Seeking Alpha: Weak Energy Weighing Heavily On Canadian Western Bank

Back in my analyst days, I had a Garfield cartoon pinned to a wall that said "Every time I think I've hit rock bottom, somebody throws me a shovel". It's a good reminder that however bad things look, there's usually some way they can get worse, and that has proved to be the case for Canadian Western Bank's (OTCPK:CBWBF) (CWB.TO) which shares have weakened further from my last update, as energy prices have eroded further and have started to hit Alberta's economy harder.

With that "it can always get worse" mometo mori in mind, it's difficult to hold, or advise holding, a company that is still going through a cyclical decline. Canadian Western is likely to see more pressure on loan growth and credit from here, and I don't think anybody really knows what will happen to Alberta's economy if oil prices stay sub-$40 for an extended period of time other than that it will be bad.

I think there's value here, but it's absolutely true that there is above-average risk. I'm expecting the next five years to see an average ROE at CWB below 10%, with a scant 1% annualized cash earnings growth rate. Over time, though, I think ROE will recover into the low-double digits and earnings will grow at an annualized rate of more than 6%. That suggests that a fair value in the high $20s is still appropriate, but the market is clearly down on this name and the high correlation to oil prices will likely continue to dominate near-term trading.

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Weak Energy Weighing Heavily On Canadian Western Bank