Cash-rich Canadian banks clamp down on spending

Canada’s top bank CEOs are reining in spending ahead of new global financial regulatory changes expected later this year.

Although financial institutions in this country are better capitalized than their U.S. and European counterparts, uncertainty surrounding future capital requirements means Canadian banks, including RBC, BMO, Scotiabank and TD, are taking a wait-and-see approach to international growth opportunities.

“We are going to carry higher levels of capital until we know what the rules are,” said RBC Chief Executive Gord Nixon as he addressed investors at RBC Capital Markets Canadian Bank CEO Conference on Thursday.

Bank of Montreal President and CEO Bill Downe said the changes will diminish even the fat cash levels enjoyed by Canadian banks.

As a result, mergers and acquisitions in the banking sector will be few and far between, according to Nixon.

Some analysts had expected a pickup in M&A activity in 2010 as Canadian banks looked to snap up smaller U.S. and European banks left paralyzed by the global financial crisis.

"Investors expecting a high level of M&A will be disappointed," Nixon said.

Nixon pointed to the lack of deals over a couple million dollars in the past two years as evidence that regulative uncertainty and risky balance sheets are steering banks away.

On the flip side, he added, it’s not worth selling assets at devalued prices.

“There’s not a lot of incentive to sell other than necessity,” he said.

Even Scotiabank Vice Chairman and Chief Operating Officer Sabi Marwah said his bank has “tempered” its approach to international opportunities.

When capital requirements go up, leverage ratios go down, he said.

"And when that happens, ROE (return on equity) are going to come down,” he said. “That's a major hurdle.”

TD President and CEO Ed Clark echoed the sentiments.

TD, which has been expanding its retail banking brand in the U.S., said it all but ruled out a blockbuster deal south of the border.

Representatives from all eight publicly traded banks were on hand at the event in Toronto.

ACQUISITION OPPORTUNITIES

Sabi Marwah, chief operating officer at Canada’s third-largest lender, Bank of Nova Scotia, said there were only two areas that might offer the internationally focused bank the opportunity for a large acquisition: Mexico, where it already has a strong presence; and Canada, where it has a stake in CI Financial Corp.

But for the time being, Marwah said the bank is happy with its significant minority stakes in Canadian wealth managers CI and DundeeWealth Inc , saying the two independents, plus Scotiabank’s own wealth management division, offer the bank flexibility.

He declined to comment on any timetable for taking a bigger stake in CI, saying only that the bank would do what is “in the best interest of Scotiabank shareholders”.

Bill Downe, CEO of Bank of Montreal, the nation’s No. 4 bank, said there is no question that Canadian banks in general, and BMO in particular, are far better capitalized than global rivals. He said that puts BMO in a good position to expand as peers work to rebuild their cash reserves.

“I think consolidation is going to start in 2010 and accelerate in 2011,” Downe said, adding there is more clarity on capital and costs than there was just two months ago.

Downe said regulatory capital changes will diminish even the fat cash levels enjoyed by BMO and other Canadian banks.

“But the gap between the best capitalized banks in the world and the least capitalized banks in the world is gigantic, and ... my view as one of the best capitalized banks in the world, is that, if you’re paying attention, that is the place you want to be.”

BMO has focused its expansion goals on the U.S. Midwest, and Downe said there will be opportunities for growth there as rivals are sidelined by the need to rebuild capital levels to meet the new global requirements.