claims expense. The change in net gains on securities reflects less favourable market conditions in the current period.
Q2 2015 vs. Q1 2015
Common shareholders' net income was $0.2 million higher as the combination of a $1.7 million increase in net insurance revenues and slightly higher trust services revenues more than offset lower net gains on securities and increased non-interest expenses. Within net insurance revenues, a $3.9 million reduction in claims expense more than offset lower net earned premiums and higher policy acquisition costs.
YTD 2015 vs. YTD 2014
Common shareholders' net income of $3.8 million was down $4.3 million, reflecting the combination of decreased net revenues from both insurance and trust services, as well as lower net gains on securities and higher non-interest expenses.
Outlook for Discontinued Operations
Discontinued Operations are expected to contribute approximately $1.38 of earnings per common share in the third quarter through recognition of combined gains on the sale of CDI and the stock transfer business of Valiant Trust. No operating contributions are expected in subsequent periods.
Comprehensive Income
Comprehensive income is comprised of shareholders' net income from Combined Operations and other comprehensive income (OCI), all net of income taxes.
Q2 2015 vs. Q2 2014
Comprehensive income of $33.3 million was down from $67.0 million in the same period last year. The significant change was driven by lower OCI, which primarily reflects $17.1 million in unrealized losses, net of tax, on available-for-sale securities, compared to unrealized gains of $14.6 million last year. The decrease in fair value of available-for-sale securities mainly relates to a lower market value of securities within CWB's portfolio of preferred shares, combined with the realization of gains or losses on these and other available-for-sale securities. While the combined dollar investment in CWB's portfolios of preferred and common equities is relatively small in relation to total liquid assets, it increases the potential for comparatively larger fluctuations in OCI.
YTD 2015 vs. YTD 2014
Comprehensive income of $88.3 million was down from $122.4 million in the same period last year. The change reflects factors similar to those described above, with the decrease in fair value of available-for-sale securities partially offset by an increase in fair value of derivatives designated as cash flow hedges.
Balance Sheet
Total assets increased 10% in the past year and 1% in the quarter to reach $21,522 million at April 30, 2015.
Cash and Securities
Cash, securities and securities purchased or sold under resale or repurchase agreements totaled $2,241 million at April 30, 2015, compared to $2,535 million a year earlier and $2,504 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 on cash and securities from Continuing Operations recorded on the balance sheet of $39.8 million compares to net unrealized gains of $6.4 million as at April 30, 2014, and net unrealized losses of $19.2 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.
The difference compared to last year reflects decreases in the market value of preferred shares, certain debt securities and common shares. The change from the prior quarter primarily reflects lower market values of certain debt securities and common shares.
Net gains on securities from Continuing Operations in the second quarter were nil, compared to $3.9 million in the same period last year and $0.6 million in the previous quarter. The decrease in net gains on securities reflects ongoing management of the securities portfolio through less favourable market conditions in the current period and elevated gains realized in the second quarter of 2014. Based on the current composition of the securities portfolio, net losses on securities may reduce second-half fiscal 2015 non-interest income compared to both assumptions at the beginning of 2015 and the level achieved year-to-date, 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 remain relatively consistent with the current level through the remainder of the year.
CWB remained compliant with the Office of the Superintendent of Financial Institutions' (OSFI) Liquidity Adequacy Requirements Guideline.
Loans
Total loans, excluding the allowance for credit losses, grew 11% ($1,885 million) in the past twelve months, 2% ($429 million) in the quarter and 6% ($1,066 million) year-to-date to reach $18,672 million. In dollar terms, year-over-year growth by lending sector was led by real estate project loans ($510 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 ($417 million), followed by personal loans and mortgages ($340 million), commercial mortgages ($236 million), and corporate lending ($229 million). The portfolio of general commercial loans grew $107 million while oil and gas production loans were up $46 million.
Growth was apparent in all lending sectors on a sequential basis, led by commercial mortgages with an increase of $128 million, followed by growth in personal loans and mortgages of $99 million, and oil and gas production loans of $69 million. Growth in oil and gas production loans primarily reflects increased usage of existing credit facilities across a number of accounts, primarily within the syndicated loans segment of the oil and gas portfolio.
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 and Ontario. Growth over the past twelve months in the related categories of real estate project loans and commercial mortgages was particularly strong in Alberta. Of the residential projects underway in Edmonton and Calgary, Alberta, greater than 80% of aggregate units are pre-sold. To date there has been no evidence of presale rescissions or account deterioration related to these projects, and CWB continues to identify attractive lending opportunities in both markets. Alberta also led all provinces in growth on a sequential basis.
