Wednesday, March 01, 2006

Fifth Third Bancorp Sees Commercial Branch Niche in Canada

Financial Post, Duncan Mavin, 1 March 2006

When Ohio-based Fifth Third Bancorp announced the opening of its first full Canadian commercial banking branch in Toronto last week, it registered barely a blip on the radar of the saturated Canadian banking sector.

In fact, the move was described as "masochistic" by one industry analyst.

With Canada's banks expected to discuss the search for growth markets at their annual meetings this week, Fifth Third believes it has found a growth play right under the noses of Canadians -- cross-border banking for small to mid-sized Canadian and U.S. businesses.

The U.S. adventures of Canadian banks have started to reap some rewards lately. Yesterday, Standard & Poor's Ratings Services revised its outlook from "stable" to "positive" for both Toronto-Dominion Bank and Royal Bank of Canada, citing TD's "successful expansion into the U.S. retail and commercial banking industry through TD Banknorth Inc." and the "continued improvement" of RBC's U.S. operations.

However, Jerry Hynes, vice-president and principal officer for the Fifth Third Canadian branch, believes no Canadian bank has yet tapped into the cross-border commercial banking market.

Small and mid-sized commercial banking is "a corollary" for sub-prime lending, which has already attracted the interest of Canada's big banks, said RBC Capital Markets analyst James Keating.

In the past two weeks, Bank of Nova Scotia and TD have each made investments in the sub- or near-prime lending business.

Sub-prime lending and mid-sized commercial banking are similar because both are credit-intensive, are immaterial to the overall Canadian banking sector and are less conducive to centralized control than other types of banking, said Mr. Keating. Also,"[mid-sized commercial banking] is probably due a lot of growth in the next few years," he said.

Fifth Third will exploit one niche in the projected growth of commercial banking.

"To compete for the Canadian-only business of indigenous Canadian companies wouldn't make much sense," said Mr. Hynes, a former RBC employee.

Fifth Third's Canadian operations will focus on mid-sized businesses requiring credit facilities or cash management services on either side of the border. "That is a market that is not crowded," said Mr. Hynes.

Fifth Third -- formed by a merger of the Third National Bank and the Fifth National Bank in the early 1900s -- estimates there are as many as 1,500 enterprises in each country that fall within its target range.

One of those was Capital Works, a small private equity firm based in Cleveland. Capital Works was recently looking to invest in a business owned by a U.S. holding company whose assets were mostly in Canada, including their headquarters in Newmarket, Ont.

"It was surprisingly complicated to get a cross-border deal done for a smaller company," said John Mueller, president of Capital Works.

Mr. Mueller approached Canadian banks hoping to net a small credit facility -- less than US$25-million. Fifth Third offered terms that were competitive with the large Canadian banks Capital Works spoke to, but Mr. Mueller said his firm was swayed by the level of specialist cross-border knowledge offered by the upstart institution's team.

If Canadian banks were to try to get into the niche, one of the keys to tapping the market is physical location, said Mr. Hynes. Fifth Third is well-placed with locations on the U.S. end of all the major crossing points at Niagara, Sarnia, and Windsor used by Southern Ontario's manufacturing industry dealing with suppliers and customers in the U.S. border states.

"None of the Canadian big five banks are on the ground in those locations," said Mr. Hynes, noting the strategy gives Fifth Third an advantage in dealing with local business needs.

Brenda Lum, an analyst at Dominion Bond Rating Service, noted that none of the Canadian banks is particularly strong in U.S. commercial banking, let alone cross-border commercial banking. Although the big Canadian players may have looked at the niche because they don't already have branches in the U.S. border states that lie beyond Southern Ontario, "the challenge is about bricks and mortar," said Ms. Lum.