National Bank to Buy Canadian Western Bank: What Investors Need to Know

National Bank of Canada (TSX:NA) is acquiring Canadian Western Bank (TSX:CWB) in a historic deal for Canadian banks.

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The Big Six Canadian bank stocks have been weighed down by numerous headwinds over many years. Undoubtedly, the Big Six banks, as they’re often referred to, have still paid generous dividends. And as they get moving back up to full speed, there’s a good chance that the dividend growth and capital gains could pick up hand-in-hand.

Undoubtedly, Canada’s top banks will get criticized for their relative lack of performance in recent years. However, I still think it’s a mistake to sell them, especially as big change comes to the cohort over the next year.

Surprisingly, National Bank of Canada (TSX:NA), the smallest of the Big Six, has been firing on all cylinders, rising even as its peers continue feeling considerable pressure. Macro headwinds aren’t gone, but shares of NA have been able to sustain a pretty remarkable run, hitting new all-time highs close to $118 per share before the latest 6% single-day pullback.

National Bank of Canada targets the West Coast with Canadian Western Bank

What caused the sharp drawdown off peak levels? National Bank is reportedly acquiring a smaller regional bank, Canadian Western Bank (TSX:CWB), in a deal worth $5 billion. Indeed, it’s a huge deal that could be a game-changer for Canada’s number-six bank as it looks to continue gaining strides over its much larger rivals. Indeed, gone are the days of the Big Five, as National Bank looks to continue proving it’s a serious contender, especially when the Canadian economy isn’t exactly in full-on bull mode.

Caisse de dépot et placement du Québec (a pension fund) is taking a huge $500 million stake in National Bank of Canada. As the Montreal-based bank looks to gain exposure to Canada’s West Coast while seeking to unlock synergies across the board, I don’t think investors should be in a rush to ditch shares of NA right here.

Indeed, $5 billion is a somewhat hefty price tag for National Bank, which boasts a $37.7 billion market cap at the time of writing. Still, I believe National Bank’s track record of operational excellence will make the deal worthwhile for shareholders.

Just look at the relative outperformance over the past five years!

Even with the 6% drop on Wednesday, NA stock is still up close to 78% over the past five years. Those are some impressive gains, while some lagging Big Six members are flat over the timespan. Indeed, I think National Bank could be a far better bank with the latest move.

It’s a big deal for National Bank. Investors should be more bullish.

As for shares of CWB, they’ve blasted off more than 68% on Wednesday in response to the big news. Canadian Western is a bank that’s been under pressure, but in numerous prior pieces, I urged investors to buy it given what I saw as severe undervaluation baked into the name. As National Bank looks to solve the subtle issues going on at Canadian Western, I do think there could be tremendous upside for NA stock.

As such, I view the latest slump as nothing more than a buying opportunity for new investors who are willing to hang on for the next five to seven years.

For now, the deal is pending regulatory approval. If the deal happens, I expect NA stock could continue to tread a bit of water, perhaps correcting all the way back to the $100-105 range. If it falls to such levels, I’d not be afraid to recommend buying. The 3.8% dividend yield is already generous, and the 11.3 times trailing price-to-earnings multiple is quite low despite NA stock’s recent outperformance.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Western Bank. The Motley Fool has a disclosure policy.

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