(Bloomberg) --Bharat Masrani waited more than seven years to make a splash with a big U.S. regional bank acquisition for Toronto-Dominion Bank. In a matter of months, it fell apart.
Canada's second-largest lender walked away from a $13.4 billion deal for First Horizon Corp., saying it's uncertain whether it can get regulatory approval for the deal. It would have been Toronto-Dominion's largest acquisition ever, adding more than 400 branches in the U.S. Southeast to fill in a network that already stretches down most of the eastern seaboard.
Regional banking has been Toronto-Dominion's main growth strategy for nearly two decades since former CEO Ed Clark struck a deal to gain control of Banknorth Group Inc. Other acquisitions followed, and last year Toronto-Dominion's U.S. retail-banking group contributed C$5.6 billion ($4.2 billion) in earnings, about 32% of its total profit.
But the collapse of the First Horizon transaction is going to make it harder for Masrani, who's been CEO since 2014, to build on it. The banks' joint statement on Thursday made it clear that the regulatory problems had nothing to do with First Horizon.
"I think they're going to pursue organic growth," John Aiken, an analyst at Barclays Plc, said in a phone interview. "From our standpoint, it's going to be very difficult for TD to convince a potential seller that they'll be able to cross the finish line again."
The First Horizon deal has looked shaky since early March, when the Memphis-based lender disclosed that Toronto-Dominion had said it didn't believe it could get regulators to sign off by a May 27 deadline.
"I cannot speculate on when we will receive approval," Masrani said on a March 2 conference call with analysts to discuss quarterly results, saying at the time that Toronto-Dominion was "fully committed to the transaction" with First Horizon.
The Canadian bank has given investors little information about the regulatory issues. "While we cannot address all of the false rumors and speculation in the market, we want to be clear that this is not in any way related to TD's good-faith dealings with our customers," Lisa Hodgins, a spokesperson for the bank, said by email on Thursday.
TD and First Horizon had started talks on an extension to the deal deadline. Questioned by shareholders last month at Toronto-Dominion's annual meeting, Masrani repeatedly declined to provide more details.
But it had become obvious that investors were not enthusiastic about the deal — at least not at $13.4 billion — given the turmoil in the sector and the sharp selloff in U.S. regional-bank stocks. Toronto-Dominion rose as much as 2.4% in Toronto on Thursday. The shares are down nearly 7% this year, the worst performance among Canada's six largest lenders, having been weighed down by concerns surrounding the purchase.
"We do not believe most investors were supportive of the transaction," Gabriel Dechaine, an analyst at National Bank of Canada, said in a note to clients Thursday. "One could envisage TD going on an opportunistic shopping spree in a U.S. regional banking market that is flush with (cheap) targets. However, if the regulator wasn't ready to approve FHN, it seems unlikely to us they would approve another transaction, especially in the near term."
That leaves Masrani and Toronto-Dominion's board with the question of what to do with the capital the bank has been hoarding in anticipation of landing First Horizon. Toronto-Dominion's Common Equity Tier 1 capital ratio was 15.5% as of Jan. 31, far in excess of the amount Canadian banks typically hold.
Heading into a possible recession, "more capital is always a good thing — full stop," Aiken said. "The problem is that, once we come out of this, the question becomes, 'What is TD going to do with this?'"
The Canadian market, already consolidated around six major financial institutions, isn't rich with takeover targets. Share buybacks may be part of the answer, Aiken said, but Canadian banks haven't been historically that aggressive in repurchasing shares.
Paul Gulberg, an analyst with Bloomberg Intelligence, said it's possible Toronto-Dominion will find a way to make U.S. retail banking deals. "They are still a strong partner," Gulberg said. "And if they offer to save a bank, offering U.S. government the best deal in terms of protecting depositors, maybe it's not fully off the table."
