Canadian banks are pulling the trigger once again on a number of deals involving financially distressed U.S. banks, after a long period of inactivity in acquisitions south of the border.

Flush with capital and backed by the strong Canadian dollar, Canadian banks are showing their confidence in the long-term prospects of the U.S. economy by picking up small regional banks and bolting them on to their existing U.S. platforms, observers say.

“Over the past year — at least, in certain U.S. states — there has been some stabilization in terms of real estate loan losses, and a big portion of writedowns [on the books of some U.S. banks] may have already occurred,” says Richard Nield, portfolio manager with Toronto-based Invesco Trimark Ltd. in Austin, Tex. “What Canadian bank CEOs are now seeing is that they have better visibility in terms of what any future losses [at U.S. bank acquisition targets] could be; whereas, a year ago, there was a lot more uncertainty.”

The Canadian banks are also making these U.S. acquisitions for relatively cheap prices — in some cases, with the active financial assistance of the U.S. Federal Deposit Insurance Corp., which is seeking to find buyers as distressed U.S. banks face failure. The modestly priced acquisitions, analysts say, are therefore having a negligible effect on the Canadian banks’ balance sheets.

In May, Toronto-based Toronto-Dominion Bank, which has been the most active Canadian acquirer, bought the Greenville, S.C.-based South Financial Group for US$191.6 million, with US$61 million going to South Financial shareholders and US$130.6 million to the U.S. Treasury department, which had previously paid US$347 million under its capital purchase program to bail out the bank.

As of March 31, South Financial had a total of US$8 billion in loans and US$9.8 billion in deposits, as well as 176 branches — 83 in South Carolina, 27 in North Carolina under the Carolina First Bank banner and 66 in Florida under the Mercantile Bank banner.

South Financial has sustained some US$1.3 billion in losses since the beginning of 2008, and TD expects to take more yet “manageable” losses on South Financial’s loan book.

In April, TD bought three Florida banks — Riverside National Bank of Florida, First Federal Bank of North Florida and AmericanFirst Bank — from the FDIC. In total, TD has gained 69 branches, $2.1 billion in loans and $3.1 billion in deposits from the three banks. As part of that deal, the FDIC has agreed to cover a portion of any losses TD sustains on the three banks’ loan books.

TD will rebrand all the new branches acquired in the two deals under the TD Bank banner, merging them with its existing U.S. network. When the South Financial deal closes, TD will have more than 1,200 branches in the U.S., stretching roughly from Maine to Florida.

“TD’s clear goal is to be one of the largest retail operations in North America,” says Shane Jones, managing director and head of Canadian equities with Scotia Asset Management LP. “To me, the South Financial deal was the perfect fit for TD, because it’s now essentially covering the U.S. eastern seaboard. Now, it’s just a matter of adding on [further acquisitions].”

Other Canadian banks also have been active in buying up U.S. banks.

In April, Toronto-based Bank of Mon-treal purchased Rock-ford, Ill.-based Amcore Bank from the FDIC, with the U.S. regulator assuming 80% of potential losses in a loan-loss agreement. BMO has merged Amcore, which had 52 branches and US$2.1 billion in deposits and US$2 billion in loans at the time of acquisition, with its Chicago-based Harris Bank subsidiary. Harris Bank will now have approximately 330 branches in Illinois, Indiana and Wisconsin.

“It was a fairly small deal, and that kind of fits with BMO’s strategy,” Nield says. “[BMO has] made no bones about the fact that it wants to be conservative on how it grows within the U.S.”

Also in April, Toronto-based Bank of Nova Scotia purchased R-G Premier Bank of Puerto Rico in yet another FDIC-assisted deal.




@page_break@Scotiabank acquired the failed bank’s US$2.2 billion in deposits and $5.6 billion in assets, including $5.3 billion in loans, as well as 29 branches.

The loans were covered by a loan-loss agreement, which saw the FDIC assume 80% of the losses.

The 29 R-G Premier Bank branches will be rebranded and merged with the existing 17 branches of Scotiabank de Puerto Rico, Scotiabank’s subsidiary.

“Puerto Rico fits into Scotiabank’s Caribbean strategy,” says Jones, “Scotiabank is the biggest bank throughout the Caribbean. The bank only had a small presence in Puerto Rico. This builds out its Caribbean presence further.”

So far, Toronto-based Royal Bank of Canada, which operates the 420-branch, North Carolina-based RBC Bank in the U.S. southeast, has not joined its peers in pulling the trigger on a deal. Considering that RBC’s U.S. retail operations have long underperformed, and that TD was able to acquire small banks in the U.S. southeast, the evidence could suggest that RBC does not have U.S. expansion at the top of its priority list.

“RBC has enough problems with what it has already [in the U.S.],” Jones says. “Its corporate focus is on growing capital markets and growing wealth management, not necessarily growing U.S. retail operations. RBC CEO Gord Nixon has been quite clear about that.”

Observers say that Canadian banks are likely to make more of these sorts of acquisitions in the U.S. if the price is right and the location of the acquired bank fits with the Canadian bank’s U.S. strategy.

“These are insignificant buys, from a price perspective,” Jones says. “But I think they’re going to be good assets in the future, and they will make a difference in earnings in the future.”

What the Canadian banks are not likely to do, banking sector observers believe, is make any big buys in the U.S., especially with G20 finance ministers still debating the form and substance of proposed revisions to global banking regulations.

And the Canadian banks will also exercise an abundance of caution on how they make any acquisitions. In fact, although TD had the resources to make the South Financial purchase using its own capital reserves, it nonetheless chose to issue some $250 million in equity to finance the deal.

In doing so, TD stayed in line with recent guidance from the Office of Superintendent of Financial Institutions that encourages Canadian banks not to tap capital reserves in order to fund acquisitions.

The Canadian government, in the midst of negotiating global banking regulations with other G20 countries, has been favouring regulatory regimes that call for higher capital reserves at banks rather than a so-called “bank tax.”

“Until the Canadian banks know exactly how much Tier I capital they’re going to need on their balance sheets [under the new global banking rules], the banks are going to err on the side of caution,” Nield says. “Yes, the Canadian banks have more capital reserves than banks in most other countries. But at this point, they’d rather have more than less.” IE