Who Needs Mergers When U.S. Banks Are Cheap?

Paralysis, senior bankers often remind us, comes at a price. Canadian banks have been sliding down the global rankings as though strapped to a luge. In the mid-nineties, the average Big Five bank was equal to New York's Chase Manhattan; now it's one-third as large as JPMorgan Chase. Even the largest, RBC, is less than half the size (by market capitalization) of a greatly diminished Citigroup. This has consequences: It means "not only that our competitors are bigger, but so are the potential targets that Canadian banks may be interested in acquiring," the Canadian Bankers Association said last week in a paper to Ottawa's competition policy panel. All true. What to do about it? The bankers' answer is mergers. The government's response should be: Very well, but prove you've got some guts first. Thanks to the mortgage mess in the United States, Canada's banks have been handed a once-in-a-generation chance to make up for lost time - without mergers. If they're as serious about expansion as they say, now's the time to show it. The credit crunch is finally proving what a lot of investors have been saying for years. The American banking system is rubbish. Actually, that's too harsh: It serves its consumers reasonably well. It's the shareholders who suffer. U.S. banks tend to rack up more bad loans and earn lower returns. Let's compare our biggest to their biggest again: Between 2001 and 2006, RBC never had a year in which its net writeoffs were greater than 0.7 per cent of its loans, according to data from Standard & Poor's/Capital IQ. But Citi never managed to get writeoffs to less than 1 per cent, and a couple of times exceeded 2 per cent. Remember: That's before the subprime mess hit the proverbial fan in 2007. Not since the late 1990s has Citi managed to earn 20 per cent on equity (RBC hit that mark in '06 and '07). But it's hardly the only U.S. bank that earns less-than-spectacular returns on its shareholders' money. Wachovia is held up as a model of a little regional bank that grew by mergers, but do you know what its average return on equity has been over the past five years? It's 12.7 per cent. And yet, until a few years ago, investors were willing to pay more to own inferior U.S. banks (proof, in case you needed it, that the market is not always rational). That didn't change until about 2004, just as the financial world was starting to clue in to the pro-Canada story: strong economy, rising currency, oil, huge federal surplus. By the start of this year, the six largest Canadian banks were trading at a fat 55-per-cent premium to a basket of large U.S. banks, according to BMO Nesbitt Burns. For the first time in ages, U.S. banks are selling at Wal-Mart prices. Not so long ago, Fifth Third Bancorp, then considered an excellent regional bank in the U.S. Midwest, traded for five times its book value (that is, its assets minus its liabilities). It's a stretch to say Bank of Montreal will buy it, but the idea is less preposterous now that Fifth Third goes for 1.4 times book. SunTrust, the biggest regional bank in the S&P 500, has seen its multiple sliced in half, to 1¼ times book. By the way, it has branches all over the U.S. Southeast; so does RBC. ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080117.wrdecloet17/BNStory/robColumnsBlogs/

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