Good News from BMO; Write-Down for TD Bank?

Blackmont Capital analyst Brad Smith put out a note about two of Canada’s banks that have been heading in opposite directions lately, and for once the most positive news came from Bank of Montreal (BMO) – at least on the surface.

BMO earns some plaudits for restructuring two asset-backed commercial paper trusts known as Apex and Sitka, whose troubles had threatened to cost the bank C$1.5-billion. But the nature of the restructured notes, BMO is now exposed to C$1.35-billion or more of risk related to collateralized debt obligations [CDOs] linked to the trusts, Mr. Smith said.

At Toronto-Dominion Bank (TD), which has been a top pick in the sector for many analysts as it has avoided the worst of the credit crunch, the news this week revolves around its acquisition of New Jersey-based Commerce Bancorp. The deal is set to close in the next couple of weeks and TD has announced that its newly acquired operations, merged with its existing TD Banknorth franchise, will be renamed TD Commerce bank. This seems like a smart idea given that Commerce has a strong brand presence in the U.S. and a reputation for high levels of customer service. It also makes sense because Banknorth has struggled to provide the sort of returns TD hoped for when it bought the Portland, Maine-based bank back in 2005.

But Mr. Smith notes that once the Banknorth brand is gone, there will be a good case for TD to scrap roughly $6-billion in related goodwill that is currently sitting on the bank’s balance sheet. As discussed in a Financial Post story in February, TD has more goodwill on its balance sheet than any of its Canadian competitors.

With Banknorth out, can a goodwill write-down be far behind, asks Mr. Smith.

Blackmont has “hold” ratings on both TD and BMO. Mr. Smith has a 12-month target price for TD of C$63.00 and for BMO of C$54.00.

Comments

[djasking]

I am not sure I see the argument for an impairment charge on goodwill associated with the purchase of Banknorth. Whether or not the return has met expectations, and it is far too early to tell, the assets have shown no sign of impairment. Impairment charges usually follow significant earnings declines. As for the name change, is that really where the value was centered, or was it the market share, branches, customers, account officers, and portfolio? Finally, as the article points out, goodwill is not included as capital for regulatory purposes, so what effect would an impairment charge really have other than to reduce taxable income and improve cash flow? All goodwill does is acknowledge the fact that the assets wouldn't otherwise trade at the lowly 1x book value.