Tuesday, January 10, 2006

Canada Polls Show Tories Leading: Sparks Bank Merger Talk

Dow Jones Newswires, Monica Gutschi, 10 January 2006

As Canada's Conservative Party surges in the polls ahead of the Jan. 23 election, the talk inevitably turns to the possibility of domestic bank mergers.

"Although the probability remains quite low, it does apear that the possibility of a majority government, and bank mergers with it, is rising," ventured Robert Wessel of National Bank Financial in a note Tuesday.

In polls released Monday, the Conservatives had a healthy lead over the governing Liberal Party, which holds a minority position in Canada's Parliament. Pundits are now speculating on the possibility the Conservatives, or Tories, will win an election for the first time since Brian Mulroney held back-to-back majority governments from 1984 to 1993.

Many observers believe bank mergers have a greater chance of receiving government approval under a Conservative government than with the Liberals, who have delayed the release of a position paper on the issue for more than a year.

Prime Minister Paul Martin rejected two proposed bank mergers in 1998 when he was finance minister.

But Wessel noted that, given the "political sensitivity" of the issue in Canada, the likelihood of mergers increases with a majority government, whether Liberal or Conservative.

As well, he said, such a decision by a majority government would be far better for bank shareholders. A minority government - were it to allow mergers - would impose much more onerous conditions and thereby reduce any potential premiums paid, Wessel said.

Bank executives have long pressured the government to allow their institutions to merge, claiming they need the greater size to compete globally. And Bank of Canada Governor David Dodge has said the limitations on banks joining forces may be hurting the financial sector's productivity.

If a majority government of either stripe is elected later this month, Wessel said the potential acquirer banks - Bank of Nova Scotia and Royal Bank of Canada "may begin to reflect some level of acquisition risk in the form of modest multiple compression."

He said both now trade at large premiums to their peers.

The probable targets - Bank of Montreal and Canadian Imperial Bank of Commerce, may benefit from relative multiple expansion, he said.