Consolidation among smaller lendersHere is National Bank's take on the possible consolidations of smaller lenders:
1:25PM ET on Tuesday Sep 27, 2022 by MT Newswires
01:25 PM EDT, 09/27/2022 (MT Newswires) -- Although it has been a tough market for all financial stocks this year, smaller lenders have had a rougher time, writes National Bank's Gabriel Dechaine. CWB, EQB, HCG & LB are down an average of 32% in 2022, compared to a ~14% decline for the average Big-6 bank stock.
The performance gap can be ascribed to several factors, namely:
1. Funding/NIM dynamics: greater reliance on term-GIC funding has put downward pressure on NIM of the smaller lenders;
2. Scale: superficially, there is no obvious disadvantage. However, investments made to improve competitive positioning, like CWB's AIRB transition, can impact short term efficiency;
3. Business mix: focused lending activities, namely in the residential mortgage space, have dampened growth outlooks (and valuations);
4. Capital management: some smaller lenders are on relatively weaker footing, while others are compelled to retain larger capital buffers.
While Canada's smaller lenders have a track record of growth through acquisition, these activities are not transformational, writes Dechaine. To narrow the competitive gap with their larger peers, something more substantial should be entertained. "Although we could evaluate a multitude of possible combinations, the one we assess in this report is a potential merger between CWB and EQB." Not only would such a pairing offer financial benefits (i.e., ~10% EPS accretion), it would also offer several strategic enhancements that could enhance earnings accretion over a longer time horizon.
In his analysis, Dechaine sees that not only would such a pairing offer financial benefits (i.e., potential EPS accretion of 10%, with upside over time), it would also offer several strategic enhancements. In short, a deal such as this one would lessen many of the challenges listed in the first bullet.
Discounts on smaller lenders could persist (or stoke M&A speculation).
The smaller lenders focused on in this report trade at a forward PE multiple of 5.5x, or a ~41% discount to the Big-6 banks. This spread represents a ten-year-high. If this discounted valuation persists, consolidation speculation of a different nature emerge: potential takeovers by larger entities.
This is not mere speculation as HCG remains in play following a bid this year, Dechaine writes.
In short:
* CWB: upside from an acquisition is obvious, especially in terms of lower funding costs. Board willingness and regulatory approvals are major hurdles.
* LB: the bank is focused primarily on an organic turnaround.
* EQB: the niche player is definitely attractive to bigger players, but hurdles include a premium valuation vs. HCG and most importantly, management's willingness to surrender the "challenger" bank vision.
Price: 22.61, Change: +0.31, Percent Change: +1.39
1:25PM ET on Tuesday Sep 27, 2022 by MT Newswires
01:25 PM EDT, 09/27/2022 (MT Newswires) -- Although it has been a tough market for all financial stocks this year, smaller lenders have had a rougher time, writes National Bank's Gabriel Dechaine. CWB, EQB, HCG & LB are down an average of 32% in 2022, compared to a ~14% decline for the average Big-6 bank stock.
The performance gap can be ascribed to several factors, namely:
1. Funding/NIM dynamics: greater reliance on term-GIC funding has put downward pressure on NIM of the smaller lenders;
2. Scale: superficially, there is no obvious disadvantage. However, investments made to improve competitive positioning, like CWB's AIRB transition, can impact short term efficiency;
3. Business mix: focused lending activities, namely in the residential mortgage space, have dampened growth outlooks (and valuations);
4. Capital management: some smaller lenders are on relatively weaker footing, while others are compelled to retain larger capital buffers.
While Canada's smaller lenders have a track record of growth through acquisition, these activities are not transformational, writes Dechaine. To narrow the competitive gap with their larger peers, something more substantial should be entertained. "Although we could evaluate a multitude of possible combinations, the one we assess in this report is a potential merger between CWB and EQB." Not only would such a pairing offer financial benefits (i.e., ~10% EPS accretion), it would also offer several strategic enhancements that could enhance earnings accretion over a longer time horizon.
In his analysis, Dechaine sees that not only would such a pairing offer financial benefits (i.e., potential EPS accretion of 10%, with upside over time), it would also offer several strategic enhancements. In short, a deal such as this one would lessen many of the challenges listed in the first bullet.
Discounts on smaller lenders could persist (or stoke M&A speculation).
The smaller lenders focused on in this report trade at a forward PE multiple of 5.5x, or a ~41% discount to the Big-6 banks. This spread represents a ten-year-high. If this discounted valuation persists, consolidation speculation of a different nature emerge: potential takeovers by larger entities.
This is not mere speculation as HCG remains in play following a bid this year, Dechaine writes.
In short:
* CWB: upside from an acquisition is obvious, especially in terms of lower funding costs. Board willingness and regulatory approvals are major hurdles.
* LB: the bank is focused primarily on an organic turnaround.
* EQB: the niche player is definitely attractive to bigger players, but hurdles include a premium valuation vs. HCG and most importantly, management's willingness to surrender the "challenger" bank vision.
Price: 22.61, Change: +0.31, Percent Change: +1.39