Toronto-Dominion Bank, Canada’s second-largest banking group,
has snapped up one of the US’s fastest-growing retail banking
franchises, Commerce Bank, in a 75 percent stock and 25 percent
cash transaction valued at $8.5 billion. TD Bank’s CEO, Ed Clark,
described the deal as a “unique, strategically compelling”
opportunity for the Canadian bank as it fulfils its goal of
becoming a North American powerhouse.
When added to TD’s established TD Banknorth US retail banking
subsidiary, Commerce Bank will double the size of TD’s US retail
business. The Canadian group will have more than 2,100 branches in
North America (444 from Commerce), making it the seventh-largest
bank in North America by number of branches (see table
below). It will have $312 billion in deposits ($44 billion
from Commerce), $188 billion in loans ($16 billion from Commerce)
and some $458 billion in assets ($48 billion from Commerce).
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TD expects to take a one-off restructuring charge of approximately
$490 million as part of the deal, and is forecasting pre-tax cost
synergies of $310 million by 2009. The price is 22.5 times
price-to-2008 earnings and 2.96 times price to tangible book value,
and represents a 13.5 percent core deposit premium.
The deal illustrates three key points: the ongoing, acquisitive
strategy of Canadian banks in general buying into the US market;
the strength of the Canadian dollar – it recently hit parity with
the US dollar for the first time in 31 years; and the abrupt end to
the independent Commerce Bank story under its charismatic founder,
Vernon Hill, who left the bank in June after a federal
investigation into insider dealing allegations.
‘America’s Most Convenient Bank’
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By GlobalDataOver the past two years, Commerce Bank, which
markets itself as ‘America’s Most Convenient Bank’, has won
numerous awards for its ‘power banking’ and customer-centric
strategy, including Best Retail Bank – Americas and Best Branch
Strategy at RBI’s global banking awards last year (see
RBI 563).
Commerce Bank’s power banking strategy is focused largely on
dedicated customer service: the bank describes itself as a power
retailer, talks about “harnessing the ‘power of wow’” in its
efforts to exceed customer expectations, refers to its customers as
“fans” and calls its business model the ‘Wow the Customer’ model.
It pioneered many no-fee services in the US and developed
initiatives such as seven-day branch banking with extra branch
staff and free personal checking accounts.
Commerce demands that staff “believe” in its model, and conducts
100,000 mystery shops each year to check that both its model and
its staff are working to the rules.
Bharat Masrani, president and CEO of TD Banknorth, said: “I am
incredibly optimistic about the future. Commerce is second to none
in its branch-building franchise. We are the name to watch in New
York… Commerce gives us scale in the Mid-Atlantic and will allow us
to turbocharge our organic growth strategy. We look forward to
creating the first truly integrated, North American financial
services powerhouse.”
International earnings diversification
Because Canada’s Big Five banking groups can not merge with or
acquire each other under the country’s banking rules – nor can they
be acquired by a foreign bank – they have, over the past decade and
more, looked internationally for earnings diversification.
The TD Bank-Commerce deal came the same day that RBC Financial
Group, the largest Canadian banking group, said it would buy RBTT
Financial, a Trinidadian bank, for $2.2 billion, its ninth
acquisition outside its home country this year. The transaction
will create one of the most expansive banking networks in the
Caribbean, with a presence in 18 countries and territories and more
than $13.7 billion in assets. “This is a transformational
acquisition for RBC in the Caribbean, one that extends our reach
into many important markets, notably Trinidad and Tobago, Jamaica
and the Dutch Caribbean,” said Peter Armenio, RBC’s head of US and
International Banking.
For TD, the US has been a key market for the past five years. It
bought control of Bank-north in 2002 and rebranded it TD Banknorth
(the Canadian group says, in contrast, it will keep the well-known
Commerce Bank brand). Since then, TD Banknorth has itself purchased
New Jersey’s Interchange Financial Services for $480.6 million and
Hudson United Bank for $1.9 billion.
Last October, BMO Financial Group (BMO), Canada’s fourth-largest
banking group by assets, purchased Indiana-based First National
Bank & Trust for $290 million. The deal was the group’s 13th US
acquisition over the past 20 years (see table
above).
Speaking at a bank conference on 11 September, Bill Downe, CEO of
BMO, stated that his bank is now focusing on branch-based customer
service in its core US retail banking businesses, echoing reasons
given by TD Bank for pouncing on Commerce Bank. “Our branch network
is key to our strategy. We will concentrate our investment spending
on our branch network in high growth areas… We’ve put new tools
in the hands of our bankers, which are returning at least 40
minutes per day to bankers on the front line,” he said.
He added that BMO’s emphasis on branch-originated sales is paying
off in its cards business. Year-to-date, BMO has benefited from a
40 percent rise in new cardholders while the number of applications
coming from branches has increased by 118 percent. “In our mortgage
business, we are hiring more [in-branch] mortgage specialists. We
expect to increase volumes and regain lost share – but with a much
higher margin.”
