Financial Post, Duncan Mavin, 19 December 2006
Global banking chiefs hungry for growth and armed with cash to burn are set to make 2007 the international year of the bank merger. The trend will lead to further concentration of international banking power, dwarfing those banks -- such as Canada's domestic banks -- that don't participate in the biggest mergers.
Transactions will be driven by healthy balance sheets and surging profits at many of the biggest banks in the world, says Tom Kersting, an analyst at Edward Jones in St. Louis.
"Put those two things together and that's a very ripe environment for very strong merger activity," he says.
In fact, hundreds of billions of dollars were spent on bank mergers and acquisitions in 2006, including the US$37-billion merger of Intesa and Sanpaolo banks in Italy, BNP Paribas of France's US$11-billion takeover of Italy's BPI and the US$14.8-billion deal that saw Capital One pick up North Fork in the United States. Next year could see even more deals.
Take, for instance, last week's rumours of transatlantic deals ranging from Bank of America's interest in a US$90-billion plus takeover of Barclays Bank PLC. in the United Kingdom, to Citigroup Inc.'s US$2-billion bid for U.K. Internet bank Egg Financial. The Barclays rumours have since been quelled by Bank of America's executives, but shares in the U.K. retail bank surged last week on the speculation.
"In-market [or domestic] consolidation is likely to take place in the United States, Germany, Japan, Australia, Korea, Taiwan and Brazil," UBS Investment Research analyst Philip Finch said in a report on international banking this month.
"We could also see transatlantic deals, driven by European expansion among certain U.S. banks, while other cross-border merger activity is likely in Greece, China, Russia and Hong Kong."
Absent, of course, from the lists of potential merger hotspots is Canada. Domestic mergers are not permitted here, while foreign ownership rules mean the Canadian banks are protected from external rivals -- otherwise the Canadian banks could become targets, given they turned in a record year, combining for profits of almost $20-billion.
Of course, Canada's banks do have international growth stories of their own that include acquisitions. Bank of Montreal, Toronto- Dominion Bank and Royal Bank of Canada all purchased additional banks to add to their strength in different regions of the United States last year. They have all said there's cash in the coffers to buy more banks in 2007, if the right target becomes available at the right price. Bank of Nova Scotia and Canadian Imperial Bank of Commerce were also active on the international acquisition trail in 2006.
Scotiabank, which now earns more than 30% of its annual profits outside of Canada, added to its holdings in Central and South America during the year, while CIBC is spending US$1.1- billion to double its current 44% stake in First Caribbean bank.
But all those deals are just pieces of quite specific regional plays, says Dominion Bond Rating Service analyst Brenda Lum.
"If you look at the strategic growth opportunities for several of the Canadian banks it's not really playing in the global arena," Ms. Lum says.
"The Canadians haven't really been standing still, but, at the same time, I think they are more conservative when it comes to large acquisitions."
In total, the Canadians combined to spend a little more than US$5-billion on overseas acquisitions in fiscal 2006, which is about the same size as the 10th single biggest deal in global banking this year -- Danske Bk of Denmark's acquisition of Sampo Bank of Finland.
If, as predicted, the biggest global banks become even bigger, the Canadian banks will become relatively smaller.
A report from international financial services firm Price Waterhouse Coopers use Coopers this year pointed out that not a single Canadian bank made the top 20 banks in the world listed by market capitalization.
"Canadian banks fail to register on the world stage, with the largest Canadian bank ranking 32nd in the world," the report said.
RBC's market capitalization stands at about US$50-billion, compared with more than US$200-million each for Citigroup Inc. and Bank of America Corp. That may not sound like a problem when you can churn out record profits from your domestic business.
But many observers contend that size really does matter when it comes to banking. In a report this week, international management consultancy firm Bearing- Point said Canadian retail banks "will need to embrace globalization" in the next decade or face competition from external banks that will use new technology and their relative size advantage to infringe on the domestic market.
"If we don't take this into account," Mr. Dodge warned, "then when we look back on 2006 from the perspective of 2020, we will wish we had."
Furthermore, the ever-widening shadow of the global giants could have a direct impact on the Canadian banks, especially when it comes to international corporate and investment banking.
"If you're becoming a relatively smaller and smaller player on a global basis, it's going to be difficult to compete globally," says Edward Jones' Mr. Kersting.
Scotiabank has started to leverage its international network to offer better corporate treasury services recently. RBC Capital Markets, meanwhile, is perhaps alone among Canadian investment banks in terms of expanding its international capacity, especially in North America where the ambitions of hedge funds and private equity players are not limited by borders. But the Canadians, in general, have only limited global networks, say analysts.
"None of the Canadian banks has ever stated that their intention is to be a global player," says DBRS's Ms. Lum. "But I think they have to be cognizant of what's happening globally as it pertains to their niche businesses."
In the long term, says Ms. Lum, the Canadians will have to consider joining in the global merger frenzy.
"If the Canadian banks have ambitions to compete globally, they're going to have be bigger than they are today," Ms. Lum says.
