Cash-rich Canada banks shy away from acquisitions

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TORONTO - The heads of Canada's four largest banks said on Thursday they remain focused on capital conservation because of uncertainty over global regulatory changes and the riskiness of making acquisitions.

Gord Nixon, chief executive of Royal Bank of Canada, the nation's biggest bank, and Ed Clark, chief executive of Toronto Dominion Bank, the No. 2 bank, both said Canadian banks have strong capital levels compared with global rivals, but that there is no rush to spend it on acquisitions.

I don't think most Canadian bank CEOs are going to be rushing to burn through their capital until they have some certainty of (global rules), Clark told investors at an RBC Capital Markets banking conference in Toronto.

TD, which has focused its expansion strategy on the U.S. retail banking market, said it has mostly ruled out a blockbuster purchase in the United States.

We've always said, not that everything would absolutely have to be an FDIC (Federal Deposit Insurance Corp)-assisted deal, but it would have to be a small deal where we thought the catastrophic risk was estimable, so the idea that we would go out and do a big acquisition -- I just don't think it is in the cards.

RBC's Nixon said the lack of mergers and acquisitions in financial services generally, particularly in the U.S. market, is due to a lack of clarity about asset values and risks. He said it is almost irresponsible to go out and invest in the current uncertain environment.

Nixon said he believed there will be good opportunities for RBC to expand in global wealth management, as well as in insurance, in part because the bank will have strong capital levels even after global regulatory changes take effect.

There is no question that global regulators will require higher capital levels and lower leverage ratios, changes that will hurt global rivals more than the conservative Canadian banks, Nixon said.

He said RBC would be in a position to consider several options to deploy excess cash, including share buybacks, dividend increases or acquisitions.

But Nixon cautioned that for now, he'd rather be criticized for having too much capital than not enough, adding that the Canadian regulator had made it clear it did not favor any of the banks depleting cash levels right now.

ACQUISITION OPPORTUNITIES

Sabi Marwah, chief operating officer at Canada's third-largest lender, Bank of Nova Scotia (BNS.TO), 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. (Reporting by Andrea Hopkins; editing by Peter Galloway)

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