The planned merger of Royal Bank of Canada and Bank of Montreal may never occur if the two banks cannot overcome strong regulatory and political objections.

Analysts noted that even if there is nothing in Canadian banking regulations to bar a merger, a phalanx of three federal regulators-the Ministry of Finance, the Office of the Superintendent of Financial Institutions, and the Competition Bureau-need to give their approval before it can proceed.

The ministry is reluctant to see further consolidation of Canada's highly concentrated banking market, and there are concerns that allowing one big merger would open the door to others, analysts said. It is therefore an open question, they said, whether the deal announced Jan. 23 will ever go through.

"It's very much a toss-up," said A. Roy Palmer, banking analyst with TD Securities Inc. in Montreal. "I'm not at all sure which way the coin is weighted."

The Ministry of Finance and the other two regulatory agencies involved plan to issue no verdict until after a task force examining Canada's financial system submits its findings in September. But there are several reasons why approval remains less than certain.

For one thing, the ministry last year quickly shot down a proposed merger between Canadian Imperial Bank of Canada and Canada Trust. For another, a merger between the two banks would give them a combined market share beyond the 30% threshold Canadian regulators have traditionally been willing to accept.

"There's been a general understanding that big would not merge with big," remarked Michael Goldberg, a bank analyst at HSBC James Capel Canada.

Canada's 11 domestic and 42 foreign banks hold $793 billion of assets. The six big Canadian banks-Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Bank of Nova Scotia, and National Bank of Canada-hold 98.5% of that total.

A merger between Royal Bank and Bank of Montreal would create a megabank with about $315 billion of assets, or almost 40% of all banking assets in Canada. The merged institution would also hold 27% ($101 billion) of Canadian retail deposits, 23% ($62 billion) of residential mortgages, 12% ($24 billion) of mutual funds, and 27% ($28 billion) of personal loans.

To be sure, some analysts strongly believe the merger will go through despite the obstacles.

Tom Jarmai, director of financial services research at Scotia Capital Markets in Toronto, predicted that Canadian regulators are more likely to use specific product lines, such as residential mortgages or personal loans, as a criteria for measuring market share rather than total assets.

"If you look at this merger according to major business lines, the answer from regulators might well not be no," Mr. Jarmai said.

Royal Bank and Bank of Montreal argue much along the same lines. "It's untrue to say this would create an undue concentration of financial services in Canada," said Nabanita Merchant, head of investor relations at Royal Bank of Canada.

"In most lines of business, our market share would only be in the 20% to 25% range, which is well below the 35% threshold."

She also stressed that it would be overly simple to appraise the merger's impact purely within the framework of banking.

"There is a great deal of financial competition in this country from credit unions, foreign banks, and monoline suppliers of financial services," Ms. Merchant said.

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