— Toronto-Dominion Bank chief executive Ed Clark is orchestrating one of the biggest foreign takeovers in Bay Street history, an $8.5-billion (U.S.) deal for New Jersey-based Commerce Bancorp Inc. that will propel TD up the ranks to become the seventh-largest bank in North America.
If TD pulls it off as expected by next spring, roughly half of its 2,100 branches will be in the United States.
“We are the first North American bank,” Mr. Clark declared, taking a not too subtle jab at rivals, such as Royal Bank of Canada and Bank of Montreal.
Commerce Bancorp has nearly 460 locations throughout New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, D.C., Virginia, Maryland and Southeast Florida. Its footprint covers five of the largest and wealthiest urban markets in the U.S., and the population in the areas it serves is bigger than that of Canada.
Mr. Clark said TD's been worried for some time about how to keep up the 15-per-cent annual pace of growth in its Canadian consumer banking operations. “It has to, by definition, slow down,” he said in an interview.
“Clearly, the United States offers way higher growth.”
Canada's mature banking market means all of Canada's big banks will be increasingly turning their attention south, according to Brenda Lum, a banking analyst at Toronto-based DBRS Ltd.
“I think that Canada provides a core, stable base of earnings and revenue,” Ms. Lum said.
The challenge domestically is that, with a handful of dominant banks, market share gains often come at the expense of revenue, because one of the few ways to make any sizable gains is by dropping prices.
“So, I think longer term, if you want to grow meaningfully, then to be a medium-sized fish in a bigger pond will make it easier,” Ms. Lum said.
TD has already hunted down at least 100 new sites where it can open branches in Commerce's neighbourhoods in coming years. With an average of more than $100-million in deposits in each of its branches, Commerce beats the industry average of between $50-million and $70-million, Mr. Clark said.
Just a few short months ago, the prospect of missing out on a big purchase was haunting him. That's because TD is still fixing up its existing U.S. bank, TD Banknorth, for which it paid a total of about $9.1-billion (Canadian) in separate transactions. Mr. Clark wanted to give it time to “get its game plan down” and grow on its own.
“My nightmare scenario is that something comes along that's strategic that I really can't miss, and it comes out at a price that I'm prepared to pay,” he told analysts in August. But when that scenario played out, for Mr. Clark, it became a dream come true.
He'd had his eye on Commerce for years, and the stars aligned for him recently. First Commerce put itself up for sale after replacing its former CEO, who is being investigated for deals he did with companies controlled by his relatives. Then the loonie hit par with the U.S. dollar in the middle of negotiations. And TD's stock was strong thanks to its lack of exposure to U.S. subprime mortgages and related areas, Mr. Clark said. The acquisition had become very affordable.
“Sometimes you just don't get to choose your timing,” he said.
He said he's found a “low-risk way” to continue his U.S. expansion. But the size of his gamble on a bank that's had trouble with regulators and an allegedly self-dealing executive carries risks. TD could also find it hard to find cash to spare for other opportunities that might arise in the near future, such as expanding its U.S. discount brokerage operations. TD owns about 40 per cent of TD Ameritrade Holding Corp.
The takeover of Commerce is worth more than 15 per cent of TD's market value, BMO Nesbitt Burns Inc. analyst Steve Theriault noted. Three-quarters of the deal will be paid for with stock, meaning TD will also find itself with a growing U.S. shareholder base.
He said the key challenge is “de-risking” Commerce's balance sheet. Its $28-billion (U.S.) securities portfolio stood at nearly 60 per cent of its total assets at the end of June, which is well above TD's comfort level, he said.
Commerce has agreed to clean up its balance sheet, with the goal of reducing its exposure to changes in interest rates, TD said. Those actions will result in an after-tax charge of about $150-million in the third quarter.
TD Banknorth CEO Bharat Masrani will be running the show as TD puts in place a 12- to 18-month integration strategy. Initially, the two banks will run separately, with Commerce's management reporting to him. Mr. Clark has no doubts that TD knows how to run a large American bank.
“We know that if you look at our statistics on customer attrition, or cross-sell ratios, or customer service, we're better than Bank of America, we're better than Wells Fargo, we're better than any of these big American banks,” he said.
He says he's never been a big fan of using Canadian mergers as the best avenue for growth.
“I think it would be better for Canadian banks, if you want to be world players, [to] go out in the world, compete head to head, and prove you're better.”
