Wednesday, January 11, 2006

Tories' Ascent Fuels Hope for Bank Mergers

The Globe and Mail, Sinclair Stewart & Heather Scoffield, 11 January 2006

Finance Minister Ralph Goodale has already proven he can move the markets. Now Stephen Harper is showing he's no slouch, either.

With polls suggesting his Conservative Party is headed toward a possible majority government, Canadian investors swiftly returned Wednesday to one of their favourite pastimes: Rolling the dice once more on the on-again-off-again prospect that the country's Big Six banks finally will be allowed to pursue mergers.

Shares of Bank of Montreal, the most obvious takeover target if Ottawa endorses consolidation, reached a 52-week high, finishing the day at $67.83 on the Toronto Stock Exchange — a gain of $1.63 or 2.5 per cent. Canadian Imperial Bank of Commerce, which also figures to be prey for a larger rival, enjoyed a similarly strong day, rising 1.6 per cent or $1.24 to $80.51.

Mind you, none of these bets has paid off for investors in the past decade. But interest in the merger file has always enjoyed something of a Lazarus quality, and this latest resurrection has occurred squarely in lockstep with the sudden revival of Mr. Harper's Conservatives.

Many believe that the Tories' ideological bent will make them more disposed to approve financial services consolidation after years of fruitless debate, government dithering and parliamentary hearings. Others, such as National Bank Financial Inc. analyst Robert Wessel, believe the recent paralysis on mergers had less to do with the ruling Liberals' political will than it did with the fact they were operating with a minority government.

“If there's a majority government, either Liberal or Conservative, I think it happens in two years,” he said of merger approvals. “I think if anyone wins a majority, [BMO's] stock jumps.”

Not surprisingly, investors drove down the prices of the most likely acquirers. Royal Bank of Canada, the country's biggest bank, fell 69 cents to $91, while Toronto-Dominion Bank dropped 46 cents to $61.40. Among this group of would-be buyers, only Bank of Nova Scotia, which has long coveted BMO, kept its head above water, eking out a marginal 23-cent increase to close at $46.21.

The Conservatives offered qualified support for bank mergers over the summer, proposing that the crucial “public interest” test on the issue be carried out by an independent body in order to depoliticize the process. However, they have remained non-committal on what promises to be a highly contentious topic with Canadians.

“We said, you know, there should be some public interest test met, if mergers would go forward,” Conservative Finance critic Monte Solberg said Wednesday in Ottawa. “You know, we've been at this for I think eight years now, and as the Prime Minister said himself, the next government must deal with this issue. So we support a process.”

Prime Minister Paul Martin acknowledged this month that the issue must be resolved; when asked whether he supported mergers, he replied that it “depends on the circumstances.”

A Strategic Counsel poll published Wednesday showed the Conservatives with 38 per cent of the popular vote: good enough for a 10-point lead over Mr. Martin's Liberals, and verging on the kind of support needed for a majority in the House of Commons.

In a research note this week, Mr. Wessel, who rates BMO a “sector perform,” said the prospect of any party winning a majority may be low, but the possibility is rising, and so too is the chance of bank mergers.

BMO has long since shed its merger premium — believed to be worth as much as $8 a share at one point — but Mr. Wessel said portfolio managers could still do well to use the stock as a hedge.

“If you're underweight and there's a majority government in two weeks, you just blew off 3 per cent of the index,” he said.