Will other banks follow BMO and TD into U.S. bank acquisitions?

Pandemic capital build-up has positioned all banks for mega-moves

Will other banks follow BMO and TD into U.S. bank acquisitions?

While the wealth industry has been focused on the central banks and their rising interest rates, two of Canada’s big banks have been making significant moves of their own, raising questions of whether others will follow, according to one industry observer who’s seeing the strength in this sector.

Coming into this year, the Bank of Montreal (BMO) broke new ground by acquiring the Bank of the West, which was the BNP Paribas’ U.S. retail banking subsidiary, for $16.3 billion U.S. It was the largest acquisition in the Canadian banking industry.

TD followed, paying $13.4 billion U.S. to buy First Horizon Corporation, a Tennessee-based regional blank. It’s a good regional bank in the U.S. southeast, currently one of the most attractive markets. This purchase was almost 15 years after BMO's last large U.S. bank acquisition – Commerce Bancorp.

“Coming out of the pandemic, the other four banks are in a very strong position to make acquisitions, too,” Robert Wessel, managing partner of Hamilton ETFs, told Wealth Professional.

“It’s not likely that you’ll see acquisitions of the size that you saw with TD and BMO, but it’s certainly possible that they could do something smaller. I wouldn’t rule out the large acquisitions, but there’s nothing obvious for the other four banks to buy. The acquisitions that we saw with BMO and TD are the biggest and second biggest in Canada’s history.”

Wessel said the moves were a result of some unique circumstances due to the pandemic, which resulted in very significant growth in capital that the banks weren’t allowed to do anything with.

“Capital kept building, building, and building for most of a two-year period,” he said. “So, this facilitated these two acquisitions, which were quite large. It gave them enough financial strength.”

Wessel said the acquisitions offer several benefits, including adding scale and providing the banks with a highly complementary geography as they penetrate more of the American market.

“One of the things that helps to drive value for the Canadian banks is capital return in the form of dividends and capital deployment in the form of either reinvesting in your business or making acquisitions. So, these two banks have used a significant amount of their capital to make large acquisitions, which are transformational to their foreign platforms. To the extent that they meet their accretions that will probably support stock prices. But, it also says that the other four banks have an awful lot of capital, which they can deploy now.”

Wessel noted the other banks haven’t committed to commercial banking to the same extent as TD and BMO, so could consider it. There are also wealth management and U.S. investment banking options.

Meanwhile, he said that the bank fundamentals have continued to be strong, “but if you’re an advisor, what you place the greatest weight on is the fact that the banks are very cheap” because the valuations have been very favourable entry points.

“The sector has never made more money and never had more capital or better reserves,” said Wessel.

“The financial strength of the sector is extremely good and, to the extent that you get a yield curve that steepens and shifts higher, you’re also likely to get margin expansion. So, that will be a positive that you can weigh against any other headwinds.”