U.S. Entices Big Banks in Canada

OTTAWA — The Bank of Nova Scotia is sometimes praised for having a nearly perfect record with its investments in the United States. But it is the only one of Canada’s five large banks that has largely avoided the American market.


Stephen Harper, the prime minister of Canada, is among the many Canadians who regularly remind the world that their country’s banking system was left largely unscathed by the global recession and credit market collapse because of its regulation and prudent management.

Now several of the banks are taking advantage of their solid balance sheets as well as the current revamping and consolidation of the American banking system to again look south for expansion. Last week, the Toronto-Dominion Bank agreed to pay $6.3 billion for Chrysler Financial. And earlier this month the Bank of Montreal bought Marshall & Ilsley, a bank based in Milwaukee, for $4.1 billion.

Given the uneven success of previous forays south of the border, however, few investors expect much good to come of either deal.

“We don’t think it’s a great idea for Canadian banks to be expanding into the American market,” said J. Bradley Smith, the head of research at Stonecap Securities in Toronto. “From a cultural perspective, we’re very similar. But from a management perspective, the American market is not an easy threshold to cross.”

Still, Canadian banks have few other options for expansion.

“The banks simply have no choice,” said Louis Gagnon, an associate professor of finance at Queen’s University in Kingston, Ontario. “They have to go beyond our borders to grow and the only market that makes sense is the United States.”

In their home market, Canada’s top five banks — the Royal Bank of Canada, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce and the Bank of Montreal — offer a complete range of banking, from retail to investment banking through a nationwide chain of branches. Changes in regulation have also allowed them to expand, on a limited basis, into insurance while most brokerage houses became bank subsidiaries.

That market dominance, and some regulatory restrictions, mean that competition from foreign-owned banks in Canada is limited. At the same time, the managers of Canadian banks are immune from takeover pressures because of federal laws that prohibit any person or company from owning more than 20 percent of a chartered bank.

While that has made for a orderly financial system for Canada that is very profitable for bank investors, the banks now find themselves accumulating substantial capital without effective ways to use it to increase their businesses within Canada.

The recent rise of consumer debt in Canada has added to the problem. Both Mark J. Carney, the governor of the Bank of Canada, suggested this month that it had become time for banks to restrict consumer lending, a proposal later echoed Jim Flaherty, Canada’s minister of finance.

The United States looks like an enticing market, but as Professor Gagnon said the results have historically been uninspiring.

By most estimates, the Canadian Imperial Bank of Commerce has fared poorest in the United States. In 2007, burdened by claims from Enron investors against its American unit, the bank sold the bulk of its United States operations to Oppenheimer Holdings.

The Royal Bank of Canada’s RBC Centura unit, which is mainly active in the southeastern United States, Toronto-Dominion’s TD Banknorth, which covers the Northeast, and the Bank of Montreal’s Harris Bank, based in Chicago, have not been similar experiences. But they are all consistent underperformers relative to their parent companies’ operations in Canada.

Toronto-Dominion has been the most aggressive in the United States recently. Ed Clark, its chief executive, has exported a formula that he used to substantially increase Toronto-Dominion’s lucrative retail business after it acquired Canada Trust, which he previously headed, in 2000. In short, it emphasizes improvements in customer service like longer business hours.

Whether that plan will succeed remains to be seen, but Canada’s banks are not the only Canadian companies that have found that their success at home do not necessarily translate to the large and more competitive environment of the United States.

For example, Tim Hortons, the doughnut and coffee shop chain, dominates Canada’s fast-food market to a degree without a parallel in the United States and successfully opens new stores rapidly. But continuing struggles with its American expansion forced the closing of 54 outlets in New England last month. Regardless, James L. Darroch, the director of the financial services program at the Schulich School of Business at York University in Toronto, said that the revamping of the American financial sector would most likely force Canadian banks to increase their investments in the United States.

“Either you’ve got to expand in the U.S. to become profitable or you’ve got to exit,” he said. “If you want to stay in that market, now’s the opportunity to shape it. The question is: ‘Can you do it right?’ ”

Uniquely, the Bank of Nova Scotia has looked outside of the United States for its growth and expansion, primarily to Latin America and China.

While that strategy has brought some missteps, particularly during Mexico’s currency crisis, it has generally been more fruitful than its competitors’ efforts in the United States.

The downside of Nova Scotia’s approach, said Professor Gagnon, who is a former senior manager at the Royal Bank, is that those markets usually take much longer to develop and do not afford the large takeover opportunities that are readily available in the United States.

While Mr. Smith, the analyst, is skeptical about further expansion by Canadian bankers in the United States, he has high praise for their skills, particularly in areas like risk management.

“I feel for the managers of Canadian banks because they’re under a lot of pressure from analysts and investors,” he said. “But the success of Canadian companies in general, even beyond banks, in expanding into the U.S. is pretty spotty over the long haul.”