05/14/09 - 01:04 PM EDT
RY , TD , BMO , RM , BNS , PNC , FITB
Canadian banks pride themselves on having mostly sidestepped the global downturn that has ensnared almost every U.S. financial firm, and their conservatism has been admirable. Now it's time for them to take advantage of their relative strength and gobble up some weaker players to the south.
The "Big Five" Canadian banks -- Royal Bank of Canada (RY Quote), Toronto-Dominion Bank(TD Quote), Bank of Montreal(BMO Quote), Canadian Imperial Bank of Commerce(CM Quote) and Bank of Nova Scotia (BNS Quote) -- are doing better than Bank of America(BAC Quote), Citigroup(C Quote) and various U.S. regional banks since the storm clouds formed in August 2007.
The stocks of these Canadian banks are down between 30% to 44% since then, compared with declines of 80% to 95% for the U.S. banks. The one U.S. bank which has notably outperformed the Canadian banks is JPMorgan Chase(JPM Quote), which is only down 22% since August 2007.
The Canadian banks need to decide how they are going to take advantage of their relative health on the global stage to serve their shareholders. All five of these banks have traditionally stayed focused on their home market. That seems laudable when you look at the wreckage of banks like the U.K.'s Royal Bank of Scotland(RBS Quote), Switzerland's UBS(UBS Quote) and Australia's Macquarie Group.
Bank of Nova Scotia, or Scotiabank, has experimented a little with expansion into Mexico and Latin America. Royal Bank of Canada has dipped its toe in the U.S. market by buying Centura Banks in North Carolina. TD Bank bought online broker Ameritrade, Banknorth in New England and Commerce Bank in New Jersey.
Instead of expanding globally, these Canadian banks have been consolidating domestically and wanted to shrink further until their government stepped in to prevent it. Without the ability to merge and shed overlapping costs in their domestic market, all these banks should be looking to grow elsewhere, and there appears to be no better place than to their south.
Following the U.S. government stress test results last week, all U.S. banks (large and regional) are raising capital in secondary offerings to beef up their capital reserves. There is a feeling that all these banks have a new lease on life. This is a perfect time to be a buyer of these assets at these levels -- it's not necessarily the best time to be a seller if you think things are finally starting to brighten up after the last two years of thunderstorms.
The Canadian banks should be going after the best of the large U.S. regional banks. Royal Bank of Canada is large enough to make a run at PNC Financial(PNC Quote). Any of the Canadian banks could look to digest smaller players like People's United (PBCT Quote), Fifth Third(FITB Quote), Marshall & Isley(MI Quote), Huntington Bancshares(HBAN Quote) and First Niagara (FNFG Quote).
Banks in the Southeast, such as BB&T(BBT Quote), Suntrust(STI Quote) and Regions Financial(RF Quote), might be more open to a buyout deal but could bring more risk with their current loan portfolios. However, with the large number of Canadian snowbirds who vacation or live in Florida, there could be an advantage to having a large footprint in that state.
Last summer, Scotiabank was one of the suitors sniffing around the assets of National City before PNC took it over. There is a big difference between some of the healthier regional banks today and Nat City then.
There are still risks facing the Canadian banks. The Canadian economy generally lags the U.S. and unemployment is likely to get worse over the coming months (although Canada actually added jobs in April). As unemployment rises, so too will the banks' losses from credit cards, mortgages and auto loans.
Yet with a newly strengthened Canadian dollar and the banks' relative strength, this could be a golden opportunity for the Canadian banks. They should not squander this chance at making serious inroads into the U.S. market.
At the time of publication, Jackson was long Fifth Third.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.
This article was originally published in TheStreet.com
Thursday, May 14, 2009
05/14/09 - 01:04 PM EDT