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 The subprime mortgage crisis has presented Canadian banks with a fascinating opportunity, and it will be interesting to see if any of them them seize it, and how quickly.
Several factors have put the five big lenders in a winsome 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, 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 acquisition of Commerce Bancorp of New Jersey. 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 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 Regions Financial Corp. or SunTrust Banks Inc., which is often the subject of takeover speculation in the U.S. media, 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 like National City Corp., Keycorp or Fifth Third Bancorp 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. 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 Categories Deal Video
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