Canada’s Big Six banks are the main attraction when it comes to quarterly earnings season in the financial sector. Squeezed from the spotlight, Laurentian Bank and Canadian Western Bank are the little guys that often get missed.
But as with any good circus, it pays to stick around after the elephants are done performing to see what the rest of the show looks like. Montreal-based Laurentian and Edmonton-based Canadian Western, this country’s Nos. 7 and 8 banks by asset size, are both well worth a look.
Laurentian and Canadian Western report second-quarter earnings Thursday and could reveal a few bright spots that investors didn’t see from the larger players in what, so far, has been a sluggish quarter for bank results.
Both are in the sweet spot to raise dividends. CIBC World Markets analyst Robert Sedran estimates Laurentian’s second-quarter results will give it a payout ratio of 34 per cent of earnings in the quarter, and 32 per cent for the year, which is significantly below the 40- to 50-per-cent target range that management has set. As a result, Laurentian can be expected to boost its dividend 8 per cent, Mr. Sedran said in a recent research note.
Canadian Western Bank will be at a 24-per-cent payout ratio, based on forecast second-quarter earnings, and 22 per cent for the year. That is below its target payout range of 25 to 30 per cent and leaves the bank well-positioned to make its second hike since December, when it boosted its quarterly payout to investors by 18 per cent, raising it to 13 cents a share.
But Canadian Western Bank has never been known for aggressively raising its modest dividend. With an annual dividend yield of less than 2 per cent, Canadian Western chief executive officer Larry Pollock is more concerned about growing the bank’s loan book while also expanding through small acquisitions such as the purchase of National Leasing two years ago for about $130-million in cash and stock.
The loan books are where the small banks may surprise this quarter. While the country’s Big Six all reported shrinking net interest margins in their Canadian businesses during the second quarter, because of increased competition and undercutting on mortgages and lines of credit, analysts figure Canadian Western and Laurentian could buck the trend.
That is to say, while net interest margins may not be going up a lot at the smaller banks, they may hold firm. And in the present environment of eroding margins, that is considered a positive development. The margins are a measure of the difference between what banks make on loan interest and what they pay out on deposit interest.
“Flat’s not a bad thing,” Mr. Sedran said in an interview, given the squeeze other banks are experiencing. Both small banks have less exposure to the mortgage and credit markets than the major banks, sheltering them from the worst of the competitive pressures the Big Six are feeling.
There is another strong factor working in Canadian Western Bank’s favour. Though it is a minor player nationally, with about $12.7-billion in assets, it is a large force in the West, particularly as a lender to the oil patch. In that arena, lending has been going strong, driven by higher commodity prices, and margins have held up.
“The phenomena in the Canadian market right now are: You’ve got a slowing consumer, you’ve got resurgent commercial [lending]activity, and you’ve got economic activity still more tilted toward the West, with oil prices doing well,” Mr. Sedran said.
“So those phenomena benefit Canadian Western Bank. The vast majority of their loan book is commercial lending, and so the growth is in the part of the business in which they excel.”
To take advantage of that, Canadian Western Bank will be looking to plow capital into building up its lending business even more. That suggests that the bank may continue to be stingy on its dividend yield. However, CEO Mr. Pollock isn’t ruling out further increases.
Upon raising the dividend in December, the CEO suggested more increases are possible in the near term: “We expect further dividend increases in the future as we achieve our performance objectives,” Mr. Pollock said.