Dow Jones Newswires, Monica Gutschi, 22 February 2007
If merger activity accelerates in the U.S. banking industry this year as expected, Canadian banks will probably join in the fray, UBS suggested Thursday.
In a research note, analyst Jason Bilodeau said those banks with a U.S. retail presence already - Bank of Montreal, Royal Bank of Canada, and Toronto-Dominion Bank - would have to consider bulking up if the pace of U.S. consolidation were to quicken "since their competitive position and growth could be compromised."
Canadian banks will likely continue growing their U.S. franchises through de novo expansion and small bolt-on acquisitions, as they have been doing for the most part in the past few years, Bilodeau said. However, he suggested they may start to look at larger assets if merger activity increases so as not to lose more ground against larger players.
Bilodeau noted the U.S. banking industry remains highly fragmented and has considerable excess capital. The operating environment is also difficult, with "deteriorating deposit trends, inverted yield curve, slowing loan growth and rising credit costs."
However, as the chief executives of those Canadian banks active in the U.S. have often bemoaned, Bilodeau said traditional price-to-earnings ratios on potential U.S. targets remains rich.
Bank of Montreal, Royal Bank and Toronto-Dominion will also face competition from eager consolidators in that market, he said, pointing to Fifth Third Bancorp, Keycorp, Wachovia Corp., Wells Fargo & Co., Citicorp, and JP Morgan. Over the past five years, the three Canadian banks have invested slightly more than $11 billion in their U.S. retail franchises, with the largest transaction being Toronto-Dominion's $3.8 billion transaction to purchase a majority stake in Banknorth. Toronto-Dominion has recently extended a $3.2 billion offer to take Banknorth private.
Bilodeau noted the most active buyer has been Bank of Montreal, with a dozen deals since first acquiring Harris bank in 1984. It now earns about 11% of net income from its U.S. retail bank, with Royal Bank of Canada earning 5% and Toronto-Dominion, 13%.
;
If merger activity accelerates in the U.S. banking industry this year as expected, Canadian banks will probably join in the fray, UBS suggested Thursday.
In a research note, analyst Jason Bilodeau said those banks with a U.S. retail presence already - Bank of Montreal, Royal Bank of Canada, and Toronto-Dominion Bank - would have to consider bulking up if the pace of U.S. consolidation were to quicken "since their competitive position and growth could be compromised."
Canadian banks will likely continue growing their U.S. franchises through de novo expansion and small bolt-on acquisitions, as they have been doing for the most part in the past few years, Bilodeau said. However, he suggested they may start to look at larger assets if merger activity increases so as not to lose more ground against larger players.
Bilodeau noted the U.S. banking industry remains highly fragmented and has considerable excess capital. The operating environment is also difficult, with "deteriorating deposit trends, inverted yield curve, slowing loan growth and rising credit costs."
However, as the chief executives of those Canadian banks active in the U.S. have often bemoaned, Bilodeau said traditional price-to-earnings ratios on potential U.S. targets remains rich.
Bank of Montreal, Royal Bank and Toronto-Dominion will also face competition from eager consolidators in that market, he said, pointing to Fifth Third Bancorp, Keycorp, Wachovia Corp., Wells Fargo & Co., Citicorp, and JP Morgan. Over the past five years, the three Canadian banks have invested slightly more than $11 billion in their U.S. retail franchises, with the largest transaction being Toronto-Dominion's $3.8 billion transaction to purchase a majority stake in Banknorth. Toronto-Dominion has recently extended a $3.2 billion offer to take Banknorth private.
Bilodeau noted the most active buyer has been Bank of Montreal, with a dozen deals since first acquiring Harris bank in 1984. It now earns about 11% of net income from its U.S. retail bank, with Royal Bank of Canada earning 5% and Toronto-Dominion, 13%.
