Laurentian Bank of Canada’s timing couldn’t be worse.
Not only did the country’s ninth-largest lender put up a “For Sale” sign in the middle of summer, when executives at rival banks are on vacation, but it picked a period when most potential bidders are hamstrung by strategic or capital issues.
Who will show up at the end of the month, when Laurentian is asking for initial bids? Analysts are already handicapping the potential players, and can count them on the fingers of one hand.
There are two major challenges facing any buyer of Laurentian, which could fetch more than $2-billion. The first is money. With the notable exceptions of Toronto-Dominion Bank and Desjardins Group, other major financial institutions will need to raise capital, likely by selling stock, to pay for the acquisition.
The second, more elusive issue, is fit, or strategic rationale. Montreal-based Laurentian is a regional bank – about a third of its clients are in Quebec – that’s less efficient and profitable than rivals. The chief executive officer of any buyer is going to need a compelling argument for how they plan to turn around this struggling 57-branch operation, and retain customers, especially if they are diluting existing shareholders to do so.
With the race for Laurentian now under way, here’s how analysts and industry executives see the field shaking out, starting with the financial institutions that are unlikely to even be in the race.
Royal Bank of Canada Last November, when the country’s biggest bank acquired HSBC Canada for $13.5-billion, the first line in the press release read: “RBC to strengthen premium Canadian business.” That’s a compelling strategy. RBC still needs regulators to sign off on the HSBC purchase, and wouldn’t want to press its luck with another in-country takeover, especially of a less compelling target.
Canadian Imperial Bank of Commerce Analysts say CIBC has the lowest capital ratios of any of the Big Six banks, and would therefore need to raise the most money to buy Laurentian. They also say the bank is working through internal issues with regulators, complicating a possible bid.
The real contenders for Laurentian, from least to most likely, would be:
Bank of Montreal Since announcing the US$16.3-billion acquisition of Bank of the West in December, 2021, BMO has staged two stock sales. A third equity offering, to fund Laurentian, would be aggressive, to put it mildly. BMO also just bought the Air Miles loyalty program. And like other Toronto-based banks, BMO could struggle to hold on to Laurentian clients in Quebec.
Bank of Nova Scotia If Laurentian wanted to woo Scotiabank, their executives should have waited for new(ish) CEO Scott Thomson to present his growth strategy, which he’s promised to do this fall. In the past, Scotiabank executives have openly discussed plans to expand in Quebec. The question is whether Laurentian represents a compelling opportunity that would justify Scotiabank tapping equity markets.
National Bank of Canada Here’s where things get interesting. No other bank enjoys the synergies available to National if it buys a local competitor. The Montreal-based bank also sports a strong balance sheet, and could likely acquire Laurentian without issuing stock. However, National’s preferred approach to building its business is through organic growth, rather than acquisitions. Analysts predict that rather than buy its competitor, the bank will target Laurentian clients and employees after its regional rival is snapped up.
Toronto-Dominion Bank This spring’s failed bid for a U.S. lender means TD Bank has the deepest pockets of any potential buyer; no stock sale is required to fund a bid. If it acquired Laurentian’s U.S. business – Northpoint Commercial Finance – TD Bank could lower the asset-backed lender’s financing costs and boost its profitability. The issue for TD Bank is weighing the opportunity against other, potentially more lucrative priorities, such as bulking up in wealth management.
Desjardins Group North America’s largest financial co-op would win plaudits from Quebec Premier François Legault by adding Laurentian’s 3,100 employees to what is already a provincial powerhouse. Desjardins is roughly four times Laurentian’s size, based on assets, and has the capital to do a deal. It would face the smoothest path to retaining clients. However, the strategic rationale is missing: Desjardins’ focus is on expanding insurance and wealth management operations, which are relatively small parts of Laurentian’s platform.
Every host’s great fear is throwing a party, only to have no one show up. At Laurentian, the board may have put up a “For Sale” sign, only to find that because of bad timing, no one makes a compelling offer.
Andrew Willis