Wednesday, April 01, 2009

Canadian Banks Not Rushing to Make US Acquisitions

  
Bloomberg, Doug Alexander, 1 April 2009

Royal Bank of Canada Chief Executive Officer Gordon Nixon says the worst of the financial crisis may be over.

“The financial services crisis has stabilized,” Nixon said in an interview yesterday in New York. “The worst is over.”

Still, Canada’s biggest lender is in no rush to buy U.S. banks. The Toronto-based bank hasn’t made a U.S. acquisition since its $1.64 billion takeover of Alabama National BanCorporation in February 2008, even as the financial crisis has driven down bank stocks.

Prime Minister Stephen Harper is urging the Canadian lenders to take advantage of their strengths to expand abroad, according to an interview published yesterday in the Financial Times.

“There’s no question that if you believe that companies in your country should be continuing to expand, to grow internationally, it is an opportunity today that wasn’t there previously,” Nixon said. “At the same time, in today’s environment, you don’t want to do things that compromise your financial strength.”

Nixon said there is still too much “uncertainty” in the U.S. market to make acquisitions to add to its consumer bank based in Raleigh, North Carolina and its New York- based investment bank.

“We’re not capable of making decisions in an environment with a significant degree of uncertainty in terms of what regulation rules are,” Nixon said. “Until that uncertainty clears up, we’re going to continue to be fairly conservative.”

Royal Bank’s patience may be rewarded, said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which owns Royal Bank shares among about $2.4 billion in assets.

“There still seems to be a lack of confidence in U.S. financials,” he said. “Why should you rush in now and buy something? Those who have gotten in early have paid the price dearly.”

Nixon said the bank is more concerned about the economy than about the crisis in the financial services industry. Rising loan losses led to a 15 percent decline in first-quarter profit, to C$1.05 billion ($830 million).

“What we are watching much more carefully today is Main Street,” he said. “What’s happening to credit cards, what’s happening to consumer loans.”

Nixon said opportunities are emerging to deploy capital in the U.S. at attractive rates of return due to the need for capital.

“We’re certainly spending a lot of time thinking about how we take advantage to some degree of what may unfold in the U.S. marketplace and other parts of the world,” he said. He added that Royal Bank may pursue acquisitions “over the next three years.”

Nixon, 52, wouldn’t say what business areas Royal Bank would target when it resumes acquisitions.

“This is going to sound really boring,” Nixon said. “We have been saying the same thing for the last eight years since I’ve been around, which is that we like our diversified strategy because we think it serves us well through good times and difficult times.”

He said the bank tries to limit its investment-banking earnings to no more than 30 percent of overall profit, with the rest coming from consumer lending and money management.

Royal Bank has spent more than C$2 billion on U.S. acquisitions in the past three years, including Atlanta- based Flag Financial Corp. and Alabama National. The bank also bought RBTT Financial Holdings Ltd. in Trinidad and Tobago for about $2.2 billion in June.

“There are probably going to be significantly better opportunities over the next five years than during the last five years,” Nixon said.
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Bloomberg, Doug Alexander, 31 March 2009

Royal Bank of Canada Chief Executive Officer Gordon Nixon isn’t afraid of being called “boring” for not rushing into U.S. takeovers during the worst financial crisis since the Great Depression.

“Being boring is all of a sudden not a bad thing,” Nixon said in an interview today in New York.

Royal Bank, Canada’s largest lender by assets, hasn’t made a significant U.S. acquisition since its $1.64 billion takeover of Alabama National BanCorporation in February 2008, even as the financial crisis has driven down bank stocks and threatened the survival of some lenders.

Prime Minister Stephen Harper is urging the Canadian lenders to take advantage of their strengths to expand abroad, according to an interview with the Financial Times. The country’s six biggest lenders reported less than C$20 billion ($16 billion) in debt-related writedowns since the credit crisis began in 2007, about 2 percent of the $914 billion recorded by banks and brokerages worldwide.

“We’re not capable of making decisions in an environment with significant degree of uncertainty in terms of what regulation rules are,” Nixon said. “Until that uncertainty clears up, we’re going to continue to be fairly conservative.”

Nixon said opportunities are emerging to deploy capital in the U.S. at attractive rates of return due to the need for capital.

“We’re certainly spending a lot of time thinking about how we take advantage to some degree of what may unfold in the U.S. marketplace and other parts of the world,” he said. He added that Royal Bank may pursue acquisitions “over the next three years.”

