Aug. 19 (Bloomberg) -- Canadian banks are starting to gain from the U.S. banks' pain.

Lenders including Bank of Nova Scotia and Toronto-Dominion Bank spent a record $10 billion on U.S.-owned assets over the last year. Royal Bank of Canada and Bank of Montreal may also continue shopping, according to CIBC World Markets analyst Darko Mihelic, with potential targets including Regions Financial Corp. and Huntington Bancshares Inc.

Canada's bankers are poised for acquisitions after tighter lending rules limited their subprime losses and debt writedowns to C$10 billion ($9.4 billion) since the start of 2007, compared with $243 billion by U.S. banks. That left the Canadians with plenty of cash to buy U.S. banks, whose stocks are down an average 42 percent in 12 months, and any units they put up for sale to raise capital, including mutual funds and brokerages.

``There aren't five banks in the world that look as strong as we are right now, so it's not like there's a plethora of banks fighting it out to do these deals,'' said Toronto-Dominion Chief Executive Officer Edmund Clark.

Their buying power has been increased by Canada's strong currency, which has appreciated 5.8 percent against the U.S. dollar in the last two years.

Toronto-Dominion, based in Toronto, spent about $7.1 billion in March for Commerce Bancorp Inc., New Jersey's biggest locally based lender, setting a record for foreign bank purchases by Canadian companies. Scotiabank, also based in Toronto, is acquiring the Canadian unit of E*Trade Financial Corp. for $442 million and has said it may buy more U.S. assets.

Pummeled Banks

Canadian lenders, which begin reporting fiscal third-quarter results on Aug. 26, are expected to post an average profit decline of 12 percent, according to Dundee Securities Corp. analyst John Aiken. By comparison, Washington Mutual Inc., the biggest U.S. savings and loan, reported a $3.3 billion loss. Bank of America Corp., the biggest consumer lender, dropped 41 percent.

One reason for the gap is that Canadian subprime holdings amount to less than 5 percent of mortgages, compared with 20 percent in the U.S., according to the Canadian Association of Accredited Mortgage Professionals. Subprime loans are made to customers with weak credit, and defaults are at record highs.

``U.S. banks have been pummeled and the fragile state of real estate and the economy could mean significantly more pain for some of the regional banks,'' Mihelic said. ``Anything out there is open game.''

Takeovers

Royal Bank, with a market value of about C$62 billion, could absorb an acquisition of as much as C$16 billion, and Bank of Montreal could handle a takeover worth up to C$5 billion, Mihelic said. Both are based in Toronto.

Royal Bank targets may include Regions Financial, the biggest bank based in Alabama, and BB&T Corp. in North Carolina, while Bank of Montreal could pursue firms such as Green Bay-based Associated Banc-Corp. and Huntington Bancshares Inc. of Columbus, Ohio, Mihelic said. Any of these targets would represent record takeovers for the two Canadian banks.

``We'll continue to look for ways to grow our businesses either organically or through acquisitions, not just in the U.S. but internationally,'' Royal Bank CEO Gordon Nixon said in a July 30 e-mailed comment.

Regions Financial spokesman Tim Deighton and Huntington spokeswoman Jeri Grier declined comment. BB&T's A.C. McGraw said the bank is ``as committed today as we ever were at remaining independent.'' Janet Ford of Associated Banc-Corp. didn't return calls seeking comment.

Consolidation

Bank of Montreal CEO William Downe said that consolidation among U.S. lenders could result in ``good fits'' for its Chicago- based Harris consumer bank.

``We continue to believe that there will be more opportunities for consolidation in the U.S.,'' Downe, 56, said in a July 29 e-mailed comment. ``Realistically, they likely will not begin to develop until later this year and into 2009.''

Toronto-Dominion has money for more takeovers, even after buying Cherry Hill, New Jersey-based Commerce Bancorp, which doubled its U.S. consumer-bank operations, Clark said.

``We're going to be patient here,'' Clark told reporters in June. ``The U.S. market is continuing to deteriorate.''

Bank of Nova Scotia, the third-biggest lender, may look for more money managers in North America after buying E*Trade's Canadian unit to double its online brokerage.

``When we had the opportunity, we were very excited,'' said Barbara Mason, Scotiabank's executive vice president of wealth management. The U.S. volatility ``provided us with a great opportunity here.''

Benchmarks

Canadian bank stocks have outperformed their U.S. rivals. The nine-member S&P/TSX Banks Index has fallen 9.6 percent this year, compared with a 28 percent decline for the 24-member KBW Bank Index of U.S. banks. The Canadian bank index has topped the U.S. index for seven of the last eight years.

``During the tough times, the well-positioned banks can actually seize on opportunities and those downturns in the industry can be a blessing in disguise,'' said Garey Aitken, chief investment officer of Bissett Investment Management in Calgary, which holds bank stocks. Canadian banks ``have the wherewithal to take advantage of weakness elsewhere, and on the balance that's a good thing.''

Still, Canadian banks may be ``too afraid'' to buy a U.S. regional in this environment, said Genuity Capital Markets analyst Mario Mendonca.

``You don't know how bad things are really going to get, so anything you're buying now you're really crossing your fingers and hoping it doesn't get any worse,'' Mendonca said.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Sean B. Pasternak in Toronto at spasternak@bloomberg.net.

Last Updated: August 19, 2008 11:00 EDT