Toronto-Dominion Bank’s agreement to buy Chrysler Financial, the automaker's former financing division, from private equity firm Cerberus Capital Management for $6.3 billion, has analysts once again focused on mergers and acquisitions in Canada’s banking sector.
The deal, announced Tuesday, is considered by many to be the latest example of well-capitalized Canadian banks finding good investments in distressed U.S. corporations.
The deal is the second announcement in less than a week of a large Canadian bank buying an American institution. On Friday, the Bank of Montreal announced it is buying Milwaukee-based Marshall & Ilsley Bank for $4.1 billion in stock. The deal would double Bank of Montreal’s presence in the United States from 321 branches to 695.
“Merger activity saw a boost in 2008 right before the crisis, but like most global banking sectors, Canada’s banks were not as acquisitive in the downturn,” says Rob Sedran, a research analyst with CIBC World Markets. “But unlike U.S. banks, they had good balance sheets and good loan books and operate much more conservatively. Now that the new Basel capital requirements have been sorted out, they’re ready to begin acquiring again.”
Sedran adds that the Bank of Montreal is the most committed of Canada’s large banks to the U.S. marketplace. When asked about Royal Bank of Canada, Sedran says RBC is focused internally on making its U.S. operations profitable, and will most likely not look to make acquisitions in the near future.
In addition to capital cushions and distressed assets, one factor fueling Canada’s acquisition spree could be the U.S. government.
Michael White of Dow Jones News Service reports on the Wall Street Journal’s Deal Journal blog that Bank of Montreal’s acquisition of Marshall & Ilsley has the feel of a “shotgun wedding and sends a loud and clear message to U.S. regional banks–the Treasury Department wants its TARP money back.”
The deal “came together quickly,” indicating regulators may have forced Marshall & Ilsley’s hand, and that could mean M&A among regional banks will pick up in the new year.
“Marshall & Ilsley’s sale suggest Treasury is getting more aggressive in asking for repayment of funds from the Troubled Asset Relief Program,” he writes. “The bank owes Treasury $1.7 billion in perpetual senior preferred stock. As part of the transaction, Bank of Montreal is repaying M&I’s obligations to Treasury.”