Orig­i­na­tion

Canada’s big banks are pur­su­ing whole­sale bank­ing, cap­i­tal mar­kets and select M&A op­por­tu­ni­ties across the bor­der to hedge against a slow­ing mort­gage mar­ket.

National Mortgage News - - Contents - By laura alix

Con­di­tions chilly at home, Cana­dian banks seek U.S. ex­pan­sion

is­sues at home — big is­sues — have Cana­dian banks turn­ing their gaze south­ward in search of a backup plan.

Sev­eral ma­jor Cana­dian banks have been eye­ing whole­sale bank­ing, cap­i­tal mar­kets and, to a lesser ex­tent, M&A op­por­tu­ni­ties in the U. S. as a cush­ion against risks that lie ahead.

Mort­gage growth has been slow­ing in Canada, due in large part to ris­ing home val­ues in the Toronto and Van­cou­ver mar­kets. Mean­while, re­cent al­le­ga­tions of fraud against Home Cap­i­tal, the coun­try’s largest al­ter­na­tive mort­gage lender, have sent a tre­mor through Cana­dian bank stock prices in re­cent months.

Ad­ding in­sult to in­jury, Moody’s re­cently low­ered its rat­ings on sev­eral ma­jor Cana­dian banks over con­cerns about ris­ing lev­els of con­sumer debt, which the agency said would af­fect the banks’ abil­ity to with­stand po­ten­tial down­turns in the mar­ket.

The down­grade “re­flects our on­go­ing con­cerns that ex­pand­ing lev­els of pri­vate-sec­tor debt could weaken as­set qual­ity in the fu­ture,” David Beat­tie, a Moody’s se­nior vice pres­i­dent, wrote in a May 10 re­port. “Con­tin­ued growth in Cana­dian con­sumer debt and el­e­vated hous­ing prices leaves con­sumers, and Cana­dian banks, more vul­ner­a­ble to down­side risks fac­ing the Cana­dian econ­omy than in the past.”

Granted, Toronto-Do­min­ion Bank, Royal Bank of Canada and Bank of Mon­treal in re­cent days re­ported year- over-year profit growth rang­ing from 9% to 28% in the quar­ter that ended April 30. But their mort­gage bal­ances slumped, a pos­si­ble sig­nal that hous­ing-mar­ket weak­ness and broader eco­nomic con­ta­gion could hurt the banks in fu­ture quar­ters.

“The mort­gage mar­ket has been boom­ing for many years now, and ev­ery once in a while peo­ple…look at the rate of price ap­pre­ci­a­tion and the state of con­sumer bal­ance sheets, and they get re­ally wor­ried and ba­si­cally as­sume that it can’t con­tinue,” said Meny Grau­man, an an­a­lyst with Cor­mark Se­cu­ri­ties. “Peo­ple…think that it’s in­evitable that what’s hap­pened in the U.S. will hap­pen here.”

The largest of the bunch are ramp­ing up growth ef­forts in U.S. op­er­a­tions and cau­tiously eye­balling po­ten­tial ac­qui­si­tions. Their ex­ist­ing U.S. op­er­a­tions, which rep­re­sent any­where from a quar­ter to a third of their to­tal rev­enue, are al­ready help­ing to lift prof­its.

In 2015, RBC ac­quired City Na­tional Bank in Los An­ge­les. The City Na­tional unit, which spe­cial­izes in pri­vate and busi­ness bank­ing, added $57 mil­lion to RBC’s bot­tom line in the lat­est quar­ter. In ad­di­tion, RBC’s cap­i­tal mar­kets busi­ness in the U.S. posted a 22% year-over-year rev­enue in­crease and ac­counted for 53% of its to­tal cap­i­tal mar­kets rev­enue.

TD also got a lift from its U.S. busi­nesses in the quar­ter, with net in­come from its U.S. op­er­a­tions ris­ing 18% year over year. Net in­come at its U.S. re­tail bank rose 21%, which TD chalked up to strong bal­ance sheet growth driven by what it char­ac­ter­ized as re­la­tion­ship bank­ing.

And while growth at BMO’s U.S. op­er­a­tions slowed in the quar­ter be­cause of softer loan de­mand, com­pany lead­ers still ex­pressed con­fi­dence that they could achieve at least midto high-sin­gle-digit growth in the U.S. for the sec­ond half of the year, cit­ing the same busi­ness op­ti­mism their Amer­i­can coun­ter­parts have re­ported among their clien­tele.

For TD, those in­clude or­ganic- growth ef­forts in whole­sale

bank­ing, which refers to fee-based cor­po­rate bank­ing ser­vices such as trea­sury man­age­ment and cap­i­tal mar­kets.

In the lat­est quar­ter, whole­sale bank­ing made up about 9% of rev­enue at the over­all com­pany, but speak­ing to Na­tional Mort­gage News ahead of its last earn­ings call, Glenn Gib­son, vice chair and re­gional head of TD Se­cu­ri­ties in the U.S., said the com­pany hopes to boost that up to be­tween 12.5% and 15% of to­tal rev­enue. A big chunk of that growth will be sought in the United States.

“We’ve ac­tu­ally had a whole­sale busi­ness in the U.S. for quite some time,” Gib­son said. “His­tor­i­cally, it’s been a smaller busi­ness, but we’ve made a strate­gic de­ci­sion to say it’s got to be a much big­ger part of our rev­enue stream.”

Blair Flem­ing, RBC’s head of cap­i­tal mar­kets and in­vest­ment bank­ing in the U.S., told Na­tional Mort­gage News by email that RBC wants to bol­ster its cap­i­tal mar­kets bal­ance sheet by around 4% to 5% each year over the next five years, ul­ti­mately aim­ing to boost its U.S. mar­ket share from about 3.25% to­day to be­tween 4% and 4.5% over the next two to three years.

“We have a well-di­ver­si­fied in­vest­ment bank­ing busi­ness across sec­tors and prod­ucts and a strong sec­ondary mar­ket plat­form to back that up,” Flem­ing said. “We have at­tracted — and we con­tinue to at­tract — great tal­ent to the firm. It’s a small street, and peo­ple are drawn to us be­cause of our growth po­ten­tial and our unique cul­ture.”

More cross-bor­der M&A is pos­si­ble, but the rise in U. S. bank stocks while Cana­dian bank stocks have sput­tered has made such deals ex­pen­sive.

TD’s pres­i­dent and CEO, Bharat Mas­rani, would not rule out a po­ten­tial ac­qui­si­tion, if the right op­por­tu­nity should present it­self, but he also ex­pressed con­fi­dence in TD’s abil­ity to in­crease mar­ket share in the U.S. or­gan­i­cally.

“We have the scale. We have the brand po­si­tion­ing and ob­vi­ously the per­for­mance not to com­pel us to ac­quire,” he said. “But should a com­pelling sit­u­a­tion arise, we would look at it very se­ri­ously.”

Grau­man said the banks’ plans make sense. “I don’t sub­scribe to the view that Canada’s doomed, but they’re clearly con­strained in this mar­ket. There is big­ger growth op­por­tu­nity out­side of the coun­try. If you want to grow faster, you prob­a­bly want to go out­side of the coun­try.”

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