National Bank of Canada’s deal to acquire a smaller rival in western Canada makes strategic sense, analysts said, but the transaction may take years to deliver on its promised benefits for shareholders.

Shares of the Montreal-based lender fell almost 6 per cent on Wednesday after its surprise announcement that it agreed to pay $5 billion (US$3.6 billion) in stock to acquire smaller rival Canadian Western Bank. The transaction, in which National would exchange 0.45 of its shares for each share of CWB, represented a 110 per cent premium over the target’s closing price on Tuesday. 

Canadian Western shares surged 68 per cent to close at $41.89 on Wednesday, still well below the implied price of the bid. That’s partly because of the long path to regulatory approval, which isn’t expected until late next year.  

“This is a solid move for National as it has significant strategic benefits,” Jefferies Financial Group Inc. analyst John Aiken said in a report, citing increased scale and the opportunity for National to expand into western Canada. 

CWB has higher exposure to commercial lending, which will help boost National on that front, Aiken wrote. The smaller bank is also less reliant on more volatile capital markets revenue.

“There is a high degree of likelihood that the deal is completed,” Aiken said, but while he expects it will ultimately win the blessing of Canada’s Competition Bureau, the timing of that is “hard to gauge.” The deal will also need an opinion from Canada’s banking regulator, and the finance minister has the final say.  

“Despite our optimism on National Bank’s outlook from the deal, with the close 18 months out, investors will have to be patient on the expected payback,” Aiken said.

‘Vote of Confidence’

Merger approvals can be slow in Canada, as shown by the extended closings for Royal Bank of Canada’s acquisition of HSBC Holdings Plc’s assets in the country, which took well over a year from the announcement to completion. Rogers Communications Inc.’s purchase of Shaw Communications Inc. took more than two years.     

And with a federal election expected next year, the transaction has the potential to become a political issue, Stephen Boland, an analyst at Raymond James Financial Inc., said during an interview on BNN Bloomberg Television. Politicians in Alberta “are going to want some assurances from National that the job losses are not going to be too material,” he said. 

National Bank has said it will maintain Edmonton-based CWB’s headquarters in the west and add two nominees from the acquired bank to its board, once the deal is done.   

“I think it’s a vote of confidence in Western Canada,” Alberta Premier Danielle Smith said Wednesday. “That being said, I would far prefer them to be domiciled in Alberta and be paying Alberta corporate income taxes than Quebec corporate income taxes.”

Nigel D’Souza, an analyst with Veritas Investment Research, praised the deal for expanding National Bank’s reach within Canada — where large banks tend to generate better returns on equity — despite its “hefty premium.” 

“Strategically, this deal is a win for National Bank as it expands and diversifies the bank’s Canadian personal and commercial franchise across Canada, further enhancing risk-adjusted ROE,” D’Souza said in report. 

It will be three years after closing before National Bank can fully realize projected annual cost savings of about $270 million, and it will take some time to determine what other benefits it can wring out of the deal, D’Souza said. 

“The amount of revenue, cost and funding synergies realized will determine if National Bank paid a ‘fair price’ for CWB.”