Regardless of whether Canada’s five national banks are permitted to merge with each other once the Liberal government releases its position on the issue expected this month, it’s likely only a matter of time until they turn their acquisition plans south of the border.
There are two probable scenarios, experts say. The first has the newly elected minority government of Canadian Prime Minister Paul Martin allowing domestic banks to merge with each other as soon as possible. The second has the consolidation issue put on the back burner until after the next election, widely expected to be in 18 to 24 months.
The members of the Big Five are RBC Royal Bank, Bank of Montreal, TD Bank, CIBC, and Scotiabank. Each bank also owns a full-service brokerage: RBC Dominion Securities, BMO Nesbitt Burns, TD Waterhouse, CIBC Wood Gundy, and ScotiaMcLeod, respectively.
Under the first scenario, assuming two pairs of Canadian banks merge, there will be one looking for a dance partner in the United States in the short term. Meanwhile, the four merging banks will likely need a year or two to consummate their marriages before looking for further scale in the market most similar to their own; i.e., the U.S.
“There will be some odd men out after consolidation has occurred in Canada. That will leave the U.S. market as their only option,” says Paul Battista, VP for financial services at Capgemini Canada, a Toronto-based technology consulting outsourcing company. “There won’t be enough organic growth to compete; they’ll have to bulk up south of the border.”
Battista notes that, as attractive as the U.S. market may be, domestic mergers are the top priority for Canadian banks from an economic and ease-of-execution standpoint.
But that would change under the second scenario, in which all five Canadian banks could be in search of banking, brokerage, and related acquisitions in the U.S. virtually immediately.
An Attractive Fragmentation
David Moorcroft, senior VP of corporate communications at Toronto-based RBC Royal Bank, notes that the opportunity for Canadian players in the U.S. is significant because of the highly fragmented banking and brokerage industries south of the 49th parallel.
“The U.S. market is 10 times the size of the Canadian market. Even a small piece of the business there is huge. There aren’t any dominant players, so it’s easier for us to go there and build new business. Unlike in Canada, the U.S. is just beginning to consolidate and trying to build a national banking system, something we’ve had for decades,” he says.
Tim O’Neill, chief economist at the Toronto-based Bank of Montreal, agrees and says it’s his bank’s intention to expand selectively in the U.S. in wealth management; retail banking, including some private banking activity; and discount brokerage.
“The regional banks are becoming super-regional banks. But there is still not a truly national bank in the U.S. That makes it very attractive for Canadian banks that are already operating as national banks in Canada. They’re used to operating across geographic regions, which perhaps isn’t true in the U.S.,” he says.
O’Neill says there is plenty of opportunity to acquire specialty U.S.-based operations focusing on particular client segments, as well as retail brokerage and banking.
But it’s not just Canadian banks that are playing the consolidation game, he says, noting the Royal Bank of Scotland recently went on a cross-Atlantic buying spree that netted Citizens Bank and Charter One.
“We’ve seen some fairly large deals that are accelerating the pace of consolidation in the U.S. market. It’s an attractive area now and has been for a while for Canadian banks. Our chairman (David Galloway) says ‘Consolidation and mergers are not a strategy, they are a means to achieving one,’ ” O’Neill says.
Frustrated by Ottawa
After quashing the proposed mergers of The Royal Bank-Bank of Montreal and TD Bank-CIBC in 1998, Canada’s federal government agreed to revisit the issue this year. It initially planned to announce in the spring guidelines and conditions that had to be met in order for mergers to be approved. But the federal election in June backed up the announcement date by several months.
Most analysts believe the government didn’t press forward with the bank merger issue in the runup to the election for fear of alienating some Liberal party members who are opposed to the idea. Many also believe that unless they strike a deal with one of the opposition parties, most likely the Conservatives, to pass merger legislation, the idea will remain on the back burner, pending what Martin undoubtedly hopes will be a Liberal majority after the next election.
A senior executive at a Canadian-based brokerage house says the government’s continued delays have put the domestic banks in an awkward situation–they can’t dip into the U.S. acquisition pool for fear of not having sufficient capital and management expertise at their disposal to pull off a domestic purchase. But the longer they are forced to wait, the more opportunities in the U.S. are gobbled up by other competitors.