If perceived long-shot Toronto-Dominion Bank actually wins the race for troubled Washington Mutual, expect the Canadian bank to be hit with a flurry of downgrades from analysts and a nasty sell-off by shareholders.
With TD Bank one of five reported contenders for Seattle-based WaMu, which formally went up for sale last week, National Bank Financial analyst Robert Sedran published a note Tuesday saying that it would be surprising to see the Canadian bank emerge with this prize - if a busted U.S. thrift can be described as a prize. He went on to say that in the unlikely event TD wins, “a transaction for the whole firm would be viewed negatively.”
Mr. Sedran, who has an ‘outperform” recommendation on TD Bank based in part on its northeastern U.S. expansion strategy, noted a series of challenges facing a foreign buyer of WaMu.
“There is little overlap with TD's existing U.S. footprint,” said Mr. Sedran, noting two-thirds of WaMu deposits come from clients in California and Nevada, the two states where the housing downturn has been particularly acute.
“In our opinion, other banks with a more national footprint would have more overlap and would therefore be in a better position to integrate the platform. As such, these banks should be in a position to pay more for the asset, “ said Mr. Sedran. National players Wells Fargo, JP Morgan Chase and Citigroup are all said to be kicking tires at WaMu, as is Spain's biggest bank, Santander.
Mr Sedrann also made the more subtle point that while there is no harm in looking, stepping up for WaMu would contradict public comments of TD Bank executives on the “need for caution” in acquisitions. The National Bank Financial also questioned when WaMu will return to profitability, and whther its regional, consumer-focused business strategy is viable.
There are also all sorts of hard-to-quantify regulatory uncertainties that come with this particular acquisition. Any buyer would want WaMu to first unload problem loans on the $700-billion U.S. rescue fund and Mr. Sedran said: “The impact of the government bailout currently being contemplated is an open question (as is the timing).”
There's a significant portion of shareholders in any Canadian bank who own the stock as a safe dividend play. For this crowd, capital gains are much-appreciated bonus, but the first rule of governance is to never, ever blow up the franchise and put the dividend at risk.
TD Bank CEO Ed Clark neared the limits of the risks that this portion of his shareholder base can tolerate with last year's acquisition of New Jersey-based Commerce Bancorp. A big, bold move onto the U.S. west coast, in these uncertain times, would likely be more than this constituency can stomach.
“We believe the market is skeptical of the U.S. outlook for [TD Bank] and (always depending on the terms) would probably not look kindly on a transformational out-of-footprint deal in the United States right now,” concluded Mr. Sedran.
