National Bank's bid to buy Canadian Western signals more consolidations in banking sector

Larger banks will try to gain more control and tackle any headwinds they might face in the near term, analysts say

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National Bank of Canada’s bid to buy Canadian Western Bank is yet another sign that Canada’s banking sector is going to further consolidate as the larger banks try to gain more control and tackle any headwinds they might face in the near term, some analysts say.

The $5-billion, all-stock deal will expand the Quebec-focused bank’s reach to Alberta and British Columbia, and comes just a few months after Royal Bank of Canada completed its acquisition of HSBC Bank Canada.

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“Our view has always been that there will be consolidation in the Canadian banking space because the large banks have structural competitive advantages that the smaller banks can’t overcome,” Nigel D’Souza, a senior investment analyst at equity research firm Veritas Investment Research Corp., said.

“They own most of the market, they have extensive national branch networks, they have lower funding costs … when you put all that together, these are advantages that the other, smaller banks cannot overcome. Ultimately, those banks will have to be consolidated.”

National Bank, the sixth largest in Canada, said the deal, which will require the approval of two-thirds of Canadian Western shareholders at a special meeting in September, would increase the bank’s presence and branch network and provide it with the opportunity to grow its retail segment.

The Competition Bureau said it would review the proposed deal.

“Under the Competition Act, the bureau has a mandate to review mergers to determine whether they are likely to result in a substantial lessening or prevention of competition,” spokesperson Sarah Brown said in an email. “Should we determine that the proposed transaction is likely to harm competition, we will take appropriate action.”

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She added that it is difficult to say how long a review will take since the bureau evaluates each deal on a case-by-case basis.

In September last year, the bureau allowed Royal Bank of Canada to buy HSBC even though the deal drew criticism because it removed the country’s seventh-largest bank from the market.

John Aiken, director of research at Jefferies Securities Inc., said in a note that there is a “high degree of likelihood” that the deal will be completed and he expects it to get approval from the Competition Bureau.

However, he said a “competing bid” cannot be fully discounted, even though the strategic benefits are likely the “highest” for National, as it increases its scale, footprint and commercial loan book.

Aiken said the deal was “a solid move” and a “direct response to Royal Bank’s acquisition of HSBC Canada.”

Strategically, D’Souza said National Bank will benefit from its takeover of Canadian Western Bank because banks that focus on Canadian banking, wealth management and capital markets tend to generate the best risk-adjusted returns over the long term versus banks that focus on international banking, which provides a lower return on equity, has higher instability and credit risk.

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“If you look at credit risk with Canadian Western Bank, its historical credit losses have been similar to National Bank,” he said. “So, it doesn’t add any risk while also expanding the franchise that generates the highest returns.”

Earlier this year, there were rumours that National Bank was looking to sell its Cambodian unit, ABA Bank, but it denied that was the case.

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The current deal may also be a sign of how the large Canadian banks are looking to consolidate to tackle “significant headwinds” such as increasing property and mortgage financing defaults, trade protectionism from the United States, volatile commodity prices and global market uncertainty due to conflicts, said Paul Samson, president of the think tank Centre for International Governance Innovation.

“For banks, bigger and more diversified should mean more robustness in facing the turbulence, or at least that is the assumption,” he said.

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