Low oil prices keep testing Canadian Western Bank’s valuation

Canadian Western Bank branch in Calgary, Alberta

Have shares in Canadian Western Bank hit bottom? Probably not given the ongoing concerns about the regional bank’s exposure to oil prices, however the stock’s recent selloff may still offer a compelling opportunity within the long haul, says John Aiken, analyst at Barclays Capital Markets.

“With the stock trading at a discount to both its peers, and to its historical average, we believe CWB continues to present an interesting value proposition for longer term investors,” he explained in a note to clients.

“However, we feel valuation will continue to be tested over the near term, with negative market sentiment driving the stock, and low oil prices starting to impact macro factors, particularly within CWB\’s core market of Alberta.”

Mr. Aiken maintained his equal weight rating on Canadian Western Bank shares and left his price target of $29 per share unchanged. The stock has fallen 30% in the past six months and it is trading near $28 this week.

His earnings estimate for 2015, meanwhile, remains at $2.75 per share, but his EPS forecast would fall 13% if the bank’s loan growth declined to levels seen in early 2010, and 6% if credit conditions deteriorated to previous peak levels of credit loss provisions.

“We believe that both measures are most likely much less than the market might be currently pricing in,” he said.

“That said, stressing both factors together, the possibility negative impact to EPS magnifies to 17% to 22% range. Applying the impact its historical forward P/E of 11.6x suggests that the market may be pricing downside to $25.00.”

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