Ottawa Citizen

Canada’s banks in acquisitio­n mode: analysts

Firms positioned to swoop in on U.S. markets


Canada’s big banks TORONTO • have weathered the credit crunch in relatively good shape and should swoop in to buy some ailing U.S. banks, observers say.

Royal Bank of Canada, the country’s largest bank, and Bank of Montreal, the fifth largest by market value, are best positioned to make U.S. acquisitio­ns, CIBC World Markets analyst Darko Mihelic said yesterday in a research note entitled “Fish or Cut Bait.”

The banks have excess capital to use and relatively clean balance sheets, Mr. Mihelic noted.

“Perhaps now is the time to think big,” he wrote.

U.S. banks have taken a beating, with the KBW Bank index down by more than 40 per cent in the past year. Over the same period, the S&P/TSX banks index of large Canadian banks is down 17 per cent.

Considered another way, the Canadian bank stocks trade at about 2.1 times book value, while the median of seven U.S. large-cap regional bank stocks is right at book value, according to RBC Capital Markets.

Eric Bushell, chief investment officer of Signature Advisors within Toronto-based CI Investment­s, told a conference this week that Canadian banks will come out of the credit crunch episode as bigger and more global players.

“The Canadian banks came into this situation extraordin­arily well capitalize­d and have essentiall­y twice the amount of return on weighted assets as the U.S. banks,” Mr. Bushell said at a Toronto conference organized by research firm Morningsta­r.

“I think they’re in a position to really pick over the carcasses,” said Mr. Bushell, who runs the $4.2 billion CI Signature Select Canadian fund.

Dennis Gartman, the Virginia-based author of investment newsletter

The Gartman Letter, said at the same conference that Canadian banks would be “in the driver’s seat” for the next decade.

“They’re going to come around buying everything in the United States ... they’re in great condition.”

Royal Bank of Canada, which acquired Alabama National Bancorp earlier this year for $1.6 billion, has ample targets and its stock carries a hefty premium multiple, CIBC analyst Mihelic said.

U.S. banks in the U.S. Southeast, where RBC operates, and in the Midwest, where BMO runs Harris Bank, have seen their premiums to core deposits plummet to single digits in the past year, while these two Canadian banks’ premiums to core deposits have held in much better, at 15 per cent, Mr. Mihelic wrote.

He crunched numbers on possible RBC acquisitio­ns of Regions Financial, and BB&T, saying Regions would add slightly to Royal’s earnings in 2009, while cost savings of five per cent would have to be found in a BB&T buy to avoid diluting earnings.

Before Alabama National, RBC’s biggest U.S. purchase was the $2.3-billion buy of Raleigh, North Carolina-based Centura Banks in 2001.

As for Bank of Montreal, it has made a string of small U.S. purchases in the last few years, but paid less than $300 million in each case.

Mr. Mihelic said buying Huntington Bancshares would add to BMO’s earnings without any cost savings, while Associated Banc-Corp would be a better geographic fit, but more difficult financiall­y.

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