Are Canada’s big banks about to embark on epic spending spree?
TORONTO The last time there was a worldwide economic meltdown, Canada’s big banks went shopping.
Having weathered the global financial crisis of 2007-08 better than some of their peers, the country’s Big Six banks made dozens of acquisitions in the years that followed, such as Montreal-based National Bank of Canada buying independent wealth-manager Wellington West Holdings Inc. in 2011.
But the coronavirus pandemic is not the global financial crisis. The cause and effects are different, and there remains a lot of uncertainty about what happens next.
National Bank president and chief executive Louis Vachon said during a virtual conference Wednesday that there are new opportunities they could look at, but that this is not 2009 or 2010, when the CEO said they put on “a generalized, risk-on, expansion strategy.”
This time around, Vachon said, the crisis is more complicated, the economy has been affected differently and central banks have swooped in harder and faster with help. “There are areas where we can take on more risk, and we will do so, but I think it’s going to be a lot more selective than ... what we did in 2009,” he added.
Vachon’s comments and those of his fellow CEOs who spoke at a Bank of Nova Scotia financial summit on Wednesday suggest that even if Canada’s big banks get through this current crisis with plenty of dry powder, they may not necessarily go on another post-crisis spending spree.
“The No. 1 priority for us is not to get distracted by a very active M&A calendar or agenda,” Vachon said later in his session when talking about National’s international strategy.
There still could be plenty of powder to spend. A recent report by credit-rating agency DBRS Morningstar said total earnings for the Big Six were up 69 per cent for the three months ended July 31 compared to the previous quarter, albeit they were still down 19 per cent from a year earlier.
The increased profits were mostly due to a 38-per-cent drop in provisions for credit losses, the report said, but those costs remained high at $6.8 billion. “The six large Canadian banks remain well positioned to weather the impact from the pandemic because of their diversified earnings power, strong liquidity and funding profiles, and solid capitalization,” the
DBRS Morningstar analysts wrote.
Buying opportunities could emerge for a bank with a solid balance sheet. Toronto-Dominion Bank has been eyeing expansion in the U.S. Southeast and would consider a “good asset generator” if it were to become available, TD president and CEO Bharat Masrani said Wednesday.
“I think this crisis finally might reveal some that might become available before this is all behind us,” he added.
There are, however, a few factors that could bog down any deal. First and foremost would be that the pandemic and its related uncertainty are ongoing. Expense control is increasing in importance again for the banks as well, and job cuts at some lenders are back on the table.
Furthermore, any acquisition would have to check the various boxes banks have for such large investments. Masrani said during his bank’s third-quarter conference they would look at buying another bank, but only do a deal that made sense.
Buying a new business is also just one of several investments a bank could make with excess cash.
“We always consider investments strategy first, strategy first, strategy first,” Bank of Montreal CEO Darryl White said on Wednesday.
Some lenders have been busy on the M&A front post-global financial crisis, such as Scotiabank. Scotiabank CEO Brian Porter said Wednesday that they have “strict prioritization framework” for investment.