Toronto-Dominion Bank shareholders can expect a big share issue by the lender should it win the bidding for BankUnited.
The bank would have to issue as much as $1-billion of stock to stay on side with regulators' targets for meeting Basel capital requirements.
It all depends on how hot the bidding for BankUnited is. Reports are that there are two main suitors: TD and BB&T Corp. . PNC Financial Services Group Inc. has apparently dropped out.
If TD can win the bank for a small premium of about eight percent, or a total price of about $2.4-billion (U.S.), that would generate about $1-billion (Canadian) of goodwill on TD's balance sheet, estimates analyst Peter Routledge of National Bank Financial. The bank would likely issue at least $500-million in stock to offset the new goodwill, he reckons.
(Goodwill is an accounting term for the amount that the buyer pays over book value, and bank regulators don't treat goodwill kindly when calculating capital ratios.) As the bidding goes higher so does the goodwill and so does the need to issue stock to pad capital.
Analyst Sumit Malhotra of Macquarie Capital Markets estimates that as the takeout value approaches $2.7-billion TD would be looking at a $1-billion stock sale. At that price, there would be $1.3-billion in goodwill and TD would be taking on about $3-billion in risk-weighted assets.
"In order to keep regulators happy from a Basel III perspective, we think the bank would want common equity funding to account for about $1.0 billion of the purchase price," he said.
One variable is how much credit TD can get for any upside in BankUnited's pre-crisis loans. Mr. Routledge pointed out that BankUnited's crisis-related writedowns on its loan book may be too aggressive. If a buyer could write up some of those loans, bringing the value higher on the balance sheet, that would cut down on goodwill. It's a long shot, but a buyer would likely give it a try.