U.S. banks too pricey for would-be Canadian buyers
Lenders north of border cool on acquisitions as American market strengthens
Canadian banks are tapping the brakes on their merger-fueled
U.S. expansion.
Executives at Canada’s largest lenders, which have just wrapped up their fiscal-fourth-quarter earnings season, said U.S. targets are pricey, making them leery of doing deals in their fastest-growing market.
If there are no acquisitions by Canadian banks in the rest of this month, 2018 will mark the first year since 2014 that Canada’s banks have not bought any U.S. retail lenders, according to Dealogic.
“We would continue to look for opportunities where we might see quality banks,” Riaz Ahmed, chief financial officer for TorontoDominion Bank, known as TD, said in an interview. “But those opportunities are few and far between and the valuations continue to be expensive. We will remain patient.”
TD built the seventh-largest retail bank in the U.S. by assets with a string of acquisitions between 2005 and 2008, and has branches stretching from Maine to Florida. The bank is looking for more growth in Florida. But it is content to engage in “hand-tohand combat” with its competition to grow deposits slowly if it can’t find a bank to buy, said Greg Braca, head of the bank’s U.S. retail business.
Coming out of the 2008 financial crisis, Canadian banks were among the biggest buyers of U.S. banks.
Their balance sheets were viewed as healthier than those of their U.S. counterparts, and the Canadian firms used their heft to snap up rivals and boost U.S. market share.
Royal Bank of Canada, Canada’s largest bank by market valuation, closed a $5 billion (U.S.) deal for City National Bank in 2015 and owns the 11th-largest investment bank in the U.S. by fee revenue.
Now, the bank is emphasizing “organic” growth outside of new acquisitions in the U.S., David McKay, RBC’s chief executive, said during the bank’s earnings call last week.
The shift is partly a function of high prices for banks in the U.S. and growing competition for targets in the U.S., said Jim Shanahan,
an analyst with Edward Jones.
“The Canadian bank advantage is gone,” he said. U.S. banks have largely repaired their businesses, allowing them more flexibility to bid in auctions.
For example, Bank of Montreal, which owns Chicago-based Harris Bank, lost a bid earlier this year to acquire Harris’ local rival MB Financial Inc. Bank of Montreal, which does business as BMO Financial Group, offered to pay more than the eventual winner, Fifth Third Bancorp.
But BMO still couldn’t convince MB’s board to back the transaction, according to people familiar with the matter.
MB picked Fifth Third because it foresaw greater long-term value in Fifth Third’s stock and got two board seats in the deal, according to regulatory filings.
Fifth Third’s stock has fallen 22% since the transaction was announced in May, compared with the 17% decline recorded by the KBW Nasdaq Regional Banking Index over the same period.
BMO acquired New York-based fixed-income broker-dealer KGSAlpha Capital Markets for an undisclosed amount earlier this year, adding to its capital-markets business. All told, the U.S. contributed 28% to the bank’s earnings of
5.45 billion Canadian dollars ($4.12 billion) this year, up from 24% of total earnings last year.
The fifth-largest Canadian bank, Canadian Imperial Bank of Commerce, last year bought PrivateBancorp Inc. for $3.8 billion, rebooting its U.S. business after essentially exiting the country in 2007. CIBC’s business in the U.S. made up 16% of its earnings this year, growing from 9% last year.
Even so, CEO Victor Dodig, during the bank’s fourth-quarter earnings call, also emphasized organic growth as the route to greater growth in the U.S.
Some analysts believe the Canadian banks’ reticence won’t last too long.
That country’s top five banks already dominate their home market and may have little choice but to continue looking south for opportunities, said Gabriel Dechaine, a banking analyst for National Bank Financial.
Buyback and dividend programs aren’t large enough to eat up excess capital being generated by the Canadian banks, he said, and the growth in their U.S. units argues for more investment.
The market’s recent tumble, which has clobbered U.S. bank stocks, may also make them more attractive targets at some point, as well.
The KBW Nasdaq Regional Banking Index, for example, is now trading in bear-market territory, having fallen more than 20% from its recent peak.
“The business climate is such that you benefit more from putting money in the U.S.,” he said.