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 Western Bank led to a revaluation of the shares of Laurentian and EQB Bank on Wednesday.
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 says.
With the transaction expected to close in late 2025, investors will have to be patient, says analyst John Aiken of Jefferies. The expert believes the takeover bid is an excellent strategic move by National Bank and a direct response to Royal Bank’s acquisition of HSBC Canada.
The asset manager for whom Maxime Robillard works – Van Berkom – has been a shareholder in the Canadian Western Bank for several years. Maxime Robillard is confident that the transaction will go through and that it will be beneficial for both banks. But he says that Van Berkom is not immediately selling his shares in the Western Bank 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 Western Bank is in the “punishment bench”.
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 needed 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 (Editor’s note: the book value is $37.13 per share) and that the dividend was well hedged and yielded over 5%.
In addition, he specifies, 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.