;
Global banking chiefs hungry for growth and armed with cash to burn are set to make 2007 the international year of the bank merger. The trend will lead to further concentration of international banking power, dwarfing those banks -- such as Canada's domestic banks -- that don't participate in the biggest mergers.
Transactions will be driven by healthy balance sheets and surging profits at many of the biggest banks in the world, says Tom Kersting, an analyst at Edward Jones in St. Louis.
"Put those two things together and that's a very ripe environment for very strong merger activity," he says.
In fact, hundreds of billions of dollars were spent on bank mergers and acquisitions in 2006, including the US$37-billion merger of Intesa and Sanpaolo banks in Italy, BNP Paribas of France's US$11-billion takeover of Italy's BPI and the US$14.8-billion deal that saw Capital One pick up North Fork in the United States. Next year could see even more deals.
Take, for instance, last week's rumours of transatlantic deals ranging from Bank of America's interest in a US$90-billion plus takeover of Barclays Bank PLC. in the United Kingdom, to Citigroup Inc.'s US$2-billion bid for U.K. Internet bank Egg Financial. The Barclays rumours have since been quelled by Bank of America's executives, but shares in the U.K. retail bank surged last week on the speculation.
"In-market [or domestic] consolidation is likely to take place in the United States, Germany, Japan, Australia, Korea, Taiwan and Brazil," UBS Investment Research analyst Philip Finch said in a report on international banking this month.
"We could also see transatlantic deals, driven by European expansion among certain U.S. banks, while other cross-border merger activity is likely in Greece, China, Russia and Hong Kong."
Absent, of course, from the lists of potential merger hotspots is Canada. Domestic mergers are not permitted here, while foreign ownership rules mean the Canadian banks are protected from external rivals -- otherwise the Canadian banks could become targets, given they turned in a record year, combining for profits of almost $20-billion.
Of course, Canada's banks do have international growth stories of their own that include acquisitions. Bank of Montreal, Toronto- Dominion Bank and Royal Bank of Canada all purchased additional banks to add to their strength in different regions of the United States last year. They have all said there's cash in the coffers to buy more banks in 2007, if the right target becomes available at the right price. Bank of Nova Scotia and Canadian Imperial Bank of Commerce were also active on the international acquisition trail in 2006.
Scotiabank, which now earns more than 30% of its annual profits outside of Canada, added to its holdings in Central and South America during the year, while CIBC is spending US$1.1- billion to double its current 44% stake in First Caribbean bank.
But all those deals are just pieces of quite specific regional plays, says Dominion Bond Rating Service analyst Brenda Lum.
"If you look at the strategic growth opportunities for several of the Canadian banks it's not really playing in the global arena," Ms. Lum says.
"The Canadians haven't really been standing still, but, at the same time, I think they are more conservative when it comes to large acquisitions."
In total, the Canadians combined to spend a little more than US$5-billion on overseas acquisitions in fiscal 2006, which is about the same size as the 10th single biggest deal in global banking this year -- Danske Bk of Denmark's acquisition of Sampo Bank of Finland.
If, as predicted, the biggest global banks become even bigger, the Canadian banks will become relatively smaller.
A report from international financial services firm Price Waterhouse Coopers use Coopers this year pointed out that not a single Canadian bank made the top 20 banks in the world listed by market capitalization.
"Canadian banks fail to register on the world stage, with the largest Canadian bank ranking 32nd in the world," the report said.
RBC's market capitalization stands at about US$50-billion, compared with more than US$200-million each for Citigroup Inc. and Bank of America Corp. That may not sound like a problem when you can churn out record profits from your domestic business.
But many observers contend that size really does matter when it comes to banking. In a report this week, international management consultancy firm Bearing- Point said Canadian retail banks "will need to embrace globalization" in the next decade or face competition from external banks that will use new technology and their relative size advantage to infringe on the domestic market.
"If we don't take this into account," Mr. Dodge warned, "then when we look back on 2006 from the perspective of 2020, we will wish we had."
Furthermore, the ever-widening shadow of the global giants could have a direct impact on the Canadian banks, especially when it comes to international corporate and investment banking.
"If you're becoming a relatively smaller and smaller player on a global basis, it's going to be difficult to compete globally," says Edward Jones' Mr. Kersting.
Scotiabank has started to leverage its international network to offer better corporate treasury services recently. RBC Capital Markets, meanwhile, is perhaps alone among Canadian investment banks in terms of expanding its international capacity, especially in North America where the ambitions of hedge funds and private equity players are not limited by borders. But the Canadians, in general, have only limited global networks, say analysts.
"None of the Canadian banks has ever stated that their intention is to be a global player," says DBRS's Ms. Lum. "But I think they have to be cognizant of what's happening globally as it pertains to their niche businesses."
In the long term, says Ms. Lum, the Canadians will have to consider joining in the global merger frenzy.
"If the Canadian banks have ambitions to compete globally, they're going to have be bigger than they are today," Ms. Lum says.
