Foreign banks ready for U.S. invasion

By David Ellis, staff writer


NEW YORK (CNNMoney.com) -- The long-anticipated wave of mergers in the banking sector could soon be upon us. The buyers, however, may not be from the United States.

Canada's Toronto Dominion Bank (TD) and Royal Bank of Canada (RY) have both in recent months publicly expressed their interest in expanding their U.S. footprint sometime soon.

And investors were abuzz earlier this month following a Wall Street Journal report that British banking giant Barclays (BCS), which acquired the North American assets of Lehman Brothers, may soon try to complement its already big presence on Wall Street with the acquisition of a retail bank.

"A lot of that has to do with buying Lehman Brothers," said Bruce Packard, a London-based analyst who covers UK-based banks at Seymour Pierce. "[Retail banking] is clearly an area they want to grow."

For many foreign banks, American soil is fertile ground for future growth. With smaller lenders failing at a rapid clip and industry leaders struggling to shore up their public image after their bailouts, many experts argue the opportunity is ripe for banks from outside the U.S. to steal market share from their American peers.

For all the talk though, cross-border merger & acquisition activity within banking has remained rather muted. No deals have been announced or completed so far this year, and only $1.6 billion worth of transactions occurred in 2009, according to deal tracker Dealogic.

Compare that to the pre-crisis days of 2007. That year, there were $21.3 billion worth of cross-border bank deals, led by TD's purchase of Commerce Bancorp and the acquisition of Sioux Falls, South Dakota-based Great Western Bank by National Australia Bank.

Experts suggest that what has kept foreign banks on the sidelines lately is the ever-present uncertainty surrounding both the U.S. economy and the banking regulatory environment.

While many U.S. financial institutions have recognized the bulk of their loan troubles, there are arguably still billions of dollars of additional losses that have yet to be accounted for as the national unemployment rate remains stubbornly high and the commercial real estate market continues to unravel.

And with U.S. lawmakers moving ever closer to passing financial regulatory reform legislation, it remains unclear what rules any bank, foreign or domestic, that operates in the United States would be subjected to.

"God forbid you buy something that you have to split up," said Jim Westlake, the head of Royal Bank of Canada's U.S. banking business, in a recent interview with industry trade publication American Banker.

Overseas regulators such as Canada's Office of the Superintendent of Financial Institutions have already bristled at the notion of one of their own scooping up an American lender and damaging their health in turn.

"[Regulators] have frequently said our banks should hold off until there is greater comfort around the recovery," said Mario Mendonca, senior financial analyst at Toronto-based investment bank Genuity Capital Markets.

Foreign lenders have also indicated they are willing to wait it out for the same sweetheart-type failed bank deals that their American counterparts have enjoyed.

"I think our fundamental view of the world hasn't really changed a whole lot and so I think we would still be quite nervous about large whole acquisitions where we're not getting any assistance," TD CEO Ed Clark said during a conference call with investors in January following the release of the firm's first quarter results.

Banco Bilbao Vizcaya Argentaria (BBVA), Spain's second largest bank, became the first overseas lender to strike such a deal with the FDIC last year. It scooped up failed Texas lender Guaranty Bank last August.

As part of the deal, BBVA Compass, the U.S. arm of BBVA, acquired Guaranty's deposits and about $13 billion worth of assets, agreeing to split the lion's share of any future losses with the Federal Deposit Insurance Corporation.

Failures of that magnitude however, are fewer and farther between these days however. Twenty four of the 30 banks that have been seized by the FDIC so far this year have had less than $1 billion in assets, hardly worthwhile for a firm looking to expand rapidly like TD or Barclays.

Ambitious foreign lenders may soon realize, as a result, that in order to break into or expand further within the U.S., a traditional merger might be necessary.

Regional lenders such as Atlanta's SunTrust (STI, Fortune 500) and Cincinnati-based Fifth Third (FITB, Fortune 500) have already both been rumored as potential targets for Barclays.

Investors have also attributed the recent surge in shares of Florida's Bank Atlantic (BBX) and fellow Southeastern lender Synovus (SNV) to takeover chatter. Both firms are expected to lose money this fiscal year. Synovus declined comment while Bank Atlantic was not immediately available.

Some U.S. lenders, of course, may be reluctant to cut deals though now that they are flush with capital and with credit losses nearing their peak.

But for many financial institutions, selling out may become an unpalatable, but necessary reality. Blake Howells, director of equity research for Becker Capital Management, an investment firm in Portland, Ore., suggests KeyCorp (KEY, Fortune 500), a bank in which his firm own shares, is one such lender.

While the Cleveland-based bank would have no trouble surviving on its own, Howells notes it could be a tough slog for the bank to generate any sort of earnings growth in the near term. A spokesperson for Key declined comment on the matter. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.94%3.93%
15 yr fixed3.03%3.03%
5/1 ARM3.33%3.27%
30 yr refi4.02%3.99%
15 yr refi3.09%3.07%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 16,461.32 -153.49 -0.92%
Nasdaq 4,382.85 -36.63 -0.83%
S&P 500 1,927.11 -14.17 -0.73%
Treasuries 2.23 0.02 0.95%
Data as of 9:55pm ET
Company Price Change % Change
Bank of America Corp... 16.40 -0.20 -1.20%
Yahoo! Inc 42.00 1.82 4.53%
Apple Inc 102.99 0.52 0.51%
Facebook Inc 78.37 -0.32 -0.41%
Boston Scientific Co... 12.32 0.29 2.41%
Data as of 4:04pm ET

Sections

Las Vegas might have first class shopping, dining and nightlife. But for serious gambling, head to Macau. More

The midterm elections are around the corner, and the economy remains a top concern. With unemployment down and inflation low, why do people still feel the economy stinks? More

Uber canceled its free rides with hot girls promotion in Lyon, France before it ever launched. More

Startups focusing on "ag tech," or agricultural technology, are gaining the attention of farmers and investors More

Dressing up in crazy costumes, traveling the world, posing for photos -- and getting paid to do it. Here are journal entries from a day in the life of professional "cosplay" character, Linda Le. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.