Canada's financial regulator has told banks and insurance companies they must finance any big takeovers by issuing new shares, making major acquisitions more difficult just as the country's banks are at the height of their international prowess.
Issuing equity in a big deal would risk angering shareholders because their stock would be so diluted. At the same time, the banks find themselves in a state of limbo as they await the outcome of negotiations among global regulators on standard minimum capital requirements.
The edict on financing takeovers through stock issues shows just how crucial the Office of the Superintendent of Financial Institutions, Canada's regulator, deems strong capital levels to be in the wake of the financial crisis. It also helps to explain why there have been no major deals in the sector despite the strong positions of Canada's banks compared with their global counterparts.
The country's banks now enjoy a stellar profile after the crisis that devastated their peers but the moves by global regulators to bolster capital levels have muddied the waters for acquisitions.
“At this time, in light of the uncertainty as to the overall regulatory requirements down the road, the picture for the entire industry as to acquisitions is less than clear,” Canadian Imperial Bank of Commerce chief executive officer Gerry McCaughey said in a recent interview.
“Over all, I believe that there is an expectation that, if major acquisitions were engaged in, until international rules are clear, share issuance would play a key role,” Mr. McCaughey said.
OSFI did not issue a written notice of its edict, but has been quietly advising the banks and insurers of the requirement. OSFI has told the financial institutions it oversees that it expects them to “finance material acquisitions through new equity,” spokesman Rod Giles said. “This is primarily because capital requirements are subject to significant change.”
OSFI has also told banks and insurers it does not want them to increase dividends or reactivate share-buyback programs any time soon.
