We’re holding CWB Despite the +65% Surge Last Week

About two years ago, the Canadian Western Bank (“CWB”) caught our attention.

After falling just about 40% from its November 2021 high, the stock price was certainly considered contrarian. In addition to being out of favour, we liked that it traded almost 30% below its book value (which is a financial term used to describe a company’s sum-of-the-parts), paid a dividend yield over 5%, and focused its attention on business loans.

For those reasons, we purchased the stock for all suitable clients at a price just under $24/share in November 2022. Since then, we’ve collected about $2.33/share in dividends.

Last week, the National Bank of Canada (“NA”) made a bid to buy CWB, offering a share swap that values CWB at almost C$5 billion. CWB’s stock price surged the next day, closing at $41.18/share on Wednesday, roughly 65% higher compared to the day before.

The transaction makes perfect sense for NA. There’s minimal overlap between the two banks. NA generates almost half its revenue in Quebec while CWB is concentrated in Western Canada. In fact, 60% of CWB’s loan portfolio sits in British Columbia and Alberta. NA’s revenue comprises personal and commercial banking, wealth management, and capital markets. By comparison, the CWB is primarily concentrated in commercial lending to businesses. 

National Bank is offering to give Canadian Western Bank shareholders 0.45 NA shares for every 1 CWB share. In other words, since NA’s stock price closed at $106.43/share on Friday, CWB shareholders would receive $47.89/share ($106.43*45%) if the acquisition closed today. 

At that price, NA is paying about 1.3x the book value of CWB, which is the same valuation that the other big Canadian banks trade for today. 

However, CWB’s stock price trades at a 14% discount right now to that same takeover price, which offers quite the arbitrage opportunity for our clients. Part of the reason for the discount is because the deal isn’t expected to close until the end of 2025. In addition, there’s always regulatory uncertainty. The deal needs to be approved by the Office of the Superintendent of Financial Institutions (also known as OSFI), the Competition Bureau, and the federal Finance Minister. However, because regulators approved the Royal Bank acquisition of HSBC, we expect this deal to be approved.

As long as the CWB stock price trades at a 14% discount to the takeover price, which will disappear as the deal moves closer towards completion, we will hold our CWB stock for clients. In the meantime, because the offer is a share swap, CWB’s stock price will trade up and down in the same direction and by a similar magnitude as NA’s. 

NA is a strong bank that has outperformed its peers over the last several years. We expect its leadership in the group to continue until this deal closes next year.