DBRS Comments on National Bank Acquisition of Wellington West

DBRS views National Bank’s (NA) announcement of an agreement to acquire the 82% it does not already own of Wellington West Holdings Inc. (Wellington) as an appropriate on-strategy, tuck-in acquisition, with no rating implications given the size of the target company (the total consideration is relatively small for the bank at $273 million (including $74 million in excess cash), or about 2.0% of common equity).

Winnipeg-based Wellington is the holding company for businesses operating in the wealth management and capital markets areas. On completion, Wellington will increase National Bank Financial’s retail assets under administration by 18% and skew the retail revenue base of the segment to almost 50% from outside of Québec. Wellington’s capital markets business is focused on mid-cap mining and energy, which NA had already identified as a targeted growth area.

About 65% of the purchase price is expected to be paid in NA common shares and the remainder in cash, with 73% of the purchase price deferred over four years. The transaction is expected to create approximately $280 million of goodwill and intangibles on close, which would have a negative impact of about 20 basis points (bps) on NA’s Common equity Tier 1 ratio under Basel 3 (Basel 3 CET1), assuming all deductions and additional risk-weighted assets are taken into account immediately (although management indicated a possible buy-back of the shares issued for the transaction would increase the impact to 55 bps); note that NA has an 8.2% Basel 3 CET1 at the end of the quarter.

The transaction, which is expected to close in July 2011, is subject to shareholder, provincial and regulatory approvals.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (January 14, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009) and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on the DBRS website under Methodologies