Saturday, July 16, 2005

Stop Flogging the Dead Cdn Bank Merger Horse

The Globe and Mail, Eric Reguly, 16 July 2005

Memo to Ralph Goodale: Shut up already.

Early this week, the Finance Minister proved he's happy to make a ritual of embarrassing himself. Every few months, he opens his cake hole to blather about bank merger guidelines. They're coming, he insists. Yup, really. Trust me -- I'm from Saskatchewan. The Ottawa press pinheads slap the quote into their laptop's automated bank-merger story software and another headline is zapped across the land: "Goodale to address bank mergers," or "Bank merger rules still coming."

Both of those headlines came from 2004. Similar stories appeared at various times this year ("I know the financial institutions are anxious to have clarity as rapidly as possible," he said in February). Then, on Monday, His Ralphness suggested, but did not promise, the guidelines are coming "this fall."

Can you stand the excitement? The phony war is over. Canada's Big Five Banks could turn into the Big Three by Thanksgiving. Your new GodzillaBank Visa card will be in the mail soon.

Forgive us, Mr. Goodale, if we don't believe the financial services revolution is imminent. But never mind. The real mystery is why the minister bothers to mention an issue that most of the banks don't care about any more. With the exception of Scotiabank, where CEO Rick Waugh has X-rated dreams about bank mergers -- believe us, you don't want to get cornered by this guy at a cocktail party -- a post-merger world is not on the agenda.

Take TD Bank. In 1998, TD tried to merge with CIBC, although its heart wasn't into it -- the plans were purely in reaction to the equally doomed Royal-Bank of Montreal union attempt. While Royal and BMO whined ad nauseam about the merger moratorium, TD got on with its life. In 2000, it bought Canada Trust. A few years later, it pushed into the U.S. Northeast with the purchase of Banknorth. This week, Banknorth agreed to buy Hudson United Bancorp of New Jersey for $1.9-billion (U.S.). If the pace continues, TD will be one of America's Top-20 commercial banks in no time.

TD is not pursuing a deal with a Big Five rival. It doesn't want to go through the hassle of another Canada Trust-style merger. By now, it knows a Canadian merger is not required to pursue its American ambitions.

TD once did a study of the American market and determined that 10 U.S. banks would meet its budget and strategic requirements. It repeated the study under the assumption a Canadian merger had doubled its size. The universe of potential U.S. targets expanded to only 14. In other words (according to TD anyway), the Canadian banks are so small by international standards that they would have hardly any more financial firepower even if they were twice the size.

CIBC and BMO are not wasting a lot of time lobbying for mergers. CIBC would be just as happy, or happier, falling into the lap of a life insurer, and in fact tried to prostitute itself to Manulife a few years ago (the Liberals fixed that one too). BMO might be happy to merge under the right conditions. In the meantime, it's finally paying attention to its lonely Harris Bank subsidiary in Chicago. Last week, Harris bought Villa Park Bank for $81-million (Canadian).

Royal says it's in no rush to see merger guidelines. Translation: It's so big -- with 1,433 branches, 4,000 bank machines and a market value of $50-billion -- it knows the feds wouldn't allow it to merge unless it unloaded half of its branch network. In which case, what's the point?

That leaves Scotiabank, which still believes heft would allow it to bulk up internationally (although not in the United States) at a faster pace. Mr. Waugh may be right. But is Mr. Goodale going to publish merger guidelines because one big bank, and a bunch of tiny credit unions, want them? The credit unions, which might represent 17 votes for the Liberals, hope to buy branches shed by any banks that head to the altar. Under a forced sale, the branches would go cheap.

The Liberals are going into an election in early 2006. Bank mergers are a net vote loser under any scenario because less competition is bad for consumers and businesses, end of story. Even when the Liberals had a majority, they were sensible enough not to touch the subject. With a minority government, why bother, especially since the better part of Bay Street is not screaming for mergers?

If Mr. Goodale were true to his plain-speaking Prairie roots, he would just say forget it, lads; the guidelines ain't coming, not this month, not next month, not under this government. If he did, Mr. Waugh and the credit unions might squawk. We'll bet no one else would.