Gordon Nixon, CEO of Royal Bank of Canada, at his Toronto office. Mr. Nixon says the era of big banking deals is over.Fred Lum/The Globe and Mail
The days of the blockbuster deal in the banking sector are over.
Though Canadian banks have spent more than $40-billion on acquisitions in the past five years, the ability of financial institutions to execute major transformational deals has all but vanished, the chief executive officer of Royal Bank of Canada said Tuesday.
Speaking at a Toronto conference hosted by Bloomberg, RBC head Gordon Nixon said new regulatory constraints and stricter rules on how banks deploy capital have meant major deals are much more difficult to complete.
"When you look at what's happening in the world today, banks are being required to continually increase their capital commitments," said the CEO of Canada's largest bank by assets. "The ability to do capital-dilutive transactions from a regulatory perspective is just about non-existent."
That has left banks around the world hunting for smaller, more-strategic acquisitions. A major deal – which could turn a bank's focus in a new direction, or create a financial goliath by merging two large players – is considered too difficult to attempt.
"That may sound less exciting than what you might have seen from 2000 to 2008, where you saw much bolder and more aggressive transactions," Mr. Nixon said. "But clearly in today's environment that's not going to be something I think you're going to see in the future."
A decade ago, the global banking industry was awash in a wave of consolidation, particularly in the U.S. where landmark transformative deals were spawning new financial giants and rewriting industry strategy.
Citigroup, JPMorgan Chase, Bank of America and Wells Fargo all made multiple acquisitions between 2001 and 2008 that reshaped the U.S. sector. However, those deals also gave rise to the "Too big to fail" era of banking where several financial institutions grew large enough that problems during the 2007 debt crisis posed a serious threat to the U.S. financial system if they faltered. Recognizing this threat, the U.S. government was forced to bail out the biggest banks.
In Canada, proposed mergers in 1998 by several of the country's largest banks were stymied by the federal government, which led banks to seek out large acquisitions elsewhere. Most notable among the deals was Toronto-Dominion Bank's strategic push into the United States with the $8.3-billion purchase of Commerce Bancorp Inc. of New Jersey, which dramatically reshaped that bank.
Huge deals are a lot harder to do under today's tougher regulations and capital standards, Mr. Nixon said. "And frankly the track record of transformational acquisitions in terms of generating appropriate returns are very difficult," he added.
Still, RBC doesn't expect to be sitting on the sidelines, particularly as struggling banks in Europe and elsewhere seek to jettison profitable assets to shore up their balance sheets. The opportunity to make smaller deals still exists.
"We will still look at making acquisitions that we view as strategic and tactical," Mr. Nixon said, pointing to RBC's $1.6-billion purchase of U.K.-based Blue Bay Asset Management in 2010 as an example. That deal is part of a drive by RBC to expand its global wealth management business, which caters to high-end clients and international investing.
"The acquisitions that we have made have been quite tactical in terms of acquiring businesses where we think there's an opportunity to fill in some of the holes that we have in some of our global platforms, such as our global wealth management platform," Mr. Nixon said. "And I think you will continue to see more of the same."
Grant Robertson