Canada’s big banks eye organic growth over U.S. acquisitions #CanadaFinance

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The heads of some of Canada’s biggest banks say they’re focusing on organic growth instead of heavily relying on acquisitions in the United States amidst the ongoing economic uncertainty.

Rising credit losses in the U.S. prevented some of Canada’s biggest lenders from meeting analysts’ expectations in their quarterly results that were released last week. Banks that comfortably beat their targets did so because of their focus on Canadian operations, some analysts said.

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“Getting bigger for the sake of bigger is not the objective,” Dave McKay, Royal Bank of Canada’s chief executive, said during a fireside chat at the annual Scotiabank Financials Summit on Wednesday. “It’s making greater returns for the shareholder.”

McKay said that some of the first questions he thinks about before an acquisition are “why are they selling” and what problems the bank will be inheriting.

“There’s a big reason why the management team is selling and you have to solve the problems,” he said. “And those aren’t trivial.”

RBC recently completed its acquisition of HSBC Holdings PLC’s Canadian division and the purchase helped increase the bank’s net income by $239 million in its third quarter.

McKay said the HSBC deal made “a lot of sense” and that it had certain characteristics that made the team “surefooted.” But the same can’t be said about a lot of banks in the U.S. that are going to be sold because they can’t raise deposits.

“If you can’t raise deposits, you can’t grow your balance sheet,” he said. “Do not pick up someone else’s deposit challenge if you can’t solve it yourself.”

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Another reason why banks are getting sold is because they don’t have the operating scale, McKay said. Overall, he said it’s important to analyze all the factors involved before thinking about an acquisition in the U.S.

“My message wasn’t that I am negative,” he said. “I love the U.S. market. It’s hard to get all … (the) things to line up on the banks that are being sold.”

Canadian Imperial Bank of Commerce chief executive Victor Dodig, who also spoke at the conference, said “organic growth is the driver” no matter how one looks at the math, be it the Canadian or the U.S. market.

“We think that is the highest and best use of our capital,” he said.

Dodig said CIBC would be interested in the “occasional tuck-in” acquisition, but it wouldn’t take “three steps back” or dilute its return on equity.

Bank of Montreal chief executive Darryl White, though, said that investing the bank’s excess returns in the U.S. is always profitable in the long run.

“I never begin or end a day without reminding myself that the U.S. has a US$35-trillion GDP and Canada’s is $2.7 (trillion),” he said. “I acknowledge the popularity index on investment in the U.S. is not very high right now, but I think you have to be very careful to not paint that with one brush. Done right … we think it’s a very sound strategy.”

BMO missed analysts’ quarterly expectations last week as it reported higher-than-expected provisions for credit losses, which is the amount of money that a bank keeps aside to cover potential bad loans.

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