If you’re looking for oil price forecasts, bank analysts probably aren’t your best bet. Robert Sedran at CIBC World Markets admits as much in a new report exploring the sector’s sensitivity to weaker energy prices.
But Canada’s “oiliest” bank, Canadian Western Bank, which is headquartered in Edmonton and it has 42% of its loan book in Alberta, warrants a closer look.
Oil and gas production loans account for only 1% of CWB’s portfolio, and fell 6% on an annual basis in the first quarter of fiscal 2015. But Mr. Sedran isn’t all that worried about its subjection to the energy sector.
“More problematic is the indirect exposure (the one that flows with the economy), which cannot be quantified,” he told clients. “Moreover, when a lot of its balance sheet is deployed for the reason that province, the road between the indirect and direct exposure becomes blurred and also the distinction becomes much less meaningful.”
Mr. Sedran believes net interest earnings are the earnings driver investors should focus on most. He’s confident loan losses will rise, particularly since CWB’s are substandard as a number of pre-tax income.
But the analyst also pointed out that higher loan losses really are a bigger problem for Canada’s larger banks, having a 50% provision increase for CWB producing a 6% reduction in his earnings estimate, compared to an average cut of 8% for the bigger banks.
CWB’s revenues, however, really are a different story because the bank depends on net interest income a lot more than its larger peers. More than 80% of the bank’s revenue comes from this earnings driver.
Assuming loan growth is cut in half (yet remains positive) and CWB’s net interest margin falls by five basis points, Mr. Sedran expects his fiscal 2016 earnings estimate would fall by 12% – much more significantly than the larger banks.
“We are not prepared to get quite this aggressive with our estimates, but do feel it is appropriate to pull them back to reflect a stubbornly more challenging top-line outlook as we look past the current year,” he told clients, maintaining his 2015 EPS forecast of $2.70 and cutting his 2016 outlook to $2.85 from $2.90.