Desjardins: Despite Industry Canada Recommendation, Bank Mergers Unlikely

“Don’t hold your breath” is the verdict from Desjardins Securities banking analyst Michael Goldberg when it comes to mergers in the Canadian financial services sector, despite last week’s recommendation from the Competition Policy Review Panel that the ban be removed.

Among the 65 recommendations in the report from the committee was the removal of the de facto ban on bank, insurance and cross-pillar mergers of large financial institutions, but Mr. Goldbeg says in a research note that “investors should not expect its implementation for the foreseeable future."

Mr. Goldberg cited two reasons for this:

• He noted that the ban was “politically motivted,” and the constituencies that oppose the idea of mergers are “still stronger and better organized” than those that favor them.
• He argued that the business case for the combinations is not compelling. While the argument for bank mergers has been made on the basis of greater scale, the "committee says that “reaching the scale of the world’s largest institutions will depend on how well Canadian banks fare in the contest to acquire foreign banks."

He also pointed out that Canadian banks are once again showing up in the list of top 10 North American banks, based on market capitalization – Royal in fifth place, with Toronto-Dominion (TD) and Bank of Nova Scotia (BNS) in seventh and eighth spots, respectively - something that hasn’t been the case in well over a decade. (In 1989, the top 10 included TD, Royal Bank (RY) and CIBC (CM). By 1998, just before the proposed merger or Bank of Montreal (BMO) and Royal - not one Canadian bank appeared on the list.)

While the rise in the rankings has come as a result as a great erosion in the valuation of US banks, thanks to the recent credit crunch, Mr. Goldberg notes that Scotia and TD have grown their banking businesses outside of Canada significantly through acquisitions and organic growth.

He said:

We believe that this history demonstrates the Canadian banks' ability to compete for foreign acquisitions has been more a function of business acumen, vision, courage and patience than it has been about scale.

So while he doesn’t rule out the possibility of Canadian bank mergers, Mr. Goldberg concluded: 

The only merger scenario we can foresee for now is a bank bailout, described for public consumption (to protect public confidence) as a merger. Are any of the major banks in a position now where they need to be bailed out? No.