Canadian Western Bank shares soar after announcing deal with National Bank

Shares of Canadian Western Bank surged Wednesday on the news National Bank was buying it at a $5-billion valuation, while shares of other mid-sized banks also saw some gains as the acquisition trend continued.

CWB shares closed up 68.3 per cent at $41.89 on the Toronto Stock Exchange after National Bank announced the all-share deal that it said values CWB at $52.24 a share.

The deal comes after RBC closed its $13.5-billion acquisition of HSBC Canada at the end of March, which created speculation of more deals to come.

“The acquisition of CWB also aligns with our expectations for further consolidation within the Canadian banking industry,” said Veritas Investment Research Corp. senior investment analyst Nigel D’Souza in a note to clients.

He said the consolidation potential comes as smaller banks are unable to overcome the many structural competitive advantages of the large banks, including economies of scale, extensive branch networks, and lower funding costs.

Shares of Laurentian Bank, whose search for a buyer last year didn’t lead to a deal, closed up 6.6 per cent, while shares for EQ Bank owner EQB Inc. closed up 2.9 per cent after giving up some gains earlier in the day.

The CWB acquisition follows not only RBC’s deal, but several others, said Shilpa Mishra, managing director in BDO’s Capital Advisory Services practice.

“There’s an unprecedented level of M&A in the Canadian banking sector,” she said.

Other deals include National Bank’s acquisition of Silicon Valley Bank’s $1 billion Canadian loan portfolio, BMO’s buying of Bank of the West for US$16.3 billion, and TD Bank Group’s attempt to buy First Horizon before anti-money laundering issues scuttled it.

The trend has raised some concerns about increased market concentration, but Mishra said she doesn’t see National Bank deal as a problem.

“It’s definitely a good thing,” she said. “It’s really about growing National Bank’s already growing portfolio and it doesn’t take anything away from the market. It gives National a broader depth of services.”

National Bank has also sold the deal as a benefit to the market, as it will see the Quebec-focused bank become a stronger national player by acquiring CWB’s Alberta and B.C.-focused operations.

“We will create a stronger full-service, coast-to-coast competitor, providing more choices to individuals, entrepreneurs and businesses across the country,” said chief executive Laurent Ferreira on a conference call after announcing the deal.

CWB is expected to maintain its branch locations as well as its Edmonton-based leadership and operations.

The deal doesn’t raise the same concerns that RBC’s acquisition of HSBC Canada did, said Keldon Bester, executive director of the Canadian Anti-Monopoly Project.

“This isn’t the largest financial institution purchasing a really differentiate competitor where there are overlaps.”

But CWB had been working to expand eastward and the loss of a growing player could be an issue if other banks also seek acquisitions, he said.

“The continuing trend is worrisome … this is one less door that folks are able to knock on for things like small business financing.”

While there aren’t many small to mid-sized banks that could be targets, there is the potential to take over some of the credit unions that have a significant share of some markets, he said.

“The real test will be if the other five (big banks) start thinking that it’s open season.”

The acquisition of CWB will have to secure regulatory approval, as well as be approved by two-thirds of Canadian Western Bank’s shareholders at a meeting expected to be held in September.

Jefferies analyst John Aiken said in a note that he believes the deal will likely be completed, but the timing of approval from the Competition Bureau is hard to gauge. He said the uncertainty on approval timing likely explains why National Bank doesn’t expect the deal to close until the end of 2025.

The deal was likely a direct response to RBC’s acquisition of HSBC Canada and the need for scale, said Aiken.

“Banking has always been driven by scale, but it has become increasingly more important given the uptick in spending over the past decade on regulatory and technology costs.”

While National Bank shares closed down 5.9 per cent at $108.49, Aiken said he sees the deal as positive for the bank despite the more than 100 per cent deal premium.

“Strategically, we believe that this is an excellent move for National as it increases its scale, footprint and commercial loan book.”

And while CWB’s shares soared on the news, its closing share price puts it about equal to where it was trading in 2014.

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