Is Canadian Western Bank a Home Capital Group Inc. 2.0?

Here are a few reasons I remain very bearish on Canadian Western Bank (TSX:CWB), suggesting caution as I did with Home Capital Group Inc. (TSX:HCG).

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Alternative lending is typically a category reserved for a few select leaders in the Canadian high-risk lending sector, namely Home Capital Group Inc. (TSX:HCG) and Equitable Group Inc. (TSX:EQB). What many investors don’t know is that regional lenders such as Canadian Western Bank (TSX:CWB) also have a significant alternative lending portfolio, one which is expected to grow over the coming year due to the decline (and possible exit) of rival Home Capital.

Loan quality aside (with loan-loss provisions for most alternative lenders still sitting at a fraction of 1%, which boggles my mind), the reality is that given the current overheated markets in Toronto and Vancouver, alternative lenders will likely be the first to take a hit should the market go south.

Let’s take a look at how exposed Canadian Western Bank really is, and try to quantify what sort of exposure Canadian Western Bank investors have to this sector.

Alternative lending portfolio

Canadian Western Bank estimates that its “Optimum” business segment has increased 18% year over year in the second quarter of 2017 based on increasing loan origination for alternative mortgages.  This portfolio exists to serve the needs of a very similar clientele to that of other alternative Canadian lenders: new homebuyers, immigrants, the self-employed, or otherwise “non-prime” borrowers traditional banks do not wish to serve.

While the Optimum portfolio totals only 11% of Canadian Western Bank’s total loan exposure, this segment is significant in that it represents one of the fastest-growing loan segments — a segment with a much riskier pool of loans with loan-to-value ratios exceeding 68% compared to a much lower LTV ratio of its traditional commercial and residential lending portfolios.

The geographic makeup of the bank’s customer base is also something to note. Currently, more than 50% of the bank’s optimum loans are generated in Ontario (primarily in Toronto) with 21% of originations taking place in Alberta and 17% in B.C.

With economists from around the world noting that some of the largest housing bubbles globally currently exist in the Vancouver and Toronto markets, and the oil market decline still hampering the economic prospects of Alberta, it appears that CWB’s exposure to all of the riskiest elements of the Canadian economy put it at a disadvantage compared to the larger, more diversified Canadian banks.

Provision for credit losses concerning

One thing which has stood out to me specifically with the balance sheet of alternative lenders such as Home Capital and Equitable, and now Canadian Western Bank, is the existence of unrealistically low loan-loss provisions.

I have written about these loan-loss provisions ad nauseam for both Home Capital and Equitable; however, it appears that Canadian Western Bank is playing a very similar game.

In the bank’s Q2 2017 financial statements, it notes that impaired loans totaled 0.62% of total loans this past quarter, yet the company has posted an average loan-loss provision of 0.26%, or 26 basis points on a year-to-date basis.

In the earnings release, the lender noted, “management expects periodic further increases in the balance of impaired loans across the portfolio,” while stating “the full-year provision is expected to fall toward the lower end of a range between 25 and 35 basis points.”

The math just doesn’t add up.

Bottom line

As a long-term investor taking a very bearish perspective on the Canadian oil and gas and real estate industries, I am very concerned about Canadian Western Bank’s prospects moving forward. Investors should take extreme caution with this name, given the economic headwinds and huge downside potential with this bank.

Stay Foolish, my friends.

Should you invest $1,000 in Silvercorp Metals Inc. right now?

Before you buy stock in Silvercorp Metals Inc., consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Silvercorp Metals Inc. wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

coins jump into piggy bank
Dividend Stocks

How to Use Your TFSA to Earn $1,057/Year in Tax-Free Income

Investing $5,000 in each of these high-yield dividend stocks can help you earn over $1,057 per year in tax-free income.

Read more »

Man in fedora smiles into camera
Dividend Stocks

How I’d Build a $20,000 Retirement Portfolio With These 3 TSX Dividend All-Stars

If you're worried about returns and want to focus on dividends, these dividend stocks are the first to consider.

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

If I Could Only Buy and Hold a Single Canadian Stock, This Would Be It

Here's why this high-quality defensive growth stock is one of the best Canadian companies to buy now and hold for…

Read more »

Concept of multiple streams of income
Dividend Stocks

3 Safe Dividend Stocks for Retirees

These three Canadian stocks are ideal for retirees due to their solid cash flows, consistent dividend growth, and healthy growth…

Read more »

dividends can compound over time
Dividend Stocks

3 Canadian Market Leaders Where I’d Invest $10,000 for Sustained Performance

Market leaders like Alimentation Couche-Tard Inc (TSX:ATD) are worth an investment.

Read more »

Hand Protecting Senior Couple
Dividend Stocks

How I’d Allocate $12,000 Across Canadian Value Stocks for Retirement Planning

Suncor Energy Inc (TSX:SU) is a Canadian energy stock worth investigating.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Stocks You Can Buy Now and Get Monthly Payouts From for Decades

Are you looking for monthly payouts? There are more than a few great investments that can fuel a monthly income…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Where I’d Put $1,000 Right Away in 2 Top Canadian Stocks for Growth

These two Canadian stocks are strong options and have been for decades, and that's not going to change anytime soon.

Read more »