Tuesday, September 23, 2008

TD Bank Weighs Bid for Washington Mutual

The Globe and Mail, Tara Perkins & Andrew Willis, 23 September 2008

Toronto-Dominion Bank is among a handful of major institutions circling Washington Mutual Inc., one of the first signs that Canada's banks will have a seat at the table as the credit crunch rapidly reshapes the U.S. banking industry.

TD stands out among peers for having avoided major writedowns on risky exposures, and is looking to build a North American consumer banking franchise, making it an obvious phone call for the investment bankers, led by Goldman Sachs, who are working for WaMu.

The Canadian bank could pick up branches in key areas if WaMu is broken up, or if some of its risky exposures are mitigated by regulators and the U.S. government.

“Every Canadian bank should be looking in the U.S., and is looking at U.S. opportunities,” said one investment banker who works on cross-border takeovers

“The problem right now is there are still too many uncertainties for Canadian bank directors to comfortably sign off on a major deal.”

With 2,300 branches – roughly double Toronto-Dominion's U.S. network – WaMu is a larger target than TD chief executive officer Ed Clark has been considering.

And, having skirted through the financial crisis in relatively good shape, the Canadian bank has no appetite for Seattle-based WaMu's toxic mortgage assets.

But investment bankers describe the opportunities that are coming up in the U.S. as historic, with the financial industry being radically reformed.

Canadian bank executives say they plan to stay apprised of the possibilities and will look at various assets that come up. Canada's banks are in better financial shape than many U.S. and European rivals, and so are being pitched on a wide range of deals. But they remain hesitant to make major moves.

The plunging market values of U.S. banks mask other costs of any acquisition, most importantly the risk of incorrectly valuing loan books and esoteric securities on bank balance sheets, Canadian executives say.

In WaMu's case, the U.S. government's plan to buy up to $700-billion (U.S.) in troubled financial assets from ailing financial institutions could help to mitigate some of that risk, but it remains to be seen exactly how much.

“There's $240-billion in risk-weighted assets in WaMu – I doubt TD wants to choke that down,” said Genuity Capital Markets analyst Mario Mendonca.

TD is still digesting the $8.5-billion (U.S.) acquisition of New Jersey-based Commerce Bancorp that closed earlier this year.

That deal was announced in October, months after Mr. Clark sent hundreds of people to New Jersey to perform due diligence on Commerce, and construct detailed growth forecasts for each of its branches.

Commerce won't be fully integrated with TD until the fall of 2009, and so Mr. Clark had planned to take a “pause” from acquisitions for the time being.

This week, credit rating agency Moody's Investors Service downgraded WaMu's financial strength rating based on “severe asset quality issues which are depleting its capital base and leading to an erosion of its franchise,” adding to the urgency with which the bank must raise capital or find a buyer.

“We believe WaMu's capital is insufficient to absorb its mortgage losses,” said Moody's senior credit officer Craig Emrick.

WaMu's regulator, the Office of Thrift Supervision, is reportedly considering negotiating a deal that would see the company divided up among several banks if a buyer for the whole can't be found within days.

The OTS declined comment yesterday, but one banking executive said it would be necessary for regulators and the government to clean up WaMu's exposures and reduce its risk before a sale could happen.

WaMu spokesman Brad Russell declined to comment. Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co. are believed to be the players most interested in a deal for WaMu.

Analysts said Tuesday that while anything is possible in the current environment, they would be surprised if TD walked away with more than a few pieces of WaMu.
The Globe and Mail, Tara Perkins, 23 September 2008

Toronto-Dominion Bank is looking at embattled Washington Mutual Inc. and its assets, but sources say the Canadian bank is being conservative in its approach.

TD is reluctant to make another major move in the United States at this point, following on its $8.5-billion (U.S.) acquisition of New Jersey-based Commerce Bancorp Inc., but is exploring its options as WaMu, stung by the credit crisis, is shopping for buyers.

Earlier this month chief executive Ed Clark said he's “extremely cautious” about U.S. acquisitions.

“We are not a hedge fund. We are franchise builders. I don't know what the value of retail assets or commercial assets are in the United States today, and so I'm not keen to try to find out by buying some and looking at them,” he said.

