The proposed acquisition of the National Bank provokes reactions

The proposed acquisition of the National Bank in the west of the country had significant repercussions on financial institutions on Wednesday.

Speculators and investors caused the shares of the Laurentian Bank to jump by 7% and that of the digital bank EQB by 3% the day after the unveiling of an agreement by which the National Bank intends to buy the Canadian Bank of the West (Canadian Western Bank).

“People seem to be saying that there aren’t many small banks left,” comments Maxime Robillard, partner and principal analyst at Van Berkom.

The purchase of HSBC’s Canadian assets by Royal Bank and the acquisition of alternative mortgage lender Home Capital Group by Smith Financial are recent transactions helping to highlight the value of companies in the sector.

The case of Laurentian is special, since a review of strategic options conducted last year ended with the status quo in the fall. “Laurentian perhaps appears less attractive as a whole, but could on the other hand be attractive in pieces for certain buyers,” says Maxime Robillard.

Regardless, the premium granted to the Banque de l’Ouest led to a revaluation of the shares of Laurentian and EQB Bank on Wednesday.

If the title of the National Bank fell on the markets on Wednesday, in particular due to the issue of shares associated with the acquisition project estimated at $5 billion, the title of the Canadian Western Bank fell appreciated by 68%, significantly less than the 110% premium offered as part of the transaction.

Maxime Robillard was somewhat surprised by the reaction of investors. He anticipated a gap due to the months-long delay before shareholder votes and regulatory approvals, but less significant than that observed Wednesday.

“Perhaps people anticipate a risk that shareholders will not vote favorably or that a possible change of government in Ottawa following the next election in the fall of 2025 will delay approval,” he said.

With the transaction expected to close at the end of 2025, investors will have to be patient, underlines analyst John Aiken of the Jefferies firm. This expert judges that the purchase offer is an excellent strategic decision on the part of the National Bank and a direct response to the acquisition of HSBC Canada by the Royal.

The asset manager for whom Maxime Robillard works – Van Berkom – has been a shareholder of the Canadian Western Bank for several years. Maxime Robillard is hopeful that the transaction will materialize and that it will be beneficial for both banks. But he says that Van Berkom is not immediately selling his shares in the Banque de l’Ouest because the gap is too large between the current price and the value offered by the National Bank.

The National Bank is trying to acquire an organization whose shares have been losing value for two years, and Maxime Robillard mentions several elements to explain why the Banque de l’Ouest is in the “punishment box”.

“Due to its smaller size, the bank is under the standard model for assessing the capital to be held in relation to the various loans it grants. It is in the process of passing under the same regime as the large banks, that of advanced internal rating (AIRB), which is intended to be another way of determining the capital required for loans. There are delays, which has helped to dampen investor enthusiasm,” explains Mr. Robillard.

For a similar loan, he continues, the bank must set aside more capital, which makes the bank less competitive for some commercial loans. “This means that the bank cannot generate the same returns on equity as others. »

He adds that the bank has implemented a market share program (ATM) in 2022 allowing it to issue shares to finance growth. “The market didn’t like the idea because the bank’s stock was trading below its book value,” he says.

“The bank also had to invest in cash management solutions for customers, which increased expenses and affected profitability. Growth was less there in the last quarters. »

Maxime Robillard nevertheless persisted in believing that the discount was not fully justified, since the share was valued at a level lower than its book value (the book value is $37.13 per share) and that the dividend was well covered and offered a yield greater than 5%.

In addition, he explains, the bank operates in an interesting niche, that of commercial loans and equipment financing. Maxime Robillard appreciates the complementarity with the National Bank, which is less present in equipment financing and in the West geographically.