Canadian lender National Bank’s (NA.TO), opens new tab expansion from east to west, rather than following Canada’s big banks south of the border, could help secure growth, analysts and investors said.
The Quebec-based bank’s C$5 billion ($3.65 billion) deal to buy Alberta’s Canadian Western Bank (CWB.TO), opens new tab, announced on Tuesday, surprised Canada’s highly concentrated sector where consolidation has included No.1 lender Royal Bank of Canada’s C$13.5 billion purchase of HSBC’s domestic operations.
Veritas analyst Nigel D’Souza said the Canadian Western deal was “a clear winner” for National Bank, which had C$423.6 billion in assets at the end of fiscal 2023. D’Souza praised the expansion and diversification of the bank’s Canadian franchise which he said had the highest risk-adjusted returns over the long term.
D’Souza said international banking, a segment that many big Canadian banks have increasingly pursued, has the lowest risk-adjusted returns.
“When you look at the banks that are underperforming, they’re typically the banks that are focused on growing international banking franchises,” he said. National Bank has the smallest exposure to international banking among peers, with Cambodia its only significant foreign operation through its acquisition of ABA Bank in 2019.
National Bank’s stock has gained 16% so far this year, making it the top gainer among the big six banking stocks in Canada.
The latest deal gives National Bank access to CWB’s C$37 billion loan book, which includes equipment financing, commercial loans, mortgages, real estate and oil and gas loans.
National Bank could introduce CWB’s equipment financing business and its focus on wealth management in Alberta to Quebec in the east, said analyst Maxime Robillard at Quebec-based Van Berkom Global Asset Management, a CWB shareholder.
National Bank has increasingly focused on its capital markets business, which accounts for a third of its income, and at the same time has grown its wealth management business.
“We used to describe this bank as a regional bank… and now with Canadian Western Bank, you could credibly say this bank actually lives up to its name. It is a national bank now,” said Brian Madden, chief investment officer at First Avenue Investment Counsel.
ELECTION YEAR
The deal is expected to close by the end of 2025 and is subject to approval by two-thirds of CWB’s shareholders and regulators.
Robillard said he would vote for the deal, but he worried that the timeline, which could coincide with a Canadian election due by Oct. 20, 2025, could inject some uncertainty.
Some deals have taken months or over a year to get approvals from the federal banking regulator, the competition bureau and ultimately the department of finance.
“There could be western-based institutions/politicians in the middle of an election that may not be overly positive on their ‘domestic bank’ being acquired,” Raymond James analyst Stephen Boland said.
MORE CONSOLIDATION?
On Wednesday, shares of Laurentian Bank (LB.TO), which failed to find a suitor when it conducted a strategic review last year, and EQB Inc (EQB.TO), which operates Equitable Bank, surged, hinting at potential investor interest in more consolidation.
Investors and analysts believe that more consolidation is on the way in Canada, either mergers and acquisitions among Canadian banks or foreign firms exiting Canadian operations.
Analysts noted that the big six banks have structural advantages that the smaller banks will not be able to overcome that could eventually drive further consolidation.
“We believe the latest competitive actions could spur or force Laurentian to revisit and re-evaluate its strategic plan,” Jefferies analyst John Aiken said.