Nixon, 52, wouldn’t say what business areas Royal Bank would target when it resumes acquisitions.

“This is going to sound really boring,” Nixon said. “We have been saying the same thing for the last eight years since I’ve been around, which is that we like our diversified strategy because we think it serves us well through good times and difficult times.”

He said the bank tries to limit its investment-banking earnings to no more than 30 percent of overall profit.

Royal Bank has spent more than C$2 billion on U.S. acquisitions in the past three years, including Atlanta- based Flag Financial Corp. and Alabama National. The bank also bought RBTT Financial Holdings Ltd. in Trinidad and Tobago for about $2.2 billion in June.

“There are probably going to be significantly better opportunities over the next five years than during the last five years,” Nixon said.

As many as 1,000 U.S. banks may fail in the next three to five years, almost double the one-year tally at the height of the saving-and-loan collapse, as losses mount on commercial real-estate loans, RBC Capital Markets analyst Gerard Cassidy said in a Feb. 9 interview.
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Financial Post, Eoin Callan, 31 March 2009

The two men who walked through the doors of the bank branch in Cleveland were both older, neatly dressed and polite.

Claiming to be real-estate brokers, the pair inquired about opening a business account and were given a quick tour.

Suspicion was aroused only after their inquiries strayed beyond the norm to the number of tellers on duty behind the counter.

Then the pair blundered, betraying total ignorance of local geography, before bolting.

"We knew our cover was blown," said one of the men in a recent interview.

While the pair's identity remains a mystery to staff at the branch, the duo were in fact two of the most senior executives of Bank of Nova Scotia, Canada's third-largest bank.

They were casing the joint as they mapped out a plan to knock off all 1,400 branches of National City in a multi-billion-dollar takeover of the regional U.S. bank.

The plot was foiled when the U.S. government unwittingly erected barriers to foreign takeovers with a series of interventions to protect the country's banking system.

Although inadvertent, the U.S. Treasury scared off many buyers of banks when it agreed last fall to inject $250-billion into more than 300 banks through the Troubled Asset Relief Program (TARP).

"The TARP money really slowed down the process of consolidation," said Rob Sedran, an analyst at National Bank Financial.

But things may start to change later this month when the U.S. is expected to give the healthiest banks a green light to start repaying government funds, and to seek strong partners for those on the sick list.

This is seen as one step in a series of developments that could help put acquisitions back on the agenda for Canadian banks, which stand out in the West for having escaped the worst of the financial crisis.

Two of Bay Street's biggest banks -- Royal Bank of Canada and TD Bank -- rank in the top 20 worldwide by market capitalization for the first time, while all of the big five are in the top 50.

The remarkable rise in standing does not reflect a steady increase in the value of Canada's banks, but rather a sudden and stunning plunge in the worth of former giants.

Yet it still puts Canada's banks at the head of a select class of institutions with international experience and an appetite for retail franchises in the vast expanse of middle America.

Prime Minister Stephen Harper has been cheering the sector on, giving his full support to international expansion as he strikes a proud note in the run up to a summit of leaders of the Group of 20 nations in London.

Still, executives up and down Bay Street stress they are using an abundance of caution when evaluating opportunities, and are reluctant to place bets on the direction of the U.S. economy.

They confess to frequent phone calls from U.S. regulators over the last six months testing their interest in shot gun marriages, but have so far demurred.

TD was among the handful of banks that held talks about rescuing Washington Mutual, the large West-coast bank that was acquired by JPMorgan.

But Ed Clark, chief executive, has since said he will concentrate on expanding TD's existing footprint, which is planted in the affluent north east, with toes stretching to the beaches of Florida.

One of the biggest impediments to deals up until now has been the uncertainty over the quality of loans on the books of American banks that has defined the credit crisis.

This is due to be addressed somewhat later in April when the U.S. examiners complete stress tests of the 20 biggest American banks.

The tests are expected to produce a government-certified health report that is a precondition to repayment of capital, though this could drag on for many months.

While the ordeal will reveal some institutions to be in critical condition and in need of capital injections, the process is designed to dispel uncertainty.

Analysts do not expect this to be a panacea, and forecast a long wait before normal merger activity resumes.

Nonetheless, branch managers in select states may not need to be too alarmed if they start encountering pairs of exceedingly neat and polite gentlemen making unusual inquiries.
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