U.S. President Joe Biden hands a pen to Lina Khan, chair of the Federal Trade Commission, as he signs an executive order on "promoting competition in the American economy" as members of his Cabinet standby in the State Dining Room at the White House on July 9, 2021.EVELYN HOCKSTEIN/Reuters
Canadian bank investors need to take a deep breath and then exhale.
U.S. President Joe Biden’s sweeping executive order on promoting competition in the American economy is unlikely to impede future mergers and acquisitions by Canadian banks south of the border.
Although Mr. Biden is ordering federal agencies to increase their scrutiny of bank mergers – and has given the Attorney-General and three other agencies until Jan. 5, 2022, to adopt new guidelines – there’s no reason to believe he has an axe to grind with Canadian banks.
Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal and Canadian Imperial Bank of Commerce all have U.S. growth strategies, but it’s been years since any of them made a transformative acquisition in that market. CIBC’S purchase of Chicago-based PrivateBancorp in 2017 was the last one of note.
In fact, Canadian banks have shown restraint even though then-president Donald Trump relaxed regulations, including capital requirements, for mid-cap banks in 2018 – a move that paved the way for a flurry of U.S. mergers.
Megadeals, such as the US$28-billion merger of BB&T and SunTrust in 2019, and PNC Financial Services Group’s US$11.6-billion acquisition of BBVA USA Bancshares this year, are likely what has the White House so fussed.
To some extent, Mr. Biden’s tough talk on bank mergers is also an attempt to make political hay. High-profile Democrats, including Senator Elizabeth Warren, have been sounding the alarm on bank mergers for years.
Although Mr. Biden issued his executive order with much fanfare last month, the U.S. Department of Justice was already on the case. In fact, it signaled plans to update its 1995 bank merger guidelines long before Mr. Biden was sworn in as President, issuing a call for public comments nearly a year ago.
The Federal Reserve, too, was mulling revisions to its bank merger rules months before Mr. Biden’s executive order landed with a thud.
Even if the final merger rules take a sharper antitrust bent, it’s hard to imagine a scenario in which a Canadian bank would find itself in the Biden administration’s crosshairs over a deal.
“There’s an equal chance that any sort of large transaction is met with regulatory indifference,” said Robert Wessel, managing partner of Hamilton ETFs, a Toronto asset manager that focuses on financial stocks.
That’s because Canadian banks still have plenty of room to grow in the U.S. market. While federal regulations prevent banks from scooping up more than 10 per cent of total U.S. deposits through mergers and acquisitions, it’s highly unlikely any Canadian bank would exceed that cap by acquiring a regional lender.
The real question for Canadian banks and their investors is whether buying a regional U.S. lender makes sense at this juncture, given sky-high valuations.
Arguably, there’s a stronger rationale for Canadian banks to acquire U.S. wealth management firms instead.
Wealth deals are attractive for several reasons. Not only do wealth managers provide a steady stream of fee income, they are not capital-intensive businesses.
That’s precisely why U.S. banks, including Goldman Sachs and Morgan Stanley, have deepened their forays into wealth management, including by making deals.
“Recent strategic moves by large U.S. banks to expand wealth management franchises highlight the growing focus on revenue and business model diversification, as margins across various segments erode and volume/scale becomes increasingly important,” Fitch Ratings wrote in a report.
While wealth deals come with their own regulatory risks (such as provisions for investor protection and anti-money laundering), they effectively sidestep the Biden administration’s antitrust agenda, which is focused on retail banking.
For instance, an acquisition of a wealth management firm – or even a private bank, for that matter – would not trigger regulatory concerns about reduced access to credit for consumers and small businesses.
Not surprisingly, Mr. Biden’s biggest beefs with banking industry consolidation include decreased access to credit, especially for people of colour and low-income consumers, along with rural branch closings.
The U.S. wealth management industry, meanwhile, will only become more competitive over the coming years as banks, retail brokerage firms and fintechs such as Robinhood vie for market share, according to Fitch.
Deal flow is also expected to increase as more wealth managers pursue digital transformation, consumers flock to cryptocurrencies and the ESG (environmental, social and governance) investing trend picks up pace.
The wealth management industry is still relatively fragmented. There have been less than 1,000 acquisitions of asset management companies, including wealth managers, in the United States since the beginning of 2018, according to S&P Global Market Intelligence.
Shareholders are antsy about Canadian banks’ M&A prospects. But those banks still have their pick of U.S. targets. The right deals are worth the wait.
With a file from David Milstead
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