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TD Bank purchase of Citizens Bank would make it top 5 in U.S.
Post Date: Nov. 04, 2012

As global banks continue to shed assets in order to build capital, their Canadian counterparts have been active buyers. Bank of Nova Scotia’s recent purchase of ING Canada and Royal Bank of Canada’s acquisition of Ally Canada are recent examples domestically.

So when an asset that is even indirectly related to a Canadian bank’s expansion plans is thought to be up for sale, that bank is naturally considered a potential buyer. That appears to be what is happening with Toronto-Dominion Bank and Royal Bank of Scotland’s Citizens Bank.
RBS was hurt severely during the liquidity crisis and is now 81%-owned by the British government.
Robert Sedran, an analyst at CIBC World Markets, noted that while there does not appear to be a formal process in place, the presumption is that the U.K. government’s desire to unload its stake in RBS is driving the chatter.
During its recent third quarter replica watches swiss movement earnings conference call, RBS management noted that while the asset is still considered core to the company’s long-term future, it also acknowledged the need to build capital. In other words, all options, include divestitures, need to be considered.
Despite the challenges associated with a deal, Mr. Sedran considers TD one of the natural buyers for Citizens Bank if and when it becomes available.
“In fact, combining the branch networks and deposit shares confirms the reasonably higher degree of overlay,” he told clients. “Even after all the transactions it has completed in the United States, we would still view this as transformational, as it would vault the bank into a legitimate top five position in terms of deposit market share in the United States, despite not having a national footprint.”
The analyst noted that moving from a solid competitive position to one of dominance in many markets would transform TD is a way organic growth could not.
Citizens Bank has 1,411 branches across 12 states and is the 12th-largest U.S. bank by deposit share. As of the end of the second quarter of 2012, it had US$129-billion in assets, including US$88-billion in loans.
While the integration risks would be significant and could derail the momentum TD’s platform has already been showing, the biggest hurdle for  this acquisition would likely be the price tag. Media reports peg the value of Citizens Bank at between US$12-billion and US$16-billion.
“The financing alone could be a deal breaker, absent some level of creativity,” Mr. Sedran said, suggesting a separately-traded U.S. subsidiary could be spun off to allow the bank to more effectively tap the U.S. market for equity.
He also said TD’s roughly US$4-billion stake in TD Ameritrade Holding Corp. could be considered a source of capital, although there has been no indication that TD is not very committed to this business.
So while overcoming the sheer size of the deal is one step in the process, making the deal palatable to new and existing shareholders is another.
“Even if TD can scrape together enough loose change under the cushions of those green lounge chairs to pay the many billions, the word ‘accretion’ will have to be a big part of the rationale for the deal,” Mr. Sedran said. “In other words, an EPS-neutral deal would not be good enough.”
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