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Canada’s major banks are flush with cash, and their chief executives are on the lookout for acquisitions, but most are setting their sights on smaller deals to satisfy specific needs rather than large-scale mergers.

Wealth managers, financial technology startups and credit card portfolios are emerging as attractive targets for banks’ deal-making teams. They often carry price tags in the tens or hundreds of millions of dollars rather than the billions, and offer banks a chance to quickly add heft to business lines that are growing quickly from a smaller scale, particularly in the United States.

The COVID-19 pandemic has created fertile conditions for deal-making. Banks have growing piles of excess capital that have swelled to unusually high levels. That’s because of temporary restrictions imposed by Canada’s banking regulator that have prevented banks from raising dividends or buying back shares at a normal pace. At the same time, investment bankers say deal pipelines are full as companies are gearing up for an economic recovery, and taking advantage of low interest rates and cheap credit to bulk up and get more efficient by acquiring rivals.

Several bank CEOs said at an industry conference on Thursday that they’re taking pitches and making offers in search of the right fit at the right price. But some also said they’re looking first for more modest deals, rather than a big splash to transform their competitive position overnight. And if the right deal isn’t available, most are more than comfortable returning some of their extra capital to shareholders once the regulator allows it.

“There’s potential for M&A. There always is. But it’s not driven just because there is excess capital,” said Toronto-Dominion Bank CEO Bharat Masrani at the Scotiabank Financials Summit, which was held virtually on Thursday.

Scotiabank has been one of the most active deal-makers in recent years, spending billions of dollars on businesses in Latin America and in Canadian wealth management, while selling off higher-risk businesses abroad that were no longer part of its core strategy. But CEO Brian Porter said he’s interested in a deal to give the bank’s wealth division “a bigger U.S. presence.”

“It won’t be a sizable acquisition in terms of dollar amount,” he said at the conference. “You can either buy teams of people or an existing business, and we’re looking at both.”

As technology plays an increasingly large role in banking, and Canada’s political leaders pledge to spur competition and innovation by creating a framework for open banking, CEOs are also on the lookout for ways to buy, invest in or partner with financial technology companies, or fintechs.

Royal Bank of Canada CEO Dave McKay said he is “absolutely” looking for fintech deals and has even made bids for health care technology companies “in the sub-$500-million range” as a way to attract more medical professionals to bank with RBC. But he also said deals for early-stage companies that are often losing money can be expensive and are hard to do without diluting shareholder returns.

“Would I spend $1-billion on a fintech? Yes, if it drove an appropriate amount of shareholder value,” he said, but added: “It’s a harder hill to climb. … Too much of the benefit often goes to the seller.”

The bank has also been building fintechs itself through RBC Ventures, an incubator for startups that are intended to help RBC build ties to consumers and businesses that could become customers later. “What we found through Ventures is we can build it ourselves because we’ve got a lot of smart people, and we’ve got money,” Mr. McKay said.

TD has a track record of investing in and acquiring fintechs, Mr. Masrani said, and has “looked seriously” at further deals. But he said investors shouldn’t expect the bank to “swing for the fences” on an acquisition unless it contributes directly to the bank’s core strategy.

“It’s got to be connected,” he said. “That’s how I look at fintechs, but we are absolutely not shy about looking at them as long as they can provide value to our customers and to our franchise.”

As credit card spending rebounds from depressed levels in the pandemic, Canadian Imperial Bank of Commerce struck a deal with Costco Wholesale Corp. last week to acquire the retail giant’s credit card portfolio and become its exclusive card issuer in Canada. CIBC said it acquired millions of customers and about $3-billion in card balances, with a chance to cross-sell other banking products to that new customer base.

Looking ahead, “there will be some tuck-in acquisitions that we make” to help the bank reach its goal of producing 25 per cent of profits in the U.S., compared with a current contribution of 21 per cent, CEO Victor Dodig said. Given the high price tags many businesses are carrying, “I think the highest and best use of our capital is to invest in our business organically and complement that with tuck-in acquisitions to strengthen our hand,” he said.

Bank of Montreal CEO Darryl White, meanwhile, said he is “very interested” in making a deal, but absent the right strategic and financial fit, the bank is comfortable using its capital to increase dividends and buy back shares.

“We don’t think it’s appropriate to say to our shareholders, We’re going to sit on a bunch of excess capital for a year or two until something happens to come along,” Mr. White said. “We think, rather, we should give it back to them in various forms reasonably quickly.”

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