In the wake of Royal Bank of Canada's $850-million (U.S.) writedown of its U.S. retail banking unit on Thursday, attention is shifting to rival Toronto-Dominion Bank, an aggressive buyers of American banks over the past five years.
Canada's banks have over $40 billion of goodwill and intangibles on their balance sheets, most of which reflects the cost of past acquisitions, according to a report published Friday by BMO Nesbitt Burns analyst Ian de Vertueil. TD Bank accounts for half of this total, after buying three large retail networks in the U.S. northeast.
Will TD Bank follow Royal Bank's lead, and take a non-cash charge on the unit. And do these writedowns actually matter?
"We believe that as long as TD's U.S. unit continues to produce a reasonable level of earnings, the goodwill will remain," said Mr. de Vertueil. "We doubt that the writedown of goodwill will be a major issue as long as the writedown doesn't indicate further deterioration in core businesses."
But obviously, if profitability drops, these banks do have a problem. A writedown will be a signal that management views the decline in earnings power as a long-term issue, and that would weigh heavily onthe premium valuations sported by Canadian banks.
However, Royal Bank's writedown is being seen as a sign of realism, not something that investors should worry about. Mr. de Verteuil said: "We believe that this will be a minor issue and is unlikely to affect the share price meaningfully."
But the top-ranked analyst did warn: "Canadian banks are now 50 per cent above their panic lows of February 2009 so a pullback for the group is possible."