TD Bank is growing its exposure to the U.S. regional banking market at a time when the sector is under increased strain, yet DBRS Morningstar said the latest acquisition remains on strategy.
In a new report, the rating agency said TD boasts the largest exposure to U.S. regional banks among the big Canadian banks. It’s set to increase that share with the pending $13.4-billion acquisition of First Horizon Corp.
The deal comes at a time when the risks in the U.S. banking sector have risen, following the failure of Silicon Valley Bank and Signature Bank and a flight from smaller banks to the large players by depositors.
Even before those events, the closing of the First Horizon acquisition was delayed due to still-pending regulatory approvals, DBRS said.
The closing has already been pushed back from Feb. 27 to May 27, and the report noted that the banks are now negotiating another extension, as approval isn’t expected to come in time for a May closing.
“First Horizon’s share price is now nearly 30% below TD’s offer price of $25 per share, indicating that the market is questioning the viability of the transaction,” it said.
The discount reflects concern about whether the deal will get regulatory approval and questions about whether “TD will attempt to renegotiate a lower purchase price in light of lower U.S. regional bank valuations following the failures of Silicon Valley Bank and Signature Bank,” the report said. It noted that First Horizon’s deposits were down 15% year over year in fiscal 2022.
“However, the bank remains optimistic about the planned acquisition based on the merits of the deal that were noted when the transaction was first announced,” DBRS said, adding that the underlying logic of the deal remains intact.
“Size and scale remain critical to competing in the U.S. banking sector, and First Horizon will accelerate TD’s U.S. growth strategy by providing immediate access to the fast-growing Tennessee and Louisiana [markets], filling in TD’s existing presence in Florida and North Carolina, and opening Texas and Georgia for further expansion,” it said.
“TD also points to the cultural alignment between the two banks with consistent risk frameworks, complementary commercial platforms that should drive growth and scale, and an opportunity to bring its strong retail model into First Horizon’s less developed retail footprint,” it noted.
Apart from the uncertainty surrounding the First Horizon deal, TD is expected to weather the increased stress in the U.S. banking sector, DBRS said.
“TD continues to maintain ample liquidity and strong capital levels, prudent risk and liquidity management, and a very strong and diversified deposit franchise,” it said.
Short-sellers have recently targeted TD stock due in part to its exposure to U.S. regional banks, with data from S3 Partners and ORTEX indicating TD was the world’s most shorted bank in late March and early April.