Canadian Western Bank (TSE: CWB) (CBWBF) provides banking services for small and medium-sized companies. The firm provides commercial banking and financial services for business banking, personal banking, or wealth management. It also offers full-service personal banking options, including checking and savings accounts, loans, mortgages, and investment products.
Terms of the Program
The bank recently announced a new at-the-market equity program, which means that it will raise money by selling shares from its treasury on the exchange at its discretion.
CWB can issue up to C$150 million worth of common shares. This program is set to expire on July 1, 2024, and any net proceeds will go towards the company’s Common Equity Tier 1 capital.
Is This Good or Bad Dilution?
It’s important to note that equity financing is dilutive to shareholders, as it reduces the percentage of ownership in a company as new shares are created. It also lowers the earnings per share figure if net profits were to stay the same.
As a result, the money used from an equity raise would have to increase the earnings per share figure in order to benefit investors. However, as a bank, this may be a good move since the cost of borrowing is going up. Banks borrow money at a specific rate and then lend that money at a higher rate. An equity raise would allow it to lend out without having to pay interest itself.
Nevertheless, equity still has a cost, and it needs to be considered. For the equity raise to be beneficial to investors, the earnings yield of the stock at the time of sale would need to be lower than the return the bank will be able to receive from redeploying that capital.
If you use the return on equity as an estimate for the average return the bank will receive on the capital, it appears that the bank would not earn more than the earnings yield. This is because the earnings yield is currently 12.2%, while its return on equity is 10.4%.
In essence, it would cost the company 12.2% in order to reinvest the money at a return of 10.4%. Therefore, it would be beneficial for the company to wait for the share price to rise.
Analyst Recommendations
Canadian Western Bank has a Moderate Buy consensus rating based on seven Buys and three Holds assigned in the past three months. The average Canadian Western Bank price target of $36.41 implies 19.6% upside potential.
Final Thoughts
Although equity raises aren’t always ideal, there may be instances where they can create shareholder value. As long as the bank considers the cost of equity when selling its shares, it could be a smart move.
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