MONTREAL - The proposed merger between the Toronto and London stock exchanges will hamper the ability of Canada's natural resources sector to raise capital, the head of the National Bank of Canada said Wednesday.

Chief executive Louis Vachon said the deal should be scrapped and a an alternative made-in-Canada solution be developed.

"It's quite difficult to see how (this transaction) can be improved financially or strategically," Vachon said in an interview after expressing the concerns at the bank's annual meeting.

TMX Group (TSX:X), which operates the Toronto stock exchange, Montreal derivative exchange and other Canadian securities markets, announced in February that it planned to merge with London Stock Exchange Group, with has markets in the United Kingdom and Italy.

Under the proposed stock swap, which requires various approvals before it can be concluded, current shareholders of LSE Group would own slightly more than half of the common equity and have one more representaitve on the new board than shareholders of TMX Group.

Canada gets very little in exchange for ceding control of the exchange to the majority partner, Vachon said.

That's especially true for the natural resources sector, which is highly dependent on obtaining capital, especially local equity capital, he said.

National Bank (TSX:NA), which holds 1.3 million TMX shares, also opposes the deal because it doesn't offer stockholders a premium.

Vachon described the London exchange as a relatively weak strategic partner, saying the TMX's financial position is stronger.

He added that it would be preferable that ownership of the derivatives business remain in Canadian hands than to be merely regulated in Canada.

The head of Canada's sixth-largest bank said his strong opposition to the merger is "not cynical plot" to defend its position in Alpha, a bank-owned rival to the Toronto Exchange.

Vachon said National Bank is concerned about the deal because it has been financially and even a bit emotionally involved in the Montreal Exchange, which merged with the TSX.

"I don't jump on a soap box on every other issue. This one we feel quite close to."

National and Quebec-based Laurentian Bank (TSX:LB) have opposed the deal even though Montreal will be the head of derivatives trading for the new exchange.

That may be good initially, but Vachon questions what will happen should the TMX-LSE partnership become involved in a subsequent transaction.

"Once you get into a strategy of global consolidation, perhaps on the first trade, maybe Montreal would be protected, but who'se going to protect Montreal on the second trade?"

The proposed merger has divided the country's largest banks. Four oppose and three favour it, including Royal Bank and Bank of Montreal (TSX:BMO), which are advising the proponent.

TMX responded to Vachon's criticisms Wednesday by saying the merger proposal is about "new opportunity."

"It is about taking what we have built over the years and expanding its scope and reach," spokeswoman Carolyn Quick said in an email.

She said the deal positions the Montreal Exchange for global leadership in the derivatives space, and opens new opportunity for growth, high-paying jobs and international business development.

Meanwhile, National Bank said it plans further dividend increases while growing through acquisitions.

In response to a shareholder's question, Vachon said National Bank is seriously considering splitting the shares to ensure they remain affordable for small shareholders that rely on the dividend for income.

"We want to ensure that our share price remains affordable for all citizens of Quebec and Canada," Vachon said.

It will be seeking expansions outside of Quebec to complement the growth it still feels is available within its home base.

The focus will be on growing its wealth management and personal and commercial banking to have a better balance between its three sectors.

It will seek partnerships to distribute its products and add branches in existing clusters in Windsor, Toronto, Ottawa region and New Brunswick. Unlike some of its banking rivals, it will stay away from the U.S. market.

"We're going to look at opportunities whether they be organic, growth, partnership or acquisitions and look at the buybacks and the dividend at the same time," Vachon added.

However, if acquisitions are too marginal strategically and financially, the bank will return excess capital to shareholders.

Shareholders applauded the bank's approach, which helped it to produce record revenues and profits last year.

Although it failed to win support for its various proposals, shareholder rights group MEDAC applauded Vachon's spirited opposition to the TMX merger.

The meeting was interrupted, however, as security guards physically removed a proxy holder from the meeting who has been a vociferous critic.

"This is outrageous," Lowell Weir of Nova Scotia yelled as he was dragged out of the room to the applause of shareholders.

Weir has been engaged in a 10-year battle against the bank. He accused it Wednesday of failing to properly disclose a $75 million fine in 2009 and for having ineligible directors on the board.

Chairman Jean Douville ordered Weir's removal after accusing him of slandering the bank's employees and directors.

"You come here to these shareholder meetings with obviously only one thing in your mind and that's to promote your own agenda."