By Lynne Olver
TORONTO (Reuters) - Canada's big banks have weathered the credit crunch in relatively good shape and should swoop in to buy some ailing U.S. banks, observers say.
Royal Bank of Canada
The banks have excess capital to use and relatively clean balance sheets, Mihelic noted.
"Perhaps now is the time to think big," he wrote.
U.S. banks have taken a beating, with the KBW Bank index <.BKX> down by more than 40 percent in the past year. Over the same period, the S&P/TSX banks index <.GTSX401010> of large Canadian banks is down 17 percent.
Considered another way, the Canadian bank stocks trade at about 2.1 times book value, while the median of seven U.S. large-cap regional bank stocks is right at book value, according to RBC Capital Markets.
Eric Bushell, chief investment officer of Signature Advisors within Toronto-based CI Investments, told a conference this week that Canadian banks will come out of the credit crunch episode as bigger and more global players.
"The Canadian banks came into this situation extraordinarily well capitalized and have essentially twice the amount of return on weighted assets as the U.S. banks," Bushell said at a Toronto conference organized by research firm Morningstar.
"I think they're in a position to really pick over the carcasses," said Bushell, who runs the C$4.2 billion CI Signature Select Canadian fund.
Dennis Gartman, the Virginia-based author of investment newsletter The Gartman Letter, said at the same conference that Canadian banks would be "in the driver's seat" for the next decade.
"They're going to come around buying everything in the United States ... they're in great condition."
Royal Bank of Canada, which acquired Alabama National Bancorp earlier this year for $1.6 billion, has ample targets and its stock carries a hefty premium multiple, CIBC analyst Mihelic said.
U.S. banks in the U.S. Southeast, where RBC operates, and in the Midwest, where BMO runs Harris Bank, have seen their premiums to core deposits plummet to single digits in the past year, while these two Canadian banks' premiums to core deposits have held in much better, at 15 percent, Mihelic wrote.
He crunched numbers on possible RBC acquisitions of Regions
Financial
Before Alabama National, RBC's biggest U.S. purchase was the $2.3 billion buy of Raleigh, North Carolina-based Centura Banks in 2001.
As for Bank of Montreal, it has made a string of small U.S. purchases in the last few years, but paid less than $300 million in each case.
Mihelic said buying Huntington Bancshares
BMO's management has said it will continue to look at acquisitions, while RBC's top executive has expressed caution about making a big U.S. move.
"Either they have the fortitude to make a deal and the capability to execute a deal or they need to re-evaluate their respective U.S. strategies," Mihelic said in his report.
As for other big Canadian names, Toronto-Dominion Bank
However, Scotiabank's CEO said in May that U.S. bank valuations were "intriguing."
($1=$1.03 Canadian)
(Reporting by Lynne Olver; editing by Rob Wilson)
© Reuters Limited. All Rights Reserved.
Reproduction or redistribution of Reuters content, including framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
