National Bank of Canada agreed to buy Canadian Western Bank for about $5 billion (US$3.6 billion) in stock in a tie-up of two of the country’s regional lenders. 

Montreal-based National will pay the equivalent of $52.24 a share for CWB, a premium of 110 per cent over the target’s closing price on Tuesday. The deal requires the approval of two-thirds of CWB’s shareholders and the Canadian government and is expected to close by the end of 2025.

For National Bank, Canada’s sixth-largest lender, the deal represents an opportunity to diversify its earnings away from Quebec, where it’s one of the most dominant financial institutions. Its stability has made it one of Canada’s top-performing banks over the past 12 months, with its stock rising about 21 per cent during that time. 

Now National Bank is using the strong valuation on its shares to acquire a weaker rival. 

“This transaction is about growth and brings together two great banks with a complementary footprint in personal and commercial banking, and supports our objectives in Western Canada and across the country,” National CEO Laurent Ferreira said in a statement.

National said it has identified $270 million in pretax cost and funding synergies.

Canadian Western has 39 branches and 65,000 clients, mostly in the provinces of Alberta and British Columbia. The bank has worked to diversify from its home province of Alberta, which is prone to the boom-and-bust cycles of the oil business. The firm opened its first branch in Ontario in 2020 and has also bulked up in other areas including equipment-leasing and wealth management.

But shares of the Edmonton-based lender have been trading at a very low valuation — less than 70 per cent of book value. Rising loan losses are a concern for Canadian Western — the key reason the bank missed analyst expectations for earnings in the fiscal second quarter. 

National plans to issue $1 billion in new equity. Quebec’s largest pension fund, the Caisse de Depot et Placement du Quebec, said it will help finance the deal by investing $500 million in National Bank via subscription receipts, which will make it the bank’s second largest shareholder. 

“CDPQ is proud to continue its long-standing commitment to National Bank by taking part in this transformative acquisition that will enable it to execute a new facet of its expansion plan,” Vincent Delisle, the fund’s head of liquid markets, said in a statement.