The TD Bank branch at the corner of King St. West and Bay St. in Toronto on Dec 6, 2021.Fred Lum/the Globe and Mail
American banking regulators are a curious bunch.
Not only did they allow Silicon Valley Bank and Signature Bank SBNY to fail on their watch, but they’re also dragging their feet on blessing Toronto-Dominion Bank’s US$13.4-billion acquisition of First Horizon Corp.
Given the crisis of confidence roiling regional banks south of the border, TD’s all-cash offer should be a no-brainer for U.S. regulators, including the Federal Reserve and the Office of the Comptroller of the Currency.
Yet the approvals process has dragged on for more than a year. Even before the banking crisis erupted, TD and First Horizon both extended their merger deadline to May 27 from Feb. 27. But now, more than ever, the regulatory dithering makes no sense.
After all, we’re talking about TD, a globally systemically-important lender that is already a quasi-American brand. It’s also run by a chief executive who has been criticized for – get this – being too conservative about taking risks, a posture that distinguishes Bharat Masrani from many of his U.S. and European peers.
There is no doubt that TD’s purchase would bolster the balance sheet of Memphis, Tenn.-based First Horizon at a time when capital requirements are set to rise for banks south of the border.
To be clear, First Horizon is not at risk of collapse like SVB, Signature or even the now-rescued First Republic. But much like other U.S. banks, First Horizon’s deposit base is shrinking. Its deposits, which are a cheap source of funding, declined by more than 15 per cent from the end of 2021 to the end of 2022, according to its financial statements.
Even if that deposit drainage gets worse, “TD has sufficient excess deposits to plug that hole,” wrote Paul Holden, an analyst with CIBC World Markets, in a research note this week.
As Mr. Holden points out, TD is already subject to more stringent capital rules, so it is well-placed to make First Horizon “a safer bank for its customers.”
Investors often look at a bank’s loan-to-deposit ratio as a measure of its liquidity (or ability to convert its assets into cash). If the percentage is too high (a ratio well above 90 per cent is considered a red flag), it could signal a potential liquidity crunch.
First Horizon’s loan-to-deposit ratio stood at 88 per cent at the end of the fourth quarter of 2022, according to Mr. Holden’s analysis. (First Horizon is scheduled to release its first-quarter results on April 18.)
TD, which follows the Canadian industry’s fiscal year, had a loan-to-deposit ratio of 69.1 per cent at the end of its first quarter on Jan. 31 – suggesting that it has a robust deposit base and plenty of room to grow its loan book.
Meanwhile, TD’s common equity Tier 1 ratio, which is a key measure of financial strength, was 15.5 per cent. That compares with First Horizon’s CET1 ratio of 10.2 per cent at the end of last year.
It’s hard to understand why U.S. regulators are hesitant to give their blessing, given that TD’s own capital requirements are also heading higher.
Canada’s top banking regulator, the Office of the Superintendent of Financial Institutions, had the foresight to strengthen its capital rules months before the current crisis in the United States and Europe.
In early December, OSFI announced plans to set the domestic stability buffer at 3 per cent (and raised its ceiling to 4 per cent from 2.5 per cent), creating a plumper capital cushion for Canadian lenders. By making those moves, the regulator also set the stage for higher CET1 ratios.
Then in January, Superintendent Peter Routledge signalled that OSFI could continue to raise banks’ capital requirements to further mitigate risks.
Said Mr. Routledge at the time: “We would rather err on the side of acting too early than be criticized for acting too late.”
Too bad that U.S. regulators didn’t show such prudence.
It’s also clear that U.S. President Joe Biden should have acted sooner to reverse a 2018 decision by his predecessor to relax regulations, including capital requirements, for midcap banks.
Sure, Mr. Biden made it clear back in 2021 that he wanted federal agencies to increase their scrutiny of bank mergers. High-profile Democrats, including Senator Elizabeth Warren, have long expressed their dismay with industry consolidation.
But it’s hard to see how this particular deal would materially reduce competition or cause massive job losses when TD has promised to keep all of First Horizon’s branches and front-line staff.
Moreover, TD recently announced a community benefits plan that includes specific commitments to improve lending and banking access for underserved individuals and communities – another key priority of Mr. Biden and regulators.
The regulatory uncertainty about this transaction sends a terrible message to members of the public, including investors, who remain rattled by the banking crisis.
Some TD shareholders are pressuring the bank to either nix the deal or renegotiate to lower the purchase price.
But if regulators are serious about restoring trust in America’s banking system, then approving this deal might be their easiest win.