Just Over The Horizon: North American Banks

A few rule changes could bring a wave of cross-border mergers

The Americans are coming! That specter is being invoked by the chiefs of two of Canada's largest banks--Royal Bank of Canada and Bank of Montreal--to drum up support for their plan to form the second-biggest bank in North America.

Expansion-happy Yanks are raiding lucrative niches in Canada such as corporate finance and credit cards, they say. And a full-scale invasion by bankers from the south--with U.S.-dominated continentwide banking hard on its heels--may be just a few government rule changes away. Canada is beset by "a swelling tide of new entrants," warns Matthew W. Barrett, Bank of Montreal's chief executive.

But the trend is going both ways: Canadian bankers are looking south for growth. Indeed, driven partly by liberalized banking laws in Canada and the North American Free Trade Agreement, bankers from both countries are moving toward full-scale, continentwide banks. At least in some areas of banking "integration will happen--and happen quickly," says Larry Wynant, a finance professor at Richard Ivey School of Business at the University of Western Ontario. The big question: Will NAFTA-wide superbanks bring lower costs, speedier service, and simplified trade? Or will they be lumbering giants, using market power to gouge or neglect?

ON THE MARCH. While it's unclear who will be leading the superbanks, for now the Canadians are doing most of the pushing. For years, Canadian bankers have built extensive operations in the U.S. and Mexico. With their proposed merger, announced on Jan. 23, Royal Bank and Bank of Montreal would form a $312 billion NAFTA-wide superbank second only to the $366 billion Chase Manhattan Corp. It would operate throughout the Midwest and Florida through Chicago's $22 billion Harris Bankcorp Inc., which Bank of Montreal has owned since 1984. And the new megabank would stretch into Mexico through Bank of Montreal's 20% voting interest in the $27.5 billion Grupo Financiero Bancomer, the biggest retail bank in Mexico.

The merged bank would hardly be alone in its continental reach. Canadians have been on the march in the U.S., plucking off plums in corporate finance and securities. Last July, the country's No.2 bank, $166 billion Canadian Imperial Bank of Commerce (CIBC), acquired Oppenheimer & Co., the $780 million-a-year U.S. securities outfit, for $525 million. On Wall Street, rumors are flying that CIBC and Mellon Bank Corp.--which have worked together in a joint-venture back-office operation--may be talking about a full-scale merger. Both decline comment.

The Canadian interest in the U.S. is easy to understand. With 29 million people, Canada is just over one-tenth the size of the U.S. market, and despite recent surges in gross domestic product, it is fairly slow-growing. Highly concentrated, Canadian bankers find little room to grow at home. What's more, behind a wall of protectionism, Canada's banks have already consolidated. Six nationwide giants dominate a market commonly regarded as heavily overbanked. So, with no legal bars to foreign ownership, the U.S. has become a magnet for growth-minded Canadians. "The Canadian economy is not large enough to generate the kind of returns for the banking industry that the major shareholders are going to expect over time," says Joel P. Friedman, a managing partner at Andersen Consulting.

U.S. bankers looking north also see opportunities. The cozy Canadian banking oligopoly has left underserved niches ripe for innovators. In December, MBNA Corp., the Wilmington (Del.) credit-card giant, began marketing its affinity-group cards--emblazoned with hockey-team logos or images from such groups as Ducks Unlimited Canada, a hunters' organization--through a bank it opened in Ottawa. And in late September, Wells Fargo & Co., the expansion-minded San Francisco bank, began lending to Canadian small businesses through its highly automated telemarketing operations. "There is a real business opportunity in Canada, or we wouldn't be doing it," says Michael R. James, a Wells Fargo executive vice-president. Citicorp, among other big-name banks, has offices in Montreal, Toronto, Calgary, and Vancouver. "If you're building an international bank, you need to be in key trading markets. Canada is one," says Alfred P. Buhler, chief of Bank of America Canada since 1991.

OFFSHOOTS. The American entrants, most of which boast just a few billion dollars apiece in Canadian assets, may be in for major growth in the coming year. The government of Jean Chretien is expected to introduce legislation that will permit outsiders to operate their Canadian units as branches of the American parent, eliminating the need for separately capitalized subsidiaries. Longer range, a government task force on banking reform is to report this September on such proposed changes as dropping a rule that effectively bars foreign buyers.

Meanwhile, bank experts, the World Trade Organization, and several big banks, including the Bank of Montreal, now urge scrapping the rule and opening the way to foreign purchases. Otherwise, warns former task force Chairman James C. Baillie, Canadian banks may be denied the chance "to participate fully in the globalization and consolidation" of banking. If barriers crumble, the first targets could be Canadian banks, whose price-earnings ratios average a point or two lower than U.S. banks'.

One way or another, continentwide banking is becoming a reality. Yet while Canadians are leading the way, it's far from clear that they will continue to do so. Bank of Montreal chief Barrett has told newspaper editors in Toronto that Royal and his bank together will "kick ass" in the U.S. They vow that their merger will help Canada bolster its position in world finance, which has been eroded by giant mergers in other countries. But if American bankers' northward path is cleared, they may respond to the challenges by taking even bigger steps into Canada.

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