U.S. consumer finance companies hoping to expand northward may find that they need to be especially nimble, thanks to the pending bank mergers there.

Take the mortgage business, for example.

Canadian banks hold about 70% of the residential mortgages in Canada, where low inflation and interest rates and healthy consumer confidence have kept the housing market brisk enough to attract interest from some U.S. players looking to expand their businesses.

But the mergers would reduce the number of major players to four banks with daunting economies of scale. Observers say the deals would make a competitive mortgage market even more cutthroat - and more difficult for newcomers to enter unless they have identified an underserved niche.

Combining Canadian Imperial Bank of Commerce with Toronto-Dominion and Royal Bank of Canada with Bank of Montreal would create two banking companies controlling just over half the market.

"By just increasing their volumes they should be able to lower the effective cost of servicing and origination," said Ian Bandeen, managing director and global head of securitization and structured finance at Nesbitt Burns Securities Inc. in Toronto.

Some American consumer finance companies have already planted roots in Canada, figuring they can prosper by serving a special niche.

The intense competition among the six big banking players active in mortgages had already created some opportunity for specialists. As one Canadian mortgage market observer wryly put it, "They all try to make their product look different but they all end up looking the same."

GE Capital Mortgage Insurance Canada, a subsidiary of GE Capital Mortgage Corp., Raleigh, N.C., is the only private mortgage insurer in Canada. IMC Mortgage Company Canada Ltd. in Ontario, a subsidiary of IMC Mortgage Company of Tampa, is offering nonconforming mortgages with loan-to-value ratios of up to 85%, said Dennis J. Pitocco, president.

IMC is competing with subsidiaries of banks that are dabbling in the nonconforming sector, Mr. Pitocco said. "We may have woken up some sleeping giants and created more of an interest in this sector."

In recent weeks the Canadian market has been buzzing with talk that American mortgage companies including Countrywide Home Loans and Norwest Mortgage might enter the market. Such companies have said they would look overseas for growth as the U.S. market matures. But none have announced Canadian ventures so far.

Indeed, the mergers in Canada could create some impetus for Canadian banks to expand in the U.S.

The latest deal, between CIBC and Toronto-Dominion, puts these Canadian banks in a stronger negotiating position for a cross-border acquisition, said John D. Leonard, banking analyst with Salomon Smith Barney in London.

"Down the road, it is a stronger competitor in the United States and probably either a stronger partner or acquirer of a U.S. franchise," Mr. Leonard said. He said it would make sense for CIBC/Toronto-Dominion to seek an alliance with or the purchase of an American financial services company.

The merger would certainly make the merged bank "a more effective competitor in the wholesale markets," Mr. Leonard said.

Indeed, the banks' presence in the United States is already big enough to attract the attention of a community activist group, Inner City Press/Community on the Move. The Bronx, New York-based group said Friday that it would oppose the merger of the banks' U.S. operations because it says TD has a poor record of complying with the U.S. Community Reinvestment Act.

Toronto-Dominion's Waterhouse Investor Services arm could be a vehicle for a virtual bank or "as an opportunity to do an Internet type or telephone banking in the states without a lot of bricks and mortar," Mr. Leonard said.

Expectations are that the CIBC Toronto-Dominion deal will be a genuine in-market merger with a full interaction of the branch networks and product lines, Mr. Leonard said. "Clearly it will accelerate the trend we've already seen in Canada to gradually reduce the reliance on branch networks and to increase the reliance on telephone banks, PC banking, and other electronic distribution channels."

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