What Canada's banks will buy

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Canada's banks seem intent lulling deal-junkies to sleep.

Despite emerging from a global financial meltdown with relatively strong balance sheets, the country's biggest banks have been reluctant to pull the trigger on major acquisitions.

There's no lack of opportunity: 'For Sale' signs are up on all sorts of foreign financial institutions. The strategic rational for takeovers is also pressing, as Canada is a mature market, with limited potential for expansion.

Yet Canadian CEOs seem largely content to sit on their hands. Toronto-Dominion Bank's Ed Clark, the most acquisitive of bosses in recent years, picked up three Florida banks with a total of 69 branches last Friday in one of the few deals seen in recent months. The purchase price on these busted banks - they were being run by U.S. regulators - was so small that TD Bank didn't even need to disclose it.

Speculation that the Canadian banks will do something big - one analyst was pushing a $14-billion Royal Bank purchase of SunTrust Banks deal last month - have now been replaced by predictions that the big banks will do nothing by induce stupor. Barclays Capital analyst John Aiken pumped out a report in the wake of TB Bank's little shopping spree in Florida that said: "While many may have expected a larger transaction, we believe that this is the only type of transaction that the Canadian banks will pursue in the near term: Low risk (valuation and execution) and little impact on capital."

Maybe the bankers will stay in their shells, content to milk domestic franchises. Or maybe outsiders are simply looking in the wrong place for potential deals.

Maybe the next big bank acquisitions will be in wealth management, with shareholder-friendly takeovers of money managers or distribution systems.

This fearless prediction comes in part from tapping into what senior bankers are saying privately, but mostly comes from listening to what executives at Royal Bank and TD Bank are telegraphing to the world.

For those who missed it, Royal Bank executive John Montalbano, head of the global asset management division, said in this weekend's Globe and Mail: "There are a number of institutions looking to shed money-management businesses. Making an acquisition in Britain is our prime goal - we want to add more than $50-billion in assets under management."

Not to be outdone, TD Bank executives pledged in a recent meeting with analysts that they would double the assets under management within five years. This is a bank with stockbrokers and planners who run $113-billion, and another $150-billion in mutual fund-type assets. The quickest way to keep this promise, and double that pile of dough, is through acquisition.

M&A in wealth management has been relatively subdued in recent months, in part because institutions are waiting on new capital rules from regulators, and in part because there's less need for the desperation sales that marked the worst days of the financial crisis. But analysts say the pace of deals is bound to pick up, as government-controlled banks shed divisions to repay bailouts, and employee-owned money managers move to cash in.

"The slack tide of the first quarter's M&A activity will begin to flow again as improved markets bring both buyers and sellers back to the negotiating table," said Aaron Dorr, a New York-based managing director within Jefferies' Financial Institutions Group. He said: "Alternative asset management businesses continue to be among the most sought after targets based on their expected future growth."

For a bank CEO, and board, buying a fund manager or a network of stockbrokers qualifies as a safe way to expand the franchise. Big purchases can be done with relatively little capital - Royal Bank paid $1.4-billion in stock two years ago to pick up the $69-billion of assets at PH&N. And investors assign a premium to the steady profits that flow from a well-run wealth management operation. Shareholders are far more leery of the low return on equity that comes with buying U.S. regional banks.