Toronto bank towers

Several of the big Canadian banks may be looking to grow by acquisition in the U.S., but they will likely have to pay up for these sorts of deals, says Hamilton Capital Partners.

The Toronto-based fund manager, which focuses on global financial services, says that last week’s major U.S. bank announcement — a merger of equals between BB&T and Sun Trust — is likely to accelerate consolidation the U.S. bank sector. And, in a research note, it says that four of the big Canadian banks — Bank of Montreal, CIBC, Royal Bank and TD Bank — will likely be players in this trend.

“If U.S. bank consolidation accelerates, we believe the four Canadian banks with U.S. platforms will participate as the strategic implications of standing by and watching the market consolidate are too significant. As a result, in the coming years, the Canadian banks have some very important decisions to make, with meaningful implications for investors,” the firm says.

Hamilton Capital notes that U.S. bank acquisitions by Canadian banks will likely face increased acquisition risk and will require them to pay takeover premiums.

“The management teams of the Canadian banks are no doubt aware that after a very long period of limited deal activity, the sheer size/significance of the BBT/STI merger could catalyze an acceleration in M&A activity. This may in turn cause them to pull forward any expansion plans. Because Canadian banks have routinely experienced multiple compression/underperformance relative to their peers after making acquisitions, we believe acquisition risk has risen,” it says.

Additionally, it notes that the Canadian banks will also have to pay a premium for any deal. “For obvious reasons, Canadian banks cannot participate in [merger of equals] transactions, meaning any acquisitions they make will necessarily involve paying the target shareholders takeover premiums,” it says.

Hamilton Capital says that it sees TD as the Canadian bank that’s most likely to make a large U.S. deal in 2019. “Given TD’s focus on the Southeast and the fact that the BBT/STI deal could precipitate further regional consolidation, TD could be prompted to become more aggressive in either the timing or size of its next deal,” it says.

BMO and CIBC, whose U.S. operations are focused in the Midwest, will have more time to find deals, the firm suggests; and, it sees RBC as having the lowest acquisition risk. “The idiosyncratic nature of City National (ultra-wealthy clientele, targeted customer base) makes it less vulnerable to further market concentration,” the report notes of the RBC subsidiary. “As a result, we believe that of all of the Canadian banks, [Royal] has the lowest U.S. bank acquisition risk.”