Canadian Banks Should Target Growth Across the Border

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

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Fifth Third and Huntington: Big Winners from Stress Test

5/8/2009 12:30 PM EDT

Earlier this week, I said I thought that Fifth Third (FITB) and Huntington Bancshares (HBAN) were my favorite banks going into the Stress Test results. They've been the best bank performers today -- up 57% and 45% respectively today and more for the week.

I've sold my FITB May $6 calls this morning but rolled some of that profit into August $17.50 calls, as I see further upside ahead. Put me squarely in Jim's camp on financials versus Doug's(at least with respect to these smaller regionals).

For these two smaller players specifically, yesterday's news takes away the fear of highly dilutive future offerings. Yes, the risk of a drop in commercial real estate but that is countered with the potential for consumer mortgage re-fis continuing as we saw earlier in the week with FITB. What yesterday's results showed is that Midwestern regional banks were much better positioned than those in the Southeast (although FITB has its share of Florida exposure). This makes me less concerned about the commerical real estate shoe dropping in that part of the country.

Position: Long FITB.

Originally published in RealMoney.com

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Fifth Third: Mortgage Refi Hope vs. Stress Test Results

Fifth Third Bank (FITB) rocketed 25% yesterday after news came out that its mortgage unit had refinanced $21 million of Freddie Mac loans recently.

There's no question that when you look at FITB -- or any of the regional banks -- they look cheap on a price-to-book basis. Signs like yesterday's that the mortgage crisis is close to bottoming and that they will participate meaningfully in the recovery are a boon to the stock price.

The question you have to overlook in investing in a FITB (and the other smaller regionals) is what will Thursday's bank stress test results reveal about its capital needs. As such, the shares of FITB and other regional banks will trade like options this week.

If the stress test results are similar to recent earnings results, anything short of complete disaster will be taken as a positive and shares will rally. There are risks, but I've taken a small position in FITB. I particularly like the insider holdings at this bank (2.4%) and another Ohio-based bank, Huntington Bancshares (HBAN) (9% with some buying in the last week), compared to a Regions Financial (RF)(where insider holdings are less than 0.5%).

FITB and HBAN also have almost double and triple the short ratios respectively as RF. This rocket fuel will also send shares higher on even muted news on Thursday.

Position: Long FITB.

Originally published in RealMoney.com on 5/5/2009 7:50 AM EDT

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New Trend This Earnings Season: If You're Breathing, We'll Bid Up Your Shares

There's a trend emerging this earnings season -- especially for small- and mid-caps -- if you still have a pulse and can hold an earnings call, the market will take that as upside.

Several names pulled that off this morning. Fifth Third (FITB), the Midwest regional bank, saw shares trade up 8% this morning as losses were less than feared. International Game Technology (IGT), the casino gaming supplier we mentioned yesterday, saw its profit fall 44% in first quarter, but that was better than expected and the stock is up 6%. Royal Caribbean (RCL), the smaller of the two main cruise lines -- and a company I'm bearish on due to continued consumers pullback from discretionary spending but, as I said last week is one likely to go higher before it goes lower -- saw shares jump 16% this morning. Even as it lowered revenue numbers for the year, it was able to show it was keeping costs under control (important with its debt load).

What's the lesson here? It doesn't take much in this environment to spark a relief rally coming out of earnings. Keep that in mind, especially in the smaller names.

Originally published in RealMoney.com on 4/23/2009 10:24 AM EDT

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