Canadian banks seen hitting U.S. acquisition trail

By Lynne Olver

TORONTO (Reuters) - Canada's big banks 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 (RY.TO), the country's largest bank, and Bank of Montreal (BMO.TO), the fifth largest by market value, are best positioned to make U.S. acquisitions, CIBC World Markets analyst Darko Mihelic said on Friday in a research note entitled "Fish or Cut Bait."

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

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

U.S. banks have taken a beating, with the KBW Bank index .BKX down by more than 40 percent in the past year. Over the same period, the S&P/TSX banks index .GTSX401010 of large Canadian banks is down 17 percent.

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," 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 Bushell, who runs the C$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 percent, Mihelic wrote.

He crunched numbers on possible RBC acquisitions of Regions Financial (RF.N), and BB&T (BBT.N), saying Regions would add slightly to Royal's earnings in 2009, while cost savings of 5 percent 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.