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The subprime mortgage crisis has presented Canadian banks with a fascinating opportunity, and it will be interesting to see whether any of them them seize it, and how quickly.
Several factors have put the five big lenders in a fascinating position. First, the Canadian government has effectively ruled out big domestic bank mergers, so the banks have to expand outside the country.
Second, the resource boom has buffeted the Canadian economy from the
global downturn, so the Canadian dollar is enjoying its greatest
strength in a generation. What's more, the stock of most Canadian banks
has held up better than that of their peers to the south.
Third and finally, in case you missed it, U.S. regional banks are rather cheap right now, with the KBW Bank Index down about 45% in the past year. The conclusion: The Canadian banks' acquisition currency has never been stronger in the U.S. It wasn't that long ago that Canadian business commentators were moaning that the country's banks would never be able to compete globally because they were too small. But now some of them have the chance to do a transformative deal that could make them major North American players. Toronto-Dominion Bank, the most aggressive of the five, is out of the mix because it's still digesting its recent $8.5 billion of Commerce Bancorp Inc. of Cherry Hill, N.J. Canadian Imperial Bank of Commerce -- which the Globe and Mail calls "the bank most likely to walk into sharp objects'' -- is unlikely to do anything either because it's got itself in a subprime mortgage mess. But Royal Bank of Canada, Bank of Montreal and Bank of Nova Scotia could do something spectacular in the U.S. Royal Bank is the most likely to do a deal because it's the largest Canadian bank, with a $60 billion market cap (that's almost two-thirds the size of Citigroup Inc. these days). It already owns the RBC Centura outfit in the Southeast and could probably swallow something like SunTrust Banks Inc. or Regions Financial Corp. without having to unhinge its jaws. Bank of Montreal owns Harris Bank in Chicago. Since the Chicagoland market is already consolidated BMO may want to look at one of the hard-whacked Ohio banks to achieve geographic diversification. Bank of Nova Scotia has focused mainly on emerging markets so far, so it could buy anywhere in the U.S. to establish a beachhead. Of course, the big question is whether the Canadian banks will find a counterparty willing to sell, as a foreign hostile bid would be unthinkable for these banks. The second-biggest question is when to do a deal. There would be three risks in waiting: First, the Canadian dollar could plunge; second, the bank panic could finally hit Canadian banks; and third, the U.S. bank environment could improve. Any of those factors would make the U.S. banks more expensive to the Canadian institutions and condemn them to a future in their domestic market. -- Peter Moreira See The Deal's Commerce deal augments TD in U.S. Categories Deal Video
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