* Q2 EPS C$0.30 vs C$0.39
* Net income down 15 pct at C$21.6 million
* Says worst is over for margin compression
* Tier I capital ratio at 11.0 percent
* Shares fall 1.7 pct (Adds analyst comments, details, market reaction)
By Andrea Hopkins
TORONTO, June 4 (Reuters) - Canadian Western Bank (CWB.TO) said on Thursday its quarterly profit fell 15 percent as declines in the prime lending rate compressed margins, sending its shares 1.7 percent lower.
"Canadian Western Bank's earnings continue to struggle with the severe margin compression it has experienced over the past two years," Dundee Securities analyst John Aiken said in a research note.
"Despite additional loan growth, core earnings have been on a decline, directly from the pressure on its net interest income," Aiken added.
CWB, Canada's seventh-largest bank, reported net income of C$21.6 million ($19.5 million), or 30 Canadian cents a share, for the second quarter, ended April 30. That's down from C$25.3 million, or 39 Canadian cents a share, a year earlier.
While the results met analyst expectations, according to Reuters Estimates, shares of CWB fell 1.7 percent to C$14.30 on the Toronto Stock Exchange, while the broader financial index was 1.1 percent higher.
The Edmonton, Alberta-based bank blamed consecutive reductions in the prime lending rate for its margin compression, noting the prime rate was down 250 basis points from a year ago at a historic low 2.25 percent.
But President Larry Pollack said margin improvement was seen in the latter part of the second quarter and it expected that trend to continue through 2009.
"Our second-quarter results were as expected, given the significant negative earnings impact from ongoing margin compression, but also as expected, there is some light on the horizon," Pollock said in a statement.
"Interest rates have bottomed, market spreads appear to be normalizing, and deposit costs are trending downwards," he added. "We are now reasonably confident that we are through the worst as it relates to margin compression, though it will likely take considerable time before we see a return to historic norms."
CWB said total loans increased just 1 percent in the quarter, due in part to "aggressive loan prices" being offered by competitors. Pollack warned the bank would struggle to achieve its 10 percent annual loan growth target.
He also said gross impaired loans, which were flat during the quarter, would likely increase as the recession wears on.
Analysts have expected bad loans to increase across the Canadian banking sector as consumers and businesses struggle to pay credit card bills, mortgages and auto loans amid rising unemployment.
"Management's own outlook for loan growth will weigh on CWB's valuation in the near term until the bank can demonstrate sustained margin expansion," Aiken said.
Pollack said the money the bank sets aside for bad loans remained within expectations.
"Based on our current assessment, actual writeoffs are expected to remain within acceptable levels and we will continue to provision accordingly. At this point, we see no need to adjust our provisions beyond the targeted level of 15 (to) 18 basis points of average loans," Pollack said.
The regional bank's Tier I capital ratio stood at 11.0 percent at the end of the quarter.
The dividend was unchanged from the previous quarter at 11 Canadian cents.
CWB offers personal and commercial banking in Canada's western provinces of Manitoba, Saskatchewan, Alberta and British Columbia.
$1=$1.10 Canadian Reporting by Andrea Hopkins; editing by Rob Wilson