Awash in excess capital, the largest Canadian banks are eyeing merger-and-acquisition opportunities in the United States.
Chief executives from Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank say they’re in no rush to burn the capital they continue to amass as a result of a pandemic-related halt on stock buybacks and increases in dividends imposed by regulators.
At the same time, they say they won’t ignore buying opportunities that come their way.
Bank of Montreal has a large presence in the Midwestern U.S. through Chicago-based BMO Harris Bank, but it would consider an acquisition “if the right circumstance came along, something out of the core footprint so you can start to attach yourself to a broader swath of customers across the continent,” CEO Darryl White during an RBC Capital Markets virtual conference on Monday.
The CEOs’ comments were significant because Canadian banks haven’t done any cross-border deals in several years. The last major acquisition of a U.S. bank by a Canadian company was in 2017, when Toronto-based CIBC bought PrivateBancorp in Chicago for $5 billion.
Bloomberg
TD built its East Coast franchise through a series of large acquisitions, but it’s been on the sidelines since it bought the South Financial Group in Greenville, S.C., in 2010. BMO’s last whole-bank deal in the U.S. was in 2011, when it bought Milwaukee-based Marshall & Ilsley.
Banks in Canada certainly have the means right now, in part because the country’s restraints on buybacks are stricter than in the U.S., where even the biggest banks are now permitted by the Federal Reserve to buy back a limited amount of stock.
Canada’s six largest banks as of Oct. 31 held nearly $205 billion in Common Equity Tier 1 capital — $55 billion more than regulatory requirements, according to a recent Bloomberg report. That form of capital consists mostly of common stock held by a bank to absorb potential losses during a financial crisis. Too much Common Equity Tier 1 weakens return on equity, so banks look for ways to put it to work.
Halts on share buybacks and dividend-payment increases were put in place in March by Canada’s Office of the Superintendent of Financial Institutions. On Monday, at the same conference, head of OSFI Jeremy Rudin said those measures would remain in place, Bloomberg reported.
That leaves banks to put the money to use by growing the businesses they already have or expanding via acquisition. At TD Bank, where the Common Equity Tier 1 ratio of 13.1% is well above regulatory requirements of around 10%, President and CEO Bharat Masrani was clear that his bank would take a look at possible M&A deals. TD operates a $420 billion-asset subsidiary in the United States.
“If you look at our history, we are good acquirers. We are disciplined acquirers and frankly when there has been a major downturn that has resulted in dislocations, TD has taken advantage of it,” Masrani said. “So you should expect us — you know, should there be a compelling opportunity — you would want us to look at it, and compelling would be defined as to make financial sense, to make strategic sense and frankly risk sense and cultural sense.”
But he cautioned that a deal is no sure thing.
“We’re not there just saying, ‘Oh, just because we’ve got strong capital, let’s go buy something,’” Masrani said. “It has to make sense to us, and that’s what we’ve always been able to show.”
That outlook falls in line with how the big Canadian banks generally think about expansion in the U.S., according to John Mackerey, an analyst at DBRS Morningstar who follows RBC and TD.
“I think we view it as that the U.S. is strategically important to them so we would expect them to remain interested in expanding in the U.S., opportunistically,” said Mackerey, who declined to speculate on any potential acquisition targets. That means “taking advantage of any market disruption. I think they’re prepared to do that given their capital position,” he added.
Royal Bank of Canada CEO Dave McKay said his company is already growing organically in the U.S., where it acquired Los Angeles-based City National Bank in 2015, and would be interested in certain M&A deals here if there would be “synergies that drive [a] premium return over time.”
“We’re playing a long-term game here,” McKay said.
Among the company’s key markets outside of California are Nashville, Tenn., New York and Washington, he said.
Meanwhile, CIBC’s Common Equity Tier 1 ratio is 12.1%, and President and CEO Victor Dodig said he expects it to stay in that range for now. Acquisitions aren’t at the top of the company’s game plan when restrictions are lifted, but rather the company is focused on organic growth, dividends and buybacks, Dodig said.
Still, any “small and organic tuck-in opportunities” that provide “some tailwinds” to wealth management and other businesses would be considered, Dodig said.