That means the bank, which will still be working on the integration of Commerce until the fall of 2009, is “in pause,” he said, adding that “the only thing that might change our mind would be small acquisitions where we can do deals where we're not taking significant asset risk ...”

Analysts said Tuesday they were not surprised TD was taking a look at WaMu, but doubted it would take a gamble by making an offer for the whole bank.

“There's $240-billion in risk weighted assets in WaMu - I doubt TD wants to choke that down,” said Genuity Capital Markets analyst Mario Mendonca. “I think TD, like many of the other banks, is hoping to buy parts of WaMu.”

In a note to clients Tuesday, National Bank Financial analyst Robert Sedran said an acquisition of WaMu would be a tough deal for TD to pull off.

There is little overlap with the bank's current U.S. acquisitions, TD's integration of Commerce Bancorp “has barely started,” and the bank's capital position is already stretched as a result of that deal, he wrote.

“While acknowledging that anything is possible in the current environment, owing to these issues, we would be surprised if TD emerged as the ‘winner' of this asset (assuming it does not get broken up, with TD contemplating a bid for only part of the company),” Mr. Sedran wrote, adding that a deal for all of WaMu would likely be viewed negatively by investors.

While WaMu might appear cheap based on its beaten up market value, the real test for banks considering a bid is the need to put a future value on WaMu's assets. An overly optimistic assessment of their worth could prove fatal.
Bloomberg, Ari Levy & Zach Mider, 22 September 2008

Washington Mutual Inc., the lender that put itself up for sale last week, fell 22 percent in New York on concern a $700 billion government-sponsored bank bailout plan won't erase enough of its soured mortgages to lure bidders.

``There could be an in-limbo case, where potential buyers are unwilling to take on WaMu's troubled mortgage book until issues are ironed out,'' CreditSights Inc. analyst David Hendler wrote in a note to investors today. ``But the company needs to raise incremental capital in the meantime.''

Toronto-Dominion Bank joined JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Banco Santander SA as potential bidders for WaMu, and talks extended through the weekend, according to a person familiar with the matter. While bidders are primarily interested in WaMu's 2,300 branches and $143 billion in retail deposits, they must also contend with up to $19 billion in mortgage losses during the next 2-1/2 years.

WaMu spokesman Brad Russell said the lender doesn't comment on speculation. Simon Townsend, a spokesman for Toronto-based Toronto-Dominion, declined to comment, as did spokesmen for the four other banks.

The Bush administration yesterday widened the scope of the bailout plan to include assets other than mortgage-related securities. The change to potentially allow purchases of instruments such as car loans and credit-card debt may force an increase in the size of the package as the legislation proceeds through Congress.

Moody's Downgrade

Three-quarters of Seattle-based WaMu's $309.7 billion in assets are loans and mortgages. The lender, the largest U.S. savings and loan, says it remains ``well capitalized'' with $50 billion in liquidity.

WaMu slid 92 cents to $3.33 at 4 p.m. in New York Stock Exchange composite trading. The stock has lost 76 percent this year, the biggest decline in the 24-company KBW Bank Index. The stock moved by an average of 20 percent a day during the past two weeks and more than doubled in the previous two trading days.

Moody's Investors Service today reduced WaMu's financial strength to E from D+ and placed the debt ratings on review for possible downgrade. WaMu has ``severe asset-quality issues, which are depleting its capital base and leading to an erosion of its franchise,'' Moody's said. Benefits to WaMu from the Treasury's plan are ``uncertain'' in the short term, the statement said.

``We believe WaMu's capital is insufficient to absorb its mortgage losses,'' Craig Emrick, a Moody's vice president and senior credit officer, said in a statement.

WaMu could potentially be acquired by a larger financial firm, in a transaction that could involve regulatory assistance, Moody's said. In such a deal, deposits would probably be assumed by the acquirer.

``Moody's believes it is unlikely that the obligations of Washington Mutual would be assumed by an acquiring entity in an assisted transaction, and the potential loss on these instruments could be significant,'' Moody's said.