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The lobby of CIBC's headquarters in Toronto on Oct. 25, 2021.Evan Buhler/The Canadian Press

Canadian bank CEOs are racing to grab a larger share of the United States banking market, eyeing expansion in targeted areas at a moment when economic uncertainty is eating into fees and putting pressure on demand for new loans.

The chief executives of several of Canada’s largest lenders outlined strategies to double down on profitable niches where they think they can gain an edge in the hyper-competitive U.S. market, speaking at a conference hosted by Bank of Nova Scotia on Wednesday. Royal Bank of Canada CEO Dave McKay said he expects his U.S. trading desk to make a leap up the competitive rankings. And Canadian Imperial Bank of Commerce, which has rebuilt its U.S. strategy almost from scratch since 2017, is aiming to make further inroads in private banking and wealth management, CEO Victor Dodig said.

The two Canadian banks with the longest track records in the U.S. – Toronto-Dominion Bank and Bank of Montreal – struck major deals over the past year to get much bigger south of the border, spending extra capital stockpiled during the COVID-19 pandemic. BMO is acquiring California-based Bank of the West for $17.1-billion, and TD followed suit by offering US$13.4-billion for Memphis, Tenn.-based First Horizon Corp., then paid US$1.3-billion for New York investment dealer Cowen Inc.

Those three deals will consume the two banks’ attention in the near term, and will also likely require more investment in the future.

‘The next shoe to drop will be the Canadian banks’: BofA chief investment strategist

Although the U.S. banking market has often been inhospitable to foreign banks, it offers Canadian banks a tantalizing chance to increase profits more quickly than they can at home. To keep up at a moment when regional U.S. banking is consolidating through mergers, Canadian lenders have to keep getting bigger.

“For many years, I’ve been saying that scale in our U.S. business matters,” TD CEO Bharat Masrani said to investors at Wednesday’s conference. “It’s important to be a sufficient scale player.”

RBC has been aggressively hiring investment bankers, which has helped it win more mandates to advise U.S. companies on mergers and acquisitions. But Mr. McKay told the conference he wants the bank’s U.S. trading desk to perform better, with help from revamped technology platforms and a greater focus on fixed income, currencies and commodities, as well as equities.

“Our big focus and I think our big opportunity is on the trading side,” where RBC is currently ranked in 15th place among financial institutions in the U.S., Mr. McKay said. “We see no reason why we can’t go from 15th to 10th.”

RBC and BMO each took large markdowns on their exposure to new U.S. bond issuances they helped underwrite with syndicates of lenders, which generated accounting losses of $385-million and $88-million respectively as turmoil in markets upended the potential value of those deals.

At Wednesday’s conference, the CEOs of the two banks defended those positions, saying they deliver large fees that compensate for the inherent risks. So far this year, BMO has earned two and a half times as much in fees as it has taken in markdowns on the portfolio, according to CEO Darryl White. “The ratio is tremendous,” he said.

Years ago, CIBC concluded that trying to compete with Wall Street was a recipe for “an enormous amount of pain, low returns,” Mr. Dodig said. Instead, CIBC specializes in commercial banking and wealth management in the U.S., building on its cornerstone acquisition of Chicago-based PrivateBancorp Inc. for US$5-billion in 2017.

For the foreseeable future, CIBC is not looking to make another big splash, but will consider “tuck-in acquisitions” in U.S. wealth management, Mr. Dodig said. In the meantime, it has been investing in technology and adding private banking offices to serve wealthy clients in key cities across the U.S. “Our U.S. strategy going forward is to continue investing,” Mr. Dodig added.

Mr. White said that BMO, which focuses heavily on commercial banking, added 2,100 U.S. customers over the past year – proof that it is “taking share” from competitors. For the time being, the bank is focused on closing the Bank of the West deal and merging the two lenders. But there could be a blueprint for future expansion in previous acquisitions the bank has made, such as its purchases of broker-dealer KGS Alpha in 2018 and electronic trading firm Clearpool Group Inc. in 2020.

“I don’t have anything imminent to talk about,” Mr. White said. “But if you were to give me a five-to-10-year horizon, I would say more of the same.”

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