Wednesday, August 22, 2007

Renewed Interest in US Banks?

Financial Post, Karen Mazurkewich, 22 August 2007

The Canadian banks are sniffing around the United States for bargains and the most likely takeover candidates are regional bank franchises.

Canadian bank expansion into the United States has been slow. Not only is it due to the conservative nature of the banking sector, but until recently, prospects have been few and far between. But the winds are shifting. "Not only is M & A chatter among [U.S.] banks picking up, it's actually becoming more serious," said Peter Winter, managing director for BMO Capital Markets in the United States.

It's estimated that there are about 8,000 banks in the United States. Despite stiff competition and a flat yield curve, consolidation has been slow. In 2005, 220 bank mergers were recorded. In 2006, the number dropped to 198, and this year only 120 M& A deals have been completed.

The reason: high valuations. The roiling markets of late is upsetting the equilibrium. "What's happening is that the valuation gap between the large cap banks and small cap banks in the U.S. has narrowed somewhat, and the ability to make these acquisitions is more doable today, then it was six months ago," Mr. Winter said.

"Rising credit costs, net interest margin pressure, slowing loan growth, increased competition is forcing [small banks] to reassess whether it makes sense to remain independent or become part of a larger organization," he said.

So who are some of the potential take-over targets? Mr. Winter's list includes Westamerica Bank in California, Sterling National Bank in New York, New York Community Bancorp or The Astoria Federal Savings Bank, Texas Capital Bank, The South Financial Group and Sovereign Bank.

So will Canadian banks start biting? "The dollar is in our favor and the valuations are in our favor," said Darko Mihelic, research analyst at CIBC World Markets. He expects that the time is right for Canadian banks to start scooping up some deals.

Unable to expand within their own market, Canadian banks have been taking conservative steps to capture a piece of the U.S. pie. Over the past few years, three institutions have established beach-heads in the United States. The Bank of Montreal purchased Harris Bancorp in 1984, and most recently purchased two banks in Wisconsin.

Toronto-Dominion Bank purchased a majority stake in Portland, Me.-based Banknorth in August, 2004, and snapped up the remaining shares in April, 2006, in addition to buying Hudson United Bankcorp in 2006. Royal Bank of Canada purchased Centura in 2001 and recently made a series of small acquisitions including 39 branches from AmSouth Bank in March.

To be sure, the Canadian banks' foray into the U.S. has been tentative. Not only did some bad early experiences curb their appetite, but "there was a lack of confidence among Canadian shareholders that these banks actually knew what they were doing," Mr. Mihelic said.

Things were put on hold. But now that the liquidity/credit crunch is putting pressure on the U.S. banks to sell, the temptation for Canadians to buy is stronger, he added.

"I do believe the environment is far more constructive for Canadian banks to go into the U.S. than it's been in the past 15 years and you could arguably make the case that it's the best it's ever been, given the confluence of currency, the strength of the existing [Canadian] balance sheet and the strength of the underpinning Canadian economy," said Ian De Verteuil, executive managing director BMO Capital Markets.