Canadian banks continue to eye acquisition opportunities south of the border as the subprime mortgage credit crisis, the housing crisis and a struggling economy continue to drive down the share prices of U.S. banks.

However, despite this seemingly golden opportunity, most observers believe that Canadian banks will be reluctant to pull the trigger on any large deals, preferring either to target smaller acquisitions, which they can then merge into existing U.S. subsidiaries, or to bide their time until prices get even cheaper.

“In this environment, banks are obsessed about their capital position and the leverage that’s on their balance sheets,” says Richard Nield, portfolio manager with AIM Management Group Inc. in Austin, Tex. “If you’re a Canadian bank CEO, you’d have to ask yourself, ‘Do I want to make a big transformational acquisition here?’”

Three of the Big Five banks — Royal Bank of Canada, TD Bank Financial Group and BMO Bank of Montreal (all based in Toronto) — already operate U.S. banking subsidiaries, built over the years through acquisitions and mergers, all in the context of a highly competitive U.S. banking environment.

In contrast, Bank of Nova Scotia has concentrated instead on building an extensive network of subsidiaries in the Caribbean and Latin America.

In April, the Wall Street Journal reported that Scotiabank was one of a number of banks and private-equity funds that had considered making a bid for Cleveland-based National City Corp., the tenth-largest bank in the U.S.

National City has been hit hard by the housing and credit crisis, with its stock price in mid-April hovering at about one-fifth of the value it had a year ago, lowering its market capitalization to US$5.3 billion.

Scotiabank declined to make a bid for the bank after performing due diligence, according to the Wall Street Journal. Instead, a private-equity firm was leading a group of large shareholders in making a capital infusion into the bank in exchange for equity.

Nield says that Scotiabank has a track record of making disciplined decisions in terms of acquisitions — and he isn’t surprised that the bank is being cautious about taking a position in the U.S.

Buying a U.S. bank “would be a bit of a change of what Scotiabank’s strategy has been,” Nield says. “I think it has talked more recently about wanting to get bigger in wealth management, whether in Canada or globally, and we all know it has a big focus in the Caribbean and Mexico.”

CIBC, which has been buffeted by various setbacks in recent years, also has no U.S. retail presence.

The strong Canadian dollar, combined with turmoil in the U.S. market, has the Big Five — with the likely exception of CIBC — looking southward again for acquisitions, especially among the ranks of the so-called “regional” U.S. banks.

“There are tremendous opportunities in the U.S.,” says Shane Jones, managing director of Canadian equities and senior portfolio manager with Toronto-based Scotia Cassels Investment Counsel Ltd.

However, each of the banks would have serious issues to deal with if they were to contemplate making any large U.S. acquisitions, Jones says, starting with RBC and TD, which have both bought U.S. banks in recent months.

“The question both RBC and TD have to ask themselves is,” says Jones: “‘Do we do another transaction at this point, while things look very cheap, or is it time to step back and integrate what we have before we take the next step?’”

In October, TD announced it had purchased Commerce Bancorp Inc. of Cherry Hill, N.J., for US$7.5 billion, a deal that closed on March 31. When combined with its existing New England-based subsidiary, TD Banknorth, TD’s U.S. banking platform has about US$110 billion in assets under administration and 1,100 branches. TD also has announced that the combined entity will be known as TD Commerce Bank starting later this year.

Commerce Bancorp, which has significant exposure to the U.S. commercial and residential real estate market, was an expensive acquisition for TD, Jones says, and TD will have its hands full integrating its U.S. business over the next couple of years.

RBC has also recently added to its U.S. banking platform, which is based primarily in the southeastern U.S. In September, RBC announced it had bought Birmingham-based Alabama National BanCorp. — the parent of 10 smaller banks in Alabama, Florida and Georgia — for US$1.6 billion, a deal that closed on Feb. 25.

@page_break@When added to RBC’s existing U.S. bank, RBC Centura, the combined entity has US$33 billion in AUA and 430 full-service banking centres. The name of the merged entity will be changed to RBC Bank.

But since RBC and TD made their acquisitions, conditions in the U.S. banking market have worsened, observers say, which could dampen their enthusiasm for any further significant purchases.

“We have a very serious problem in the U.S. right now, so do you take the plunge and add more? How are your shareholders going to feel about that?” asks Jones, who notes that RBC and TD could still make smaller “bolt-on” acquisitions if they can make those deals at the right price.

In the case of BMO, matters are further complicated by the fact that the bank itself has been beset by its own credit crisis problems, taking writedowns on losses in natural gas trading and in structured investment vehicles.

Nevertheless, BMO, which has owned Chicago-based Harris Bank for more than 20 years and which has made several additional modest U.S. acquisitions in recent years, has indicated that it will keep on the lookout for chances to pick up U.S.-based banks.

“In the coming months — realistically, in the coming 12 months — there are going to be opportunities in the marketplace,” BMO CEO Bill Downe said at an investor conference in mid-April. “There are 8,000 banks in the U.S. and there’s going to be consolidation. Some of those banks will be good fits [with Harris], and we’ll be in the discussions when that happens.”

Analysts believe that BMO will continue to look for chances to add small 10- or 15-branch banks to its existing U.S. banking platform, but will shy away from biting off anything bigger.

“With the issues that BMO has had, it has put pressure on its capital,” Nield says. “It’s been a distraction to senior management and, in light of the pressure that it must be under, they probably feel making a good-sized U.S. acquisition would just be a bit too much right now.” IE