Canadian Western Bank - Two Steps Forward, Almost Two Steps Back

Edmonton-based Canadian Western Bank (OTCPK:CBWBF) (CWB.TO) is an example of why I'm a more-or-less retired analyst. This bank is a maddening mix of promise and pitfalls, opportunities and risk. I don't like management's surprise equity raise last month, but I do like the acquisition of GE's (NYSE:GE) Canadian Franchise Finance business and the bank's progress in diversifying its lending beyond Alberta.

While credit losses continue to look manageable on an incoming basis, and more energy companies are indicating that stability is in sight, I don't like the fact that CWB's provisions have been specific and not general reserve-building. I want to trust that management knows their business, but I also recognize that many banks have been taken out at the knees by "unprecedented" events that take management teams by surprise.

With the local shares up about 5% since my last update and the ADRs up closer to 10%, I'm not inclined to pound the table so much as polish it a bit. My long-term earnings-based fair value of C$28 does assume that the bank can't/won't get its ROE back above 14% (which it managed all but one year in the past 10), so there is upside. At the same time, the heavy reserve-building in a host of banks' energy portfolios suggests to me that the worst may not be over yet.

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Canadian Western Bank - Two Steps Forward, Almost Two Steps Back