Wacky Times Present Unique Opportunities for Canadian Banks

If it is good enough for Bank of America’s (BAC) Ken Lewis, it is good enough for Canada’s CEOs. I know the last “Big Idea” didn’t get any traction (see prior post “Put Citigroup out of its misery” June 26-08), but it is time to put the thinking caps on again. To whit:

• Morgan Stanley’s (MS) market cap. is sitting at $20 billion.
• Goldman Sachs’ (GS) market cap is at $40 billion, and the A-rated 2031 sub debt is trading at $0.79 on the dollar.

Although Goldman professes no interest in marrying with a commercial bank, according to one interview, Com Kelleher, Morgan Stanley’s CFO was being more pragmatic, 

We have to be adaptable. If the market fully decides that you need deposits, then it’s decided.

The market caps of the Canadian banking and insurance fraternity are as follows (all in US$):

• Bank of Montreal (BMO): $21 billion
• Bank of Nova Scotia (BNS): $40 billion
• CIBC (CM): $19.5 billion
• Manulife Financial (MFC): $47 billion
• Royal Bank of Canada (RY): $54 billion
• Toronto-Dominion (TD): $43 billion

Take these six partners, and compare them to both Morgan Stanley and Goldman Sachs. Each presents a different, yet potentially interesting, fit.

• About 30% of BMO’s assets are in the U.S., and CEO Bill Downe spent enough years working in the U.S. to be comfortable with that market.
• BNS is a bit conservative for such things, but it has the firepower.
• CIBC recently exited its U.S. I-banking biz, so it would be tough to return to the scene of the crime so quickly.
• Manulife has just announced a new CEO, which puts the current one in an awkward spot if he wanted to do one last deal before sailing off into the sunset.
• Royal Bank is trying to grow its U.S. business lines, but its CEO has already said he’s staying on the sidelines right now.
• This leaves us with TD’s Ed Clark, who certainly could make a credible play for any major U.S. institution right now, including these two (see prior post “Betting on the jockey is working at TD Bank” October 4-08).

The Canadian banks have been criticized throughout this decade for missing the boat on many of the transformative acquisitions that have been available over the past ten or fifteen years (see prior post “Matt Barrett the real winner in ABN Amro deal” April 23-07). Now that Prime Minister Stephen Harper has affirmed his opposition to domestic bank mergers, the strategic choices of Canada’s banks are pretty clear.

Organic growth via market share gains, chip away at small U.S. tuckunders, or reach in the same way that Charlotte-based NationsBank (now called B of A) has been doing for more than a decade. Recognizing that a conservative approach has its rewards (see prior post “Slow and Steady can still win the Race” September 16-08), you can’t help but ask yourself if you’d get a multiple lift by merging with either Morgan or Goldman.

Each of these two great firms turned a profit this week, despite huge drops in revenue. This flexibility is something that commercial banks just don’t have. Naturally, one would need to validate the balance sheets, but Bank of America was able to do that in a short time period - at least on a cursory basis.

Out there as ideas go, perhaps, but turn your mind back a few days. Who, merely a week ago, predicted that Merrill Lynch would agree to sell itself? When you are hunting a trophy deer, you might sit in a blind for several consecutive seasons before the target of a lifetime pops out behind a stand of trees. Hesitate, and the opportunity might be lost forever.

Disclosure: We own BMO, BNS and GS in our household.

Comments

[zeppq:]

"Naturally, one would need to validate the balance sheets,..."

Ah, there's the rub. It would take a brave CEO to trust the outcome of any due diligence on those analyses. Or a stupid one. Canadian bank mgmt is very cautious, so they will stay well undercover in their 'blinds' and let the prey pass by. Again.

2008 Sep 18 10:21 AM

[between the...:]

The naked shorts should be prosecuted, their firms shut down, and disgorged of profits. That would end this crap!!!

2008 Sep 18 02:12 PM

[livesinhiscar:]

Right, well I think the Canadian banks just want to be absolutely sure they are shooting at a deer and not something that looks like a deer in the heat of the moment. They will shoot, eventually. True waiting may cost if others more recjless swoop in earlier, but they are willing to pay that price in order not to make huge mistakes.

2008 Sep 18 07:34 PM