What's Next for Canadian Banks Intent on U.S. Expansion

Canadian banks are again warming up to the idea of buying U.S. banks.

Royal Bank of Canada and Canadian Imperial Bank of Commerce have plunked down $9.1 billion in the past 18 months to acquire large institutions. TD Bank Group and Bank of Montreal have also built U.S. operations through deals.

Those banks may think about buying more institutions to strengthen their current operations or extend them into new regions, industry experts said. They also could seek deals to expand in niche businesses such as wealth management and specialty finance.

"The Canadian market is mature for the country's biggest banks," said Stephen Clark, co-chair of the financial institutions group at the Canadian law firm Fasken Martineau. "They'll be looking for acquisitions that are strategic and that align with their own strengths in Canada. There's tremendous opportunity for growth in the U.S., which is a market they know and understand."

Canadian banks want access to the large U.S. population, which is about nine times larger than that of their home country, Clark said. Having a larger U.S. bank could also help those institutions serve vacationing Canadians.

The Canadian economy also remains lackluster. Eastern Canada relies heavily on manufacturing, which has hit a snag, and depressed oil prices had stalled growth in areas such as Alberta.

As a result, Canadian financial institutions seem intent to look south for growth opportunities. CIBC noted in its presentation to buy PrivateBancorp that Chicago has 16% more high-net-worth assets up for grabs than all of Canada.

"If you look at a number of the internationally headquartered banks, there's a de-risking process that is going on and a refocusing toward the U.S. and other countries where there is more of an evolved bank supervisory system," said Walter Mix, head of the financial services practice at Berkeley Research Group. "They're also looking toward profitable business lines, like private banking."

There are also deterrents, including the potential for more regulatory scrutiny and the threat of protests by community activists. City National in Los Angeles, which was sold to Royal Bank of Canada, pledged $11 billion in spending for Community Reinvestment Act efforts after drawing the ire of community groups.

Any Canadian bank with an eye on at the U.S market must be prepared to "work with community groups proactively to create a strategy and written plan to achieve approval by the regulators," Mix said.

Larry Richman, president and chief executive of the $17.7 billion-asset PrivateBancorp and the future head of CIBC's U.S. operations, said in an interview last week that the support "we provide to the community is in embedded in our culture and we will continue to do what's right." The companies have not disclosed a plan to commit funds for lending and community initiatives tied to the merger.

A number of Canadian banks could add to their U.S. holdings, industry observers said.

CIBC could eventually consider making more acquisitions, though the $463 billion-asset company is focused on buying PrivateBancorp and organic growth, President and CEO Victor Dodig said in a recent interview. Still, Dodig said he envisions CIBC expanding beyond the Chicago area to other metro centers, possibly with acquisitions.

Royal Bank of Canada could start exploring new opportunities to gain market share, said Brian Klock, an analyst at Keefe, Bruyette & Woods.

David McKay, Royal Bank's chief executive, said during a June investor day that organic growth is the company's focus but that he is open to deals that would accelerate expansion while meeting certain financial metrics.

Bank of Montreal, which bought Harris Bank in the 1980s and Marshall & Ilsley in 2011, could weigh acquisitions in the Midwest, Klock said. The company in recent months has agreed to buy the boutique advisory firm Greene Holcomb Fisher and General Electric's transportation finance business.

Tom Flynn, chief financial officer of BMO Financial Group, said at a recent conference that any transactions the Toronto company pursues would be small fill-in deals to complement its existing business. He added that management's immediate focus was the acquired GE business.

An acquisition could help TD Bank strengthen retail operations that stretch across the East Coast, industry experts said. The Toronto company built its U.S. bank by buying regional institutions such as Banknorth, Commerce Bancorp and South Financial Group.

TD has sufficient scale and doesn't feel the need to buy anything in the U.S., a spokeswoman said. The company will be "very selective," she said, adding that any acquired assets would need to have high quality, stay within its risk appetite and make financial sense.

Bank of Nova Scotia is perhaps the least likely bank to pursue a substantial U.S. acquisition, industry experts said. The company is focused on an international strategy aimed at building scale in areas such as Mexico, Peru, Chile and Colombia, a spokesman said.

Canadian banks could also rely on technology to bring in new clients, said Michael Iannaccone, president of MDI Investments in Chicago. 

"If it is just a reach for geography or deposit share, you could do that without an acquisition," Iannaccone said. "Banking has changed; you don't need an actual physical presence to grab a customer and complete a transaction on a deposit."