National Bank offers to buy Canadian Western Bank in deal valued at $5-billion

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National Bank of Canada NA-T is buying Canadian Western Bank CWB-T in a pending deal that extends the reach of the country’s sixth-largest lender into Alberta and British Columbia.

The Montreal bank said Tuesday that it struck a stock-swap deal that values the Edmonton-based Canadian Western Bank at $5-billion.

National Bank has been on a tear in recent years, with its share price surging 89 per cent in the past five years – making it the best performing Big Six bank stock – as it focused on expanding its business beyond Quebec and growing niche areas where it believed it could grow.

“CWB will strengthen our national reach by increasing our presence and branch network, providing us the opportunity to grow our retail segment,” Laurent Ferreira, National Bank’s chief executive officer, said during a conference call.

“Together, our clients will have greater access to banking services across Quebec, Ontario, Alberta and B.C.”

The deal is subject to approval of two-thirds of the votes cast by Canadian Western shareholders at a special meeting expected to be held in September. National Bank expects the transaction to close at the end of next year.

National Bank is set to gain the customer portfolio of Canada’s eighth-largest lender, with $37-billion in loans across 65,000 customers and 39 branches in Western Canada and Ontario. The deal increases National Bank’s Canadian lending portfolio outside of Quebec by 37 per cent.

The Montreal bank has been pushing into the Western provinces as part of its growth strategy. In the past three years, National Bank has grown its commercial loan book outside of Quebec at a compound annual growth rate of 18 per cent.

The deal adds to National Bank’s Western presence, as it says Alberta and British Columbia already represent about 24 per cent of its assets under administration.

But Canadian Western’s branch presence significantly accelerates National Bank’s move into the provinces. National Bank adds 16 Canadian Western branches to its three in British Columbia, and 14 to its three in Alberta.

Canada’s banking market is dominated by six major lenders which hold the majority of the country’s deposits. Competing in Canada typically involves luring customers from peers as acquisition opportunities have rarely come up over the past few decades – until recently.

In April, Royal Bank of Canada closed its takeover of HSBC Bank Canada in the largest domestic banking takeover on record, scooping up a long-awaited prize.

Last summer, Laurentian Bank of Canada put itself on the auction block, but failed to attract a buyer after the lender had struggled to turn around its beleaguered business.

With Canadian Western, National Bank will grow its commercial and wealth businesses – key growth areas for the lender – with niches in equipment financing, trust services and wealth management. More than $30-billion of Canadian Western’s loan book is in commercial, while the other $7-billion is in personal loans and mortgages.

The Edmonton bank had been growing its footprint in Ontario, especially in wealth and the middle market commercial banking segment with business clients that generate between $5-million and $100-million in revenue.

“CWB was founded by Western Canadian entrepreneurs and has spent the last 40 years building a strong banking franchise for business owners in Canada,” said Chris Fowler, Canadian Western’s CEO.

“With this transaction, we have the opportunity to build on our legacy to expand our services to our long-standing clients.”

National Bank expects to save $270-million annually by the third year after the transaction closes by streamlining the two lender’s operations and technology platforms.

National Bank is offering $52.24 for each Canadian Western share, representing a 110-per-cent premium to Tuesday’s closing price of $24.89. Current Canadian Western shareholders will own about 10.5 per cent of National Bank after the deal closes.

In doing a stock-for-stock deal, National Bank is using a hot currency. The total return of its shares – price gains plus dividends – has been the best among the Big Six banks for the past five-year, three-year and one-year periods, according to S&P Global Market Intelligence. National Bank stock is also the top performer so far in 2024, up 17.6 per cent.

Canadian Western shares, meanwhile, have lagged the pack. Before Tuesday’s announcement, they were down 16.3 per cent in 2024, easily the worst mark of any bank listed on the TSX. While National Bank shares are close to their all-time high, Canadian Western’s stock was more than 40 per cent off its all-time high prior to the announcement.

Going into the deal, National Bank stock was at a price-to-book value ratio of 1.77, according to S&P Global Market Intelligence. Canadian Western’s ratio was 0.63, ahead of only Laurentian Bank in the country’s banking sector.

To boost its capital levels for the deal, National Bank will do a $500-million public share offering and will also receive a $500-million investment from Quebec’s largest pension fund manager, Caisse de dépôt et placement du Québec, which will become the second-largest shareholder of National Bank.

“This investment is perfectly aligned with our strategy to expand the reach of Quebec companies in order to consolidate their leadership positions in their sectors,” Vincent Delisle, the Caisse’s head of liquids market, said in a statement.

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, has hiked capital levels in recent years, forcing the banks to hold billions of dollars in excess funds as a cushion against an economic downturn.

With the share offering, National Bank expects its common equity tier 1 ratio – a key measure of a bank’s ability to absorb losses – to reach 12.75 per cent after the deal closes, comfortably above OSFI’s 11.5-per-cent minimum.

National Bank said it will add two Canadian Western directors.

With a report from David Milstead