As goes oil, so goes Canadian Western Bank's share price. But the Edmonton-based lender wants to upend this relationship with an ambitious strategy to expand into Ontario.
The bigger challenge may be to get investors to follow along.
The bank's Alberta base isn't a problem when oil prices are strong and the province's economy is booming. From 2003 to 2007, the price of crude oil tripled (in U.S. dollars) and CWB's share price performed even better.
In this five-year period, CWB rose nearly 220 per cent – about five-times the pace for the S&P/TSX composite commercial banks index and about three-times the pace for Royal Bank of Canada, the epitome of a big, diversified bank.
But CWB is volatile. When the financial crisis kicked in, its share price plummeted 75 per cent, suffering far worse than its banking peers.
It recovered between 2009 and 2014. But when the price of crude oil plummeted to 13-year lows between 2014 and 2016 – walloping Alberta's oil-fueled economy – CWB's share price again fell sharply, this time by 65 per cent.
It has since recovered some lost ground, but remains well below recent highs. Management has clearly had enough with the seesawing.
At an investor-day event on Tuesday – held in Toronto, to underscore its point – CWB declared that within five years, the bank's operations in Ontario should be as substantial as those in Alberta. The bank expects that each province will generate 30 per cent of loans, marking a substantial shift from the 36-16 split currently. (British Columbia will also generate 30 per cent of loans.)
"We recognized some time ago that diversification is a necessary part of our next phase of growth," Chris Fowler, CWB's chief executive officer, said in his opening remarks.
The bank isn't retreating from Western Canada but rather counting on strong growth in Ontario through CWB's exposure to equipment leasing, alternative mortgages and specialized financing.
In its presentation on Tuesday, CWB estimated that its Maxium Financial division, which provides loans and equipment leases largely to Ontario businesses, will see its loan book expand to $2.5-billion, up from $1-billion.
It expects that its franchise finance division, specializing in loans to hotels and restaurants – 60 per cent of them in Ontario and Quebec – will grab a 10- to 20-per-cent market share and drive as much as 5 per cent of total bank profit within five years.
And it expects that its Optimum Mortgage division, which has about half of its business in Ontario, will double in size to $4-billion in loans within five years.
At a time when the big banks are struggling to find growth opportunities in Canada, CWB believes that it has some advantages: It is focused on specific industries and it is largely free of costly bricks-and-mortar branches.
"In other words, we set ourselves apart through our specialized knowledge of targeted industry segments, and this specialization has enabled us to be more nimble and responsive than our competitors," Mr. Fowler said.
Analysts appear to be taking a wait-and-see approach to CWB's outlook: Growth projections for Ontario look ambitious and the bank still has a big exposure to Alberta, which continues to struggle with oil prices below $50 (U.S.) a barrel.
"Overall, we believe the bank's strategy to diversify geographically, enhance loan mix and optimize funding are all steps in the right direction," analysts at CIBC World Markets said in a note. However, they left their recommendation on the stock unchanged: "neutral," or the equivalent of a lukewarm hold.
RBC Dominion Securities expects that near-term growth will be a challenge, given that 45 per cent of the bank's current loan portfolio resides in the Prairie provinces.
"Recent indications suggest that the economic outlook in these regions are improving but will likely remain slow," the RBC analysts said. They left their recommendation on the stock at "sector perform" - also the same as a hold.
CWB has always been a bet on oil. For now, it still is.
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