PACIFIC & WESTERN CREDIT CORP. (P&W), based in London, Ont., is taking its wholly owned bank subsidiary, Pacific & Western Bank of Canada (P&W Bank), public in order to free the parent company to invest in a broader array of real estate investments and to fund the acquisitions of those assets better.
“It will give the shareholders of [P&W] two streams of income: one from the [remaining ownership stake in the] bank; and another from direct investment in real estate,” says David Taylor, president and CEO of P&W.
The initial public offering (IPO) also will give the bank subsidiary the flexibility to raise capital to help it maintain the reserves required under the new Basel III banking requirements.
As Taylor wrote in a Jan. 31 message to shareholders: “Listing the bank on the [Toronto Stock Exchange] will give [the bank] direct access to the public markets so that it can raise capital to support growth as the need arises.”
Parent to be freed
After the IPO, P&W – the parent company – will be free, on a regulatory basis, to return to offering higher loan-to-value mortgages and entering into joint ventures in the commercial and multi-residential real estate sector – a business P&W had agreed to give up in 2002 so it could secure its Schedule I bank charter for P&W Bank from the Office of the Superintendent of Financial Institutions.
“[Real estate] is an area in which we, the management, have a fair degree of expertise and a long and very successful history,” Taylor says. “We thought that with the bank focusing on the less risky side of the real estate market, it left us an opening for investment in the more riskier side – which, of course, comes with the possibility of much more return.”
P&W Bank, which does not have branches, raises its deposit base through a cross-country network of deposit brokers and is involved in lending to the public, corporate and real estate sectors. On Jan. 31, the bank reported total assets under administration of $1.4 billion, down from $1.6 billion on the same date in 2012, and net income of $1.1 million for the quarter ended Jan. 31, down from $1.8 million for the corresponding quarter a year earlier.
On March 7, holders of the parent firm’s Series C notes voted overwhelmingly in favour of a plan that would see all future interest obligations of those notes be paid with common shares of P&W Bank and also see holders of the notes be given the option of converting those notes into common shares of the bank.
On March 11, P&W converted $30 million of subordinated notes held by P&W Bank into common shares of the bank, boosting the bank’s common equity’s Tier 1 capital ratio to 10.4% – saving the bank $3 million in interest expenses related to the subordinate debt.
Increasing profitability
As Taylor’s note explains: “Stripping [P&W Bank] of most of its expensive subordinated debt will significantly increase its profitability.”
Should P&W receive all regulatory approvals, the firm expects to complete the IPO by the end of April. Following the IPO, P&W estimates, approximately 10% of P&W Bank’s shares will be held by the public, with the remaining 90% held by the parent firm. Over time, Taylor says, P&W expects its ownership stake to decrease as the public increases its stake in the bank.
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