Optimum Mortgage
Net of portfolio sales, total loans of $1,622 million within the broker-sourced residential mortgage business, Optimum Mortgage (Optimum), increased 21% ($280 million) year-over-year, 6% ($89 million) compared to the prior quarter, and 10% ($152 million) in the past six months. 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 87% of Optimum's total portfolio at quarter end, compared to 85% last year and 86% in the prior quarter. Ontario continues to account for more than half of all new originations. At approximately 38% of the total, Ontario also represents the largest geographic exposure by province within Optimum's portfolio, followed by Alberta at 32% and British Columbia at 17%. Optimum continues to deliver very strong performance with an attractive risk profile.
Securitization
Securitized leases are reported on-balance sheet with total loans. The gross amount of securitized leases at April 30, 2015 was $621 million, compared to $282 million one year ago and $564 million last quarter. Leases securitized in the second quarter and year-to-date totaled $113 million (2014 - $85 million) and $264 million (2014 - $102 million), respectively.
Outlook for loans
Consensus forecasts for economic performance in Western Canada have been further revised in recent months, primarily as a result of the anticipated impact of continued low oil prices. Alberta and Saskatchewan are expected to underperform 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, with the exception of slowing growth within the equipment finance and leasing portfolio in Alberta, ongoing loan growth was apparent in both provinces through the second quarter.
The combination of low oil prices and a weaker Canadian dollar has improved the outlook for Canada's non-oil exporting provinces, including British Columbia, Manitoba and Ontario. The foregoing factors, combined with improving economic conditions in the U.S., have resulted in consensus expectations for stable overall economic conditions in Canada this year. With the recent relative steadying of oil prices, most forecasters now anticipate a continuing moderate oil price recovery in the second half of calendar 2015, further supporting CWB's outlook for double-digit growth this fiscal 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-related companies within the sector representing an additional 4% of total loans. Notwithstanding the increase in oil and gas production loans this quarter, growth opportunities in these areas are expected 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 outside of certain neighborhoods in Toronto and Vancouver remains within historical ranges, largely reflecting very low interest rates. However, reduced housing sector activity is apparent in Alberta and Saskatchewan, and the combination of historically high price levels and sentiment related to potential economic headwinds caused by low energy prices could also lead to further moderation of housing sector activity in these and other markets.
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. 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 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. Although evidence of this behavior has not materialized through the end of the second quarter, CWB continues to pursue opportunities to service high quality borrowers operating within targeted industry segments notwithstanding current macroeconomic conditions.
Credit Quality
Overall credit quality reflects continued strong underwriting practices and relatively stable levels of economic activity within CWB's markets through the second quarter. The full impact of lower oil prices has yet to work its way through all facets of the economy, and CWB continues to proactively monitor all accounts with a particular focus on those located within the oil-exporting provinces. Based on the results of stress tests simulating severe, negative economic conditions in Alberta and Saskatchewan over a multi-year timeframe, and assuming CWB's peak loss rates across all lending segments were experienced simultaneously within those regions, management is confident CWB would continue to deliver profits for shareholders while maintaining strong financial stability.
The dollar level of gross impaired loans at April 30, 2015 represented 0.50% of total loans at quarter end, compared to 0.44% last quarter and 0.30% one year ago. Combined gross impaired loans in Alberta and Saskatchewan represented 42% of total gross impaired loans, which compares favourably with the 49% of total loans located in these two provinces.
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 is consistent with management expectations in view of the very low levels of impairments experienced in prior quarters, and management does not view the increase to be evidence of unexpected weakness within CWB's portfolio. In spite of the higher level this quarter, gross impaired loans remain low as a percentage of total loans and compare to a five-year peak of 1.68% in the second quarter of 2010.
With updated engineering reports completed through the second quarter and oil price assumptions revised in January, nearly all of CWB's reserve-based credit facilities extended directly to oil and gas producers have been revised to reflect current reserves and very conservative oil price assumptions. CWB's current price assumptions are significantly lower than prevailing market prices for oil.
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, actual credit losses are expected to remain within CWB's historical range of acceptable levels.
As at April 30, 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 $107.9 million at April 30, 2015, compared to $100.5 million last quarter and $89.0 million a year earlier. The total allowance for credit losses represented 116% of gross impaired loans at quarter end, compared to 126% last quarter and 176% one year ago. Growth of the collective allowance over the past twelve months was consistent with loan portfolio growth of 11%.
