Scotiabank bullish on National Bank-CWB merger despite stock dip

Market too harsh on National Bank's $5 billion Canadian Western deal, says bank

Scotiabank bullish on National Bank-CWB merger despite stock dip

National Bank of Canada's shares have dropped sharply after announcing plans to acquire Canadian Western Bank (CWB), but analysts at Bank of Nova Scotia said the market reaction is too pessimistic.

The $5 billion deal, announced last week, values CWB at $52.24 per share – a 26% premium over its closing price before the announcement. Despite this, National Bank’s stock has dropped nearly 9% since the news broke.

“Overall, we have a very positive view of this transaction,” Scotiabank analyst Meny Grauman said in a statement. “We tend to view in-market transactions as relatively low risk for large Canadian banks.”

Grauman expects the deal to bolster National Bank's capital levels, with the common equity tier 1 ratio projected to be 12.75% or higher after closing, which he views as "conservative" compared to the 11.5% regulatory minimum.

Despite potential regulatory scrutiny due to ongoing consolidation in the banking sector, Grauman is optimistic the acquisition has "a high chance" of getting the green light.

"[I] don't see any competing offers coming over the top,” Grauman said in a separate note.

The deal comes in the wake of RBC’s $13.5 billion acquisition of HSBC Canada, which raised concerns about decreased competition in the market. The Competition Bureau has indicated it will review the National Bank-CWB merger to assess its impact on market competition.

Read more: National Bank, Canadian Western acquisition deal raises competition concerns

“Large banks have structural competitive advantages that smaller banks can’t overcome,” said Veritas Investment Research analyst Nigel D’Souza. “They have extensive branch networks and lower funding costs, which make it hard for smaller banks to compete. Ultimately, these smaller banks will have to be consolidated.”

John Aiken, an analyst at Jefferies Securities, also believes the deal is likely to go through, citing the probability of regulatory approval, though he warned that a competing bid cannot be entirely ruled out.

Canadian Western Bank serves around 65,000 clients through 39 branches, primarily in British Columbia and Alberta. The acquisition is expected to increase National Bank’s commercial lending portfolio outside Quebec by 37%, adding CWB’s $37 billion in commercial loans.

National Bank, Canada’s sixth-largest lender, aims to strengthen its national presence and competitiveness with this acquisition. The transaction is seen as a strategic move to enhance its operations in western Canada, a region where it currently has a limited presence.

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