Rally in U.S. bank stocks flummoxes Canadian acquirers

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The surge in financial stocks since the election of President Trump has put a damper on plans by M&A-hungry banks in Canada to explore U.S. deals.

During earnings calls this week, the CEOs of two leading banks north of the border — Royal Bank of Canada and Canadian Imperial Bank of Commerce — said the spike in U.S. bank stocks has changed the acquisition landscape. The KBW Bank Index has risen 30% since Republicans swept the elections on expectations of lower taxes and a lighter regulatory touch in the years ahead.

The surprise rally is creating sticker shock for Canadian bankers looking to make a deal. CIBC CEO Victor Dodig suggested that the company will not raise its bid for the $20 billion-asset PrivateBancorp, which it agreed to buy last June. Investors in the Chicago company have called the $3.8 billion deal insufficient in light of its higher stock price.

RBC CEO Dave McKay also cited the run-up in stock prices in explaining to analysts why the company plans to hold off on doing another U.S. acquisition for at least another year.

“You look at the prices of U.S. banks and the run-up there, and [the] ability to generate synergies and return capital remains challenging,” McKay said Friday.

McKay added that RBC will focus instead on organic growth at City National, its subsidiary in Los Angeles. Down the road, it may look for a “tuck-in” acquisition in nearby markets, he said.

The comments illustrate somewhat of a change in tune for Canadian bank CEOs. Faced with a sluggish economy at home, many had recently looked to the U.S. market to bolster their operations.

After pulling out of the U.S. following the financial crisis, RBC re-entered with a splash two years ago, scooping up City National, the West Coast franchise known for its rich-and-famous clientele. The deal, which closed in November 2015, was one of the biggest bank acquisitions since the financial crisis.

CIBC looked to replicate that success eight months later, announcing its deal for Private, primarily a middle-market lender in the Midwest.

But the stock market rally — and the surge in M&A pricing — have put the two Canadian banks on different trajectories.

During a call with analysts Thursday, Dodig left open the possibility that the Private deal may not close by its June 29 deadline. Notably, Private in December postponed a shareholder meeting to vote on the CIBC deal.

Private’s stock price has jumped about 25% since the election, slightly less than KBW Bank Index’s growth.

“We think we bring a lot to the party, and we think that the long-term strategic interest of their shareholders and our shareholders are best served by coming together,” Dodig said. “Having said all of that, the market’s clearly run [up]. Our goal is to be rational, our goal is to be disciplined, our goal is to be patient.”

Dodig reiterated, however, that the company’s U.S. expansion strategy remains intact and that CIBC has room to grow organically.

In 2013 the Toronto company acquired Atlantic Trust, a wealth management company in Atlanta. A year earlier it acquired MFS McLean Budden, an investment management firm in Boston.

“We believe we need to have that U.S. exposure” to grow in the long run, Dodig said, when an analyst pushed him about the implications of walking away from the Private acquisition.

Meanwhile, as RBC stays on the sidelines of the M&A market, it continues to reap the benefits of City National’s wealth management prowess.

For the three-month period that ended Jan. 31, U.S. wealth management revenue at the Toronto-based RBC increased 28% from the prior year, to $861 million.

The $46 billion-asset City National unit’s deposits also increased 29%, while loans rose 16%, according to McKay. The company has invested in expanding its jumbo mortgage business, too.

Still, McKay noted that RBC would consider expanding in markets where it already has a presence, should the right possibility come along.

“We’re obviously very conscious of shareholder return as we look for tuck-in acquisitions,” he said.

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Wealth management M&A Banking RBC CIBC