April 26, 2010 / 9:36 PM / 8 years ago

Canadian banks hone in on small, low-risk deals

By Andrea Hopkins - Analysis

TORONTO (Reuters) - Canadian banks, healthier than most global rivals, have finally started to make a move to expand their U.S. businesses, snapping up small, troubled banks south of the border. And they are hungry for more.

It may mark the beginning of a long-awaited series of cautious and opportunistic acquisitions by big Canadian banks, which have made no secret of their desire to increase their presence in U.S. retail banking.

While global regulatory uncertainty means deals are likely to remain small in the short term, two deals announced in the last two weeks suggest acquisitions made with the assistance of U.S. regulators are a perfect fit for Canada’s conservative, cash-rich bankers.

“The Canadian banks are in a fairly unique position to be able to spend a few dollars in this environment,” said Edward Jones analyst Craig Fehr.

“In the very near term, you’re going to continue to see them look at these very small deals, deals they can tuck in and integrate quickly and then try to drive growth out of those branches longer term,” Fehr said.

In the last two weeks, Canada’s second-largest bank, Toronto-Dominion Bank (TD.TO), and No. 4 Bank of Montreal (BMO.TO), announced deals to buy the assets of failing U.S. lenders, folding regional branch networks into the growing retail franchises of the Canadian brands.

The deals, announced late on a Friday afternoon, will by no means transform the Canadian banks. Both TD and BMO simply stepped in to buy up small banks with a handful of branches, after first ensuring the U.S. government would assume much of the risk of the deal.

TD went first, on April 16, acquiring the assets and liabilities of three troubled Florida banks worth $3.8 billion from the Federal Deposit Insurance Corp (FDIC).

BMO followed a week later, on April 23, as its Harris unit acquired the assets and liabilities of Amcore from the FDIC in a deal that boosts its reach in Illinois and Wisconsin.

The acquisitions were exactly as promised for months by the heads of the two Toronto-based banks. TD has said it wants to extend its retail banking reach down the U.S. East Coast, building on Northeast strength. BMO, with its Chicago-based Harris unit, has said it wants to expand in the U.S. Midwest.

The purchases are also relatively risk-free, a requirement for the cautious Canadian franchises, which watched in relative health as global rivals were forced into bankruptcy or bailout by the bad debt and global financial crisis of 2008 and 2009.

By doing FDIC-assisted deals, the banks were able to negotiate a loss-sharing agreements that limit the risk of taking on an unfamiliar loan book.

OPPORTUNITIES AWAIT

Observers watching the drip-drip of small U.S. bank failures each week say more opportunities for hungry Canadian banks will surface in the weeks and months to come. The Canadians have more capital to spend than U.S. rivals who might also be interested in buying.

“There are thousands of banks in the U.S. and a lot of the smaller ones are struggling, especially ones that were very much concentrated in commercial real estate,” said Moody’s analyst Ali Mozaffari.

    “The American banks are first in line for them, but even though they are recovering a little bit, they are by no means out of the woods. So the Canadian banks have the benefit of having these very healthy domestic franchises that spit out tons of earnings every quarter so they are in better condition than would-be competitors.”

    Having remained mostly profitable through the financial crisis and boasting huge capital levels compared with global peers, the Canadian banks have seen share prices bounce back from 2009 lows and, in the case of TD and Royal in recent days, exceed the all-time highs set in booming 2007.

    While all of Canada’s Big Six domestic banks emerged relatively unscathed from the financial crisis, only three -- TD, BMO and Royal Bank of Canada (RY.TO) -- have significant U.S. operations that they want to build.

    With RBC focused on fixing its U.S. operations, which caused it some big writedowns in 2009, and expanding its global wealth management division, eyes are on TD and BMO as the likeliest candidates for more U.S. acquisitions.

    In the near term at least, the deals will be minor.

    “It’s our stance that larger, more significant acquisitions are unlikely until we have more clarity around regulatory changes,” Barclays Capital analyst John Aiken said.

    But once the new rules are known and Canadian bankers can calculate their cash piles with confidence, all bets are off.

    “As we move into medium term where regulatory clarity has improved and visibility in terms of risk in loan portfolios has improved, I think that’s when you’ll see Canadian banks be a bit more aggressive and we’ll see larger deals,” Fehr said.

    Reporting by Andrea Hopkins; Editing by Frank McGurty

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