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Canadian Banks Pursue Growth in U.S.

Buoyed by the strong Canadian dollar, banks are on the hunt for acquisitions. Unfortunately for job seekers, they are finding their best deals in the U.S.

Royal Bank of Canada, the country's largest bank, reportedly held acquisition talks with embattled Wall Street firm Lehman Brothers Holdings, indicating the continuing interest of Canadian banks in snapping up distressed companies in the U.S. In April, shares of Bank of Nova Scotia tumbled after The Wall Street Journal reported it was considering a bid for Cleveland-based National City. Earlier this year, TD Ameritrade Group acquired New Jersey-based Commerce Bancorp. JPMorgan Chase beat out the Toronto-based bank to acquire Washington Mutual, the largest bank ever seized by the U.S. government. Analysts expect more deals to follow.

The Royal Bank-Lehman talks, which were reported by the Financial Post, broke down over the summer for reasons the newspaper wasn't able to determine. Had it happened, the deal would have invited scrutiny from regulators in Ottawa worried it might put the Canadian banking system at risk, the newspaper said. In any case, acquiring the now-bankrupt Lehman would have created enormous headaches for RBC and would have run counter to the company's acquisition strategy.

RBC Chief Executive Gordon Nixon tried to downplay the talk about Lehman during a recent investor conference. "While he did not mention Lehman directly, he noted that investment banking makes up about one-quarter of RBC, while three-quarters is consumer banking, wealth management and insurance," the Globe & Mail reported. "That is the 'right composition for long-term success,' he said, adding that he has no intention of shifting it." An RBC spokesperson wouldn't comment.

"I never put much stock in it," Chris Blumas, an equity analyst with Morningstar who follows Canadian banks, said in light of media reports about RBC's interest in Lehman. "They are certainly well-positioned to do acquisitions in the U.S. (But I) would expect them to do smaller acquisitions, more retail focused."

Plenty of Potential Targets

Given the state of the U.S. financial markets, there are plenty of deals for Canadian banks to consider. The companies have little choice but to consider expanding outside the country where the potential for growth surpasses what they can get in Canada, according to Blumas. RBC Dominion Securities Inc., Canada's No. 1 investment bank, recently announced that new co-chief executive Doug McGregor will be based in New York while his counterpart Mark Standish will be based in Toronto. RBC Dominion is the securities arm of the Royal Bank of Canada.

Indeed, the Canadian economy, which has outperformed the U.S. for months, is showing signs of slowing. Economists from the Bank of Nova Scotia are forecasting Ontario will have zero growth for the year, and growth for Canada as a whole will be 0.7 percent, according to the Globe and Mail.

So far, Canadian banks have avoided the massive layoffs seen in the U.S. Toronto-based recruiters have repeatedly said securities firms are continuing to hire. Canadian Imperial Bank of Commerce, which has announced job cuts, recently reported better-than-expected quarterly results. Bloomberg News notes the bank's $885 million (Canadian) writedown was less than half of some analysts' forecasts.

Speaking at a recent industry conference, CIBC Chief Executive Gerry McCaughey said the bank's sub-prime exposure was not nearly as problematic as it was a year ago, according to Reuters. CIBC has been retrenching, selling off its U.S. investment banking business and shutting down its structured finance unit in Europe.

AUTHORJonathan Berr Insider Comment

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