Canada's Banks Looking Toward the South

In now-legendary advice, newspaperman Horace Greeley once pointed opportunity seekers to the West.

But when capital-rich Canadian lenders think opportunity - particularly in the wholesale banking business - their eyes turn south toward the United States.

"Quality corporate lending and investment banking in the U.S. looks very good indeed," said A. Charles Baillie, executive vice president for corporate and investment banking at Toronto-Dominion.

In the acquisition arena, meanwhile, Canadian banks are going slow, partly because of earnings pressure brought on by a domestic recession. In some quarters, damage control is the theme of the moment. But there, too, longer-term prospects across the border are good.

Terms May Get Better

With many U.S. banks piling up loan losses, the longer Canadian banks wait to strike a deal, the more favorable terms they are likely to get, said Hugh M. Brown, a banking analyst with Burns Fry Ltd. in Toronto.

"They're getting propositions by the hour," he said. "But they want to see the bottom of the recession first."

For now, Canadian banks are aggressively pursuing wholesale business in the United States. Royal Bank, for example, now originates 38% of its international loans in the United States. That compares with a figure of 26% three years ago.

The $113 billion-asset bank also recently added offices in Buffalo and Atlanta. Royal Bank is Canada's largest and the second largest bank in North America after New York-based Citibank.

Building U.S. Earnings

Toronto-Dominion is also looking south for new business. And Bank of Montreal - which since 1984 has owned $12 billion-asset Harris Bancorp Inc. in Chicago - plans to build U.S. earnings to 50% of its total, up from 28%.

In other sectors, Royal Bank and Canadian Imperial Bank of Commerce have obtained Federal Reserve Board approval to underwrite and deal in U.S. securities.

Toronto-Dominion has begun trading in commercial paper issued by U.S. and Canadian borrowers. The bank also trades debt issued by the Canadian government and by government-owned corporations.

Canada's banks are well positioned to expand their U.S. activities, most observers say. For one thing, their core capital levels are comfortably above the minimum 4% primary capital-to-asset ratios set under international capital guidelines.

Capital Is Solid

Toronto-Dominion's core capital equals 6.7% of assets. The figure is 5.6% at Bank of Montreal, 5.5% at Canadian Imperial, and 5.4% at Bank of Nova Scotia.

Canadian banks also believe that because of nationwide banking at home, they will be better equipped to take advantage of prospective interstate banking legislation in the United States. These banks maintain they would quickly be able to transplant their large-scale payments and information systems.

Nonetheless, there are plenty of problems for Canadian banks to tackle at home. Competition for market share is heating up, and planned deregulation may exacerbate the situation. Moreover, a deep domestic recession has sparked a rise in nonperforming loans and a dip in profits.

The Grim Numbers

During the second quarter, earnings at Royal Bank dropped 10%, to $201 million. Toronto Dominion Bank's profits for the period fell 17%, to $113 million, while those at National Bank of Canada dipped 18%, to $44.36 million.

Bank of Nova Scotia's earnings jumped 16.5% to $142.6 million. But over the past 12 months, the bank's nonperforming commercial real estate loans in the U.S. rose 7% to $1.22 billion.

"The main thing for the banks at the moment is damage control," said A. Roy Palmer, an analyst with Bunting Warburg in Montreal. "They aren't looking for asset growth."

"We have been focusing on strategies aimed at effectively managing a bank in a recession," said Toronto-Dominion's Mr. Baillie.

Establishing Goals

The bank's immediate objective, he said, is to help customers survive the recession, locate problem credits early, increase retail deposits, and diversify business to decrease dependence on any single economic sector.

Meanwhile, competition on the home front is simmering. Canadian banks - led by Bank of Montreal - have dropped their lending rates in an effort to grab market share. And pending legislation - which would permit financial concerns to move into a broader range of activities - likely would make things even tougher.

Under deregulation, banks would be allowed to acquire insurance and trust companies. But trust and insurance companies would also be allowed to move into retail and corporate banking.

Royal Bank has already signed an agreement to purchase International Trust Co., a Toronto-based company that specializes in trustee and custodial services for pension funds. The bank plans to complete the acquisition as soon as deregulation takes effect.

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