Based on the economic environment and current expectations for credit quality looking forward, management expects the annual provision for credit losses to fall between 17 and 22 basis points of average loans.
Deposits
Total deposits were up 8% over the past year ($1,309 million), relatively unchanged from the previous quarter and increased 3% ($605 million) over the past six months. Total deposits by type and source are summarized below:
Personal deposits represented 59% of total deposits at April 30, 2015, relatively consistent with 60% one year ago and 58% the prior quarter. Total branch-raised deposits, including trust services deposits, represented 54% of total deposits at April 30, 2015, unchanged from the previous quarter and up from 53% one year ago. Demand and notice deposits increased 24% from the same quarter last year and now compose 36% of total deposits, up from 31% in the same period last year and 34% in the previous quarter. Term deposits raised through debt capital markets were $2,040 million at quarter end, representing 11% of total deposits, up from 10% last year and down from 12% 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.
Recent improvements to CWB's product offerings for business clients, along with training programs and targeted staffing enhancements, continue to support this focus on growing branch-raised deposits. CWB's expanding market presence, including ongoing expansion and upgrades to existing branches, also supports the generation of branch-raised deposits. Very strong 24% year-over-year growth in lower cost demand and notice deposits reflects this ongoing strategic focus.
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 include assets held for sale, totaled $564 million at April 30, 2015, compared to $383 million one year ago and $593 million last quarter.
Other liabilities, which include liabilities held for sale, were $618 million at quarter end, compared to $466 million a year earlier and $491 million the previous quarter. Higher other liabilities primarily relate to securities sold under repurchase agreements at April 30, 2015.
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 $9,490 million at April 30, 2015, compared to $11,539 million one year ago and $9,223 million last quarter. Higher assets under administration last year reflected funds temporarily on hand at Valiant Trust related to a large corporate action. Assets under management were $1,911 million at quarter end, compared to $1,763 million a year earlier and $1,868 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 April 30, 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 April 30, 2015, CWB's capital ratios were 7.9% CET1, 9.1% Tier 1 and 12.1% total capital. The CET1 ratio was unchanged from the prior quarter, while the Tier 1 and Total ratios were each down 10 basis points, primarily reflecting an increase in unrealized losses within the securities portfolio. At 7.7%, the Basel III leverage ratio was consistent with the prior quarter and remains very conservative.
Impact of Divestitures
Effective May 1, 2015, subsequent to quarter end, CWB closed the transactions involving CDI and Valiant. Management estimates the capital generated from the gain on sale and the related adjustment to risk-weighted assets will increase CWB's common equity Tier 1 capital ratio by approximately 70 basis points next quarter. 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:
Proceeds of the recent divestitures are expected to result in capital levels considerably 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 other financial institutions which utilize the AIRB methodology.
Plans for CWB's possible multi-year transition to an AIRB methodology for managing credit risk and calculating risk-weighted assets are being assessed, including the evaluation of resource requirements and associated costs. 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 April 30, 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 April 30, 2015 was $20.19, compared to $18.52 last year and $19.99 last quarter. The gain on sale from the strategic transactions involving CDI and Valiant is expected to add approximately $1.38 to CWB's book value per share.
Common shareholders received a quarterly cash dividend of $0.21 per common share on March 26, 2015. On June 3, 2015, CWB's Board of Directors declared a cash dividend of $0.22 per common share, payable on June 25, 2015 to shareholders of record on June 15, 2015. This quarterly dividend is 5% higher than last quarter and up 10% from the dividend declared one year ago.
Preferred shareholders received a quarterly cash dividend of $0.275 on April 30, 2015. On June 3, 2015, the Board of Directors also declared a cash dividend of $0.275 per Series 5 Preferred Share payable on July 31, 2015 to shareholders of record on July 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.
On May 1, 2015, CWB sold 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. The gains on disposal of an estimated $111 million, or $1.38 per diluted common share, will be reflected in the third quarter Interim Consolidated Financial Statements to coincide with the derecognition of the related assets and liabilities and the transfer of risks to the purchasers. The estimated gain reflects the sales proceeds less the net carrying value of the assets and liabilities classified as held for sale and related transaction costs. The gain is subject to adjustment and may differ from current estimates.
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 other federally regulated Canadian banks with October year ends, 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 April 30, 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 r
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Datum: 04.06.2015 - 12:00 Uhr
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