Canadian banks are looking at their U.S. counterparts as though they are shoppers eyeing a blue-light special, wondering if a deal is worth it at any price.

Armed with healthier balance sheets than their U.S. rivals, the biggest Canadian banks have been cautiously considering opportunities in the United States as the recession has deepened. Though it was unsuccessful, Toronto-Dominion Bank's bid late last week for the failed BankUnited Financial Corp. suggested that Canadian bankers may soon accelerate their long-awaited expansion south of the border.

Canadian banks "absolutely have an interest in expanding their presence" in the United States, said William Hickey, a principal and co-head of investment banking at Sandler O'Neill & Partners LP. "There is a lack of U.S. domestic buyers right now. That gives them a lot of opportunities. I think they are going to be very cautious, as they always have been. They feel that the market is coming to them, and I think they are right."

The three Canadian banking companies that already have sizable retail banking presences in this country — Royal Bank of Canada, Toronto-Dominion and Bank of Montreal — are seen as the most likely acquirers because they are familiar with the U.S. regulatory environment and have the infrastructure needed to absorb a failed or struggling bank. Scotiabank could also extend its reach into the U.S. after having branched into Latin America and the Caribbean, industry observers said.

Ralph "Chip" MacDonald, a partner in the Jones Day law firm, said a vacuum has appeared in the market for U.S. banks, with regulators unable to find suitors for at least four failed banks this year. Canadian banks could fill the void; they have a leg up on other foreign buyers given their proximity and familiarity with the United States, he said. Florida, he said, is particularly attractive to Canada's banks.

"There are places in Florida where the Canadian flag is flown right alongside the U.S. flag," he said. "So they have the opportunity to serve some of their existing customers, as well as to expand their business."

Chris Thompson, a senior executive in Accenture Ltd.'s financial services group, said that, unlike acquisitive U.S. banks, Canadian banks will not be distracted by the adoption of new regulatory practices that sap time and money. Canadian banks "are already at a higher standard of regulation … those things aren't happening to the Canadians," he said.

Canadian bankers also have a cultural affinity with the United States, which could make it easier to pass muster with regulators in failed-bank transactions, Thompson said. Regulators have yet to sell a failed bank to a foreign bank or its U.S. subsidiary, though some overseas investment firms were part of the private-equity consortium that bought BankUnited.

Industry watchers have been waiting for Canadian banks to pounce on U.S. turf since the economy began to waver last year. Canadian banks have weathered the global recession relatively well; they had historically tighter lending standards and steered clear of the risky financial products that crippled U.S. and European banks.

But so far, the Canadians have been hesitant to do new deals in America. Royal Bank and Toronto-Dominion extended their U.S. reach earlier in the decade.

They are waiting for the U.S. economy to bottom, analysts said. Canadian banks' forays into the United States have not exactly been roaring successes, either. For instance, Royal Bank of Canada's earnings were hit last year by credit losses at money-losing RBC Bank.

And though they have remained profitable, Canadian banks have not gone untouched by the recession; the first Canadian bank to report results for the quarter ended April 30 — Bank of Montreal — said Monday that its net income declined 44% in the period, its biggest profit decline in seven years.

Still, the static nature of the Canadian financial services industry makes further penetration to the south inevitable, industry watchers say. The Canadian market is comfortably diced up among the major players, hindering the potential for domestic growth.

"Historically, growing market share in banking, particularly deposits, is pretty much a zero-sum game," Thompson said. "It's hard and expensive to do that against the other banks in Canada."

A slowdown of Canada's domestic growth in recent years almost invites banks to set their sights elsewhere. Canadian banks are also under pressure to keep history from repeating itself — the industry came under heavy criticism for failing to capitalize on prior slowdowns in the U.S. economy in the 1980s and 1990s. In March, Canadian Prime Minister Stephen Harper urged his country's banks to take advantage of their strength by buying assets in the United States and other countries.

Toronto-Dominion, for one, appears to be heeding that call. The company's chief executive, W. Edmund Clark, has repeatedly said he wants to take advantage of teetering U.S. banks to steal market share in this country, possibly through acquisitions. Toronto-Dominion's U.S. arm, TD Bank, is headquartered in Cherry Hill, N.J., and Portland, Maine, and has nearly 1,100 U.S. branches. "You want to grow like stink here if you can do it," Clark told American Banker in March. The bank declined to comment for this article.

Ellen Costello, the chief executive of Bank of Montreal's U.S. subsidiary, Harris Bankcorp Inc., has a similar aim. She told American Banker in April that acquisitions could be crucial as the Chicago company looks to grow from 281 branches to 1,000. The bank didn't return telephone calls for this article.

RBC also declined to comment for this article, citing its 'quiet period.'

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