October 31, 2012 / 9:08 PM / 7 years ago

Analysis: Canadian banks seek assets to offset mortgage slump

TORONTO (Reuters) - Call it the Homer Simpson approach to business growth: when the pie is shrinking, eat a bigger piece.

Canada’s big banks have been doing just that. Facing slower growth in the mortgage market and an unofficial government ban on buying one another, the five biggest lenders have been ravenously snapping up any other financial assets that have become available. It’s a trend that looks set to continue.

“As you see slower growth in the mortgage business, they’re going to be finding these different types of lending businesses to drive growth,” said Tom Lewandowski, a St. Louis-based analyst at Edward Jones.

Last week Royal Bank of Canada (RY.TO), the country’s biggest bank, said it would purchase the Canadian auto finance arm of Ally Financial GKM.N, nearly doubling its exposure to auto lending.

That followed Bank of Nova Scotia’s (BNS.TO) C$3.1 billion ($3.1 billion) acquisition of the Canadian online operations of Dutch bank ING Group ING.AS in late August. When it closes in December, that deal will instantly add C$40 billion in assets and 1.8 million customers to Canada’s No. 3 bank.

Both deals followed bidding wars with fellow Canadian lenders.

Also last week, Toronto-Dominion Bank (TD.TO), Canada’s No. 2 bank, agreed to buy discount retailer Target Corp’s (TGT.N) U.S. credit card portfolio and signed an agreement that will allow it to issue the retailer’s cards.

“This is just a trend that I think is going to continue as you go forward,” Lewandowski said.


Moves by the Canadian government to cool the country’s hot housing market and curb household borrowing appear to be taking effect.

That means Canadian banks can no longer rely on their huge mortgage lending businesses for the double-digit percentage growth that has underpinned their profits since the global financial crisis wreaked havoc in many banking sectors worldwide.

“Volumes have obviously slowed in the marketplace as government regulations take effect,” Dave McKay, RBC’s head of Canadian banking, said in an interview.

Canadian banks now have two choices if they want to continue to show growth in their domestic businesses: find higher-yielding loans or expand market share. The recent deals suggest they’re trying to do both.

Scotiabank’s ING deal promises to increase its reach in mortgage lending and deposits, while TD and RBC’s acquisitions will increase their respective exposure to credit-card and auto loans, which carry interest rates far above mortgage rates.

More importantly, all three deals will boost the banks’ customer reach.

“We’re making a loan to a consumer that’s not walking into one of our own stores. They’re walking into a GM or a Chrysler dealership and buying a car, and we’re providing the financing when they’re in their store,” McKay said.

Canadian banks have also been active in forging new card partnerships. Last Wednesday, the day after the Target deal was announced, TD said it had agreed to take over the private label credit card program for Kroger Co.-owned (KR.N) Fred Meyer Jewelers.

Meanwhile, RBC said in September to it would launch a co-branded Mastercard with Canadian drugstore chain Shoppers Drug Mart SC.TO.


With all of the Canadian banks well-capitalized, profitable, and keen to add assets, analysts say the only barrier to more deals is the limited supply of available targets.

“There aren’t very many things left to buy in Canada,” said David Baskin, president of Toronto-based Baskin Financial Services.

With only a handful of domestic lenders and an unofficial government ban on mergers, acquisitive banks have feasted on the few foreign-owned assets that have come up for sale. In the last four years, deals have largely involved assets being sold off by firms looking to cut costs, raise capital, or in the case of ING and Ally, needing to repay government loans.

While HSBC (HSBA.L), Citigroup (C.N) and some other foreign banks have modest operations in Canada, those are largely profitable businesses, making obvious targets difficult to find, analysts say.

That said, it seems likely some European banks could eventually decide to sell off non-core Canadian assets in view of the euro debt crisis.

“It’s the motivated seller that’s more often the trigger than a motivated buyer,” said Robert Sedran, a CIBC World Markets analyst. “When there’s an asset for sale clearly Canadian banks are going to participate if it’s in the footprint.”

Editing by Frank McGurty; and Peter Galloway

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below