Bank analyst Richard Bove says that if Jefferies Group Inc. is forced to sell, a Canadian bank is a likely buyer.
Specifically, he pointed to Toronto-Dominion Bank and Royal Bank of Canada after Fox Business said Jefferies may sell.
While Canada's banks have money and solid balance sheets, with all due respect to Mr. Bove, I wouldn't bet on it.
Not for the up-front price, which at a couple of billion is not huge at this point, but for the bigger possible cost – the potential effect on a buyer's multiple and cost of capital. On top of that, there's other bank-specific reasons to be skeptical.
RBC's multiple is already weakened by the perception that it is big in the bumpy business of securities relative to its Canadian peers. A headline grabbing purchase of a big U.S. securities business that's rightly or wrongly viewed as troubled will not help that.
RBC's U.S. securities business also shares some similarities with Jefferies in size, scope and aim. There would be overlap, and RBC would have to pay for people it wouldn't keep.
Throughout this crisis, RBC chose to build its securities business more stealthily, hiring teams and individuals it wants from franchises that can't hold on to good people. If great Jefferies talent ends up at RBC, that's likely how it will happen.
And when RBC has spent money flashily, it's been on wealth-management businesses that it can showcase to shareholders as steady businesses that deserve a bigger earnings multiple.
TD has also been an aggressive acquirer in this financial crisis, but it has focused on leveraging its big U.S. retail franchise. It has added branches in fire sales and looked for ways to profitably lend out the huge pile of money it acquired from deposit rich but loan-poor Commerce Bancorp in 2007. That focus led the bank to buy Chrysler Financial. Jefferies doesn't fit as well into that plan.
What's more, TD has tended to down play its wholesale business, emphasizing that on a relative basis it has a small securities business. That's in part because investors love the bank's steady retail earnings and reward TD with a strong multiple. (Currently its stock trades at 11 times earnings, while RBC's is 10.7.)
What about other Canadian banks?
Bank of Nova Scotia has never shown much interest in U.S. wholesale lending, and it just spent a lot on the Colombian acquisition. The bank's capital position might even require it to raise equity to buy Jefferies, and that wouldn't be attractive.
Canadian Imperial Bank of Commerce has capital to burn, and the bank is looking to grow after a period or retrenchment, but it also just bailed on its own U.S. wholesale experiment a few years ago. Plus, CIBC is more focused on asset management and tends to favour partnerships over outright acquisitions.
Bank of Montreal would be an interesting idea. Like RBC, it has been aggressively building in the U.S. securities business through hiring. But it just spent $4-billion on a U.S. retail bank that it's busy integrating, so the timing doesn't feel right.
Finally, National Bank of Canada is small and has a lot on its plate with wealth-management purchases. It also suffers from the perception that its securities business is already large relative to its other operations.
If someone does buy Jefferies, I wouldn't bank on the bid coming from Canada.