Wednesday, September 20, 2006

Cdn Banks View US Deals as Too Pricey

Reuters, Lynne Olver, 20 September 2006

Executives of three Canadian bank subsidiaries in the United States are cautious about further U.S. acquisitions in light of current high prices, and one said on Wednesday that a decline in transaction pricing could be a year or two away.

Several of Canada's biggest banks are looking for growth in the United States to offset the smaller, mature banking market at home, where bank mergers are not allowed.

But Bill Ryan, chief executive of Portland, Maine-based TD Banknorth, a unit of Toronto-Dominion Bank, said the situation has worsened for buyers of U.S. banks, "so I think we'll go slow for a while."

Potential sellers are seeking premiums on top of acquisition premiums already built into their stock prices, making it difficult to acquire banks at costs that make long-term sense, Ryan said during a panel discussion at a Boston financial conference.

"I also think that the earnings estimates that are out there for most of American banks next year are much too high," because the U.S. yield curve has been inverted since June, Ryan said at the conference, organized by RBC Capital Markets.

Earlier this month, TD Banknorth said its third-quarter and fourth-quarter profits would be lower than analysts were forecasting at the time.

But Ryan, an industry veteran whose bank has made more than two dozen acquisitions, said the cycle will turn "fairly quickly" and he predicted aggressive activity when that occurs.

"I don't think that's until at least the end of next year, 2007, maybe 2008," Ryan added.

Chicago-based Harris Bankcorp Inc., a unit of Bank of Montreal, is "poised to acquire" and is actively looking for targets primarily in the U.S. Midwest. But the acquisition premiums being demanded today are "pretty significant," Vice-Chairman Chuck Tonge said at the conference.

In the absence of acceptable deals, Harris will continue to expand branches in the Chicago area, Tonge said.

Scott Custer, chief executive of Royal Bank of Canada's RBC Centura Banks Inc. unit in Raleigh, North Carolina, said macroeconomic and industry dynamics should bring "rationalization" to transaction pricing.

A stricter regulatory environment has increased compliance costs for smaller banks, Custer noted, and their margins have been compressed as customers shifted deposit money from low-cost accounts to higher-cost products.

"I think more of these companies will come to the realization that it's a tough road to slug it out on your own," Custer said.

Meantime, high prices will not stop all deal-making, the executives said.

RBC Centura is in the midst of closing its purchase of Atlanta-based Flag Financial Corp., a transaction worth about $456 million, or 20 times Flag's expected 2006 net income.

Since Flag fits in between RBC Centura's existing retail network and commercial business, "we were willing to pay a little more because of the strategic value and the fit that they brought," Custer said.

At Harris, "we're not going to be dogmatic and pass everything, but it's got to make sense," Tonge said.
Bloomberg, Sean B. Pasternak and Doug Alexander

Toronto-Dominion Bank, Royal Bank of Canada and Bank of Montreal, three of Canada's biggest banks, say high prices for U.S. lenders are making it harder to make acquisitions.

William Ryan, the chief executive officer of Toronto- Dominion's TD Banknorth unit, said that the opportunities for acquisitions have become "worse, not better." The Portland, Maine-based bank has acquired 27 banks in the last 12 or 13 years, he said.

"I think it's just going to be difficult right now to acquire banks at prices that make a lot of sense for the long term," Ryan said today at an investor conference in Boston sponsored by RBC Capital Markets. Toronto-Dominion is Canada's second-biggest bank by assets.

Lenders such as Toronto-Dominion and Royal Bank, blocked by the Canadian government from merging with each other, have looked to the U.S. for growth. Ryan said that some U.S. banks are trading at 17 times earnings, which he considers expensive with projected earnings growth of about 10 percent next year.

Bank of Montreal, the fourth-biggest bank "is accumulating capital significantly up in Canada and we want to deploy that capital," said Chuck Tonge, vice chairman of the Chicago-based Harris Bancorp unit. He added that "I think the acquisition premiums that are built into most of the candidates today are pretty significant."

Scott Custer, chief executive officer of Royal Bank's Raleigh, North Carolina-based RBC Centura, said that ``there'll be more rationalization in the pricing of these kinds of transactions,'' when banks realize how slow earnings growth will be.

Bloomberg, Sean B. Pasternak

The opportunities for making bank acquisitions in the U.S. have become "worse, not better," TD Banknorth Inc. Chief Executive Officer William Ryan said.

"It's hard for me to believe that banks are going to be sold on 10 percent earnings growth when we've had an inverted yield curve since June," Ryan said, speaking today at an investor conference in Boston sponsored by RBC Capital Markets.

TD Banknorth is the U.S. consumer banking arm of Toronto- Dominion Bank, Canada's second-biggest bank by assets. The Portland, Maine-based bank has acquired 27 banks in the last 12 or 13 years, Ryan said.