Rocky road for bank stocks
Canadian banks looking to expand in the U.S. through acquisitions are facing increased scrutiny from regulators and politicians along with renewed attention on past disputes.
Both TD Bank and BMO are working to close big deals there, TD with a US$13.4 billion deal for southeastern U.S.-focused First Horizon and BMO with a US$16.3 billion deal for California-based Bank of the West.
The Canadian banking industry’s general push south for growth comes after U.S. President Joe Biden issued a broad executive order last year calling for increased economic competition, including through the “revitalization” of merger oversight in the banking industry.
BMO and TD Bank each face public meetings on their proposed deals, a step that’s not required by regulators but that the U.S. Office of the Comptroller of the Currency announced in May will apply to these deals. It also extended the public comment period for both deals.
The public hearings came after a speech by OCC acting head Michael Hsu saying "the time is ripe to rethink the frameworks used to analyze bank merger applications."
While there’s little to suggest the changing regulatory climate prevent the deals from going through, the shift risks creating delays and has increased the attention on those trying to make them, as well as providing fodder for politicians who have been critical of the industry.
Earlier this month U.S. Sen. Elizabeth Warren sent a letter to the OCC, the key banking regulator, asking it to "block any merger until TD Bank is held responsible for its abusive practices."
The letter stems from a report last month by investigative media outlet Capital Forum that alleged a government investigation in 2017 had found “problematic account practices stretched across retail branches from Maine to Florida” at TD, including a points system that rewarded employees for enrolling customers in new accounts and services like overdraft protection without their permission.
Warren said the alleged practices, which she called “rampant fraud and abuse,” drew parallels to the account scandal at Wells Fargo, where the bank created millions of fraudulent accounts without customer consent. The high-profile case led to charges against the former CEO and a $3 billion settlement with federal agencies in 2020.
TD has strongly pushed back against the claims in the investigative piece.
"The allegations in the Capitol Forum article are completely unfounded. It's unfortunate that they chose to run a factually incorrect story," said spokeswoman Elizabeth Goldenshtein by email.
"Our business is built on a foundation of ethics, integrity, and trust, and our compensation practices — which place a heavy emphasis on customer satisfaction — are carefully and actively managed."
She said the bank continues to advance its work to secure approval for the First Horizon deal.
Nonetheless, the attention was enough to raise doubts about the deal for National Bank analyst Gabriel Dechaine, who said in a note to clients that the letter from Warren and three members of Congress could cause TD's acquisition to be blocked.
He said the wider attention the letter is calling for, including asking the regulator to "closely examine any ongoing wrongdoing" at TD, might be a bigger risk to the bank.
"Whether or not the acquisition of [First Horizon] is approved could prove to be a secondary issue. Any time a bank’s sales practices in the U.S. are being compared to Wells Fargo’s (which is what Sen. Warren’s letter is doing) is not a good time."
He noted that TD has already faced reprimands for similar sales practices in the U.S. after the bank was fined US$122 million in 2020 by the Consumer Financial Protection Bureau for “unlawful overdraft enrolment.”
TD, along with many U.S. banks, have since significantly reduced or done away with overdraft fees under pressure from U.S. regulators as part of wider banking reforms.
The more intense regulatory pressure also played a part in Dechaine downgrading both TD and BMO in March as he said he expects both U.S. deals to close later than the banks are projecting based on “regulatory approval uncertainty.”
The more intense process has already created delays for other banks. Just last month Tokyo-based Mitsubishi UFJ Financial Group, Inc. said that a longer-than-expected regulatory approval process had pushed back the expected closing date of the US$8 billion sale of its subsidiary to U.S. Bancorp.
BMO’s deal has not drawn the kind of attention that TD is facing, though there has been commentary in U.S. media that the US$1.9 billion lawsuit the bank is facing in Minnesota related to a Ponzi scheme could complicate proceedings.
St. Louis-based banking analyst James Shanahan said there is certainly a different regulatory climate at the moment.
“There's more scrutiny. That is for sure,” said the Edwards Jones senior analyst.
“With Biden's executive order and the Democrats in control of the House and Senate, we've observed some greater scrutiny of M&A activity, broadly, but perhaps particularly in the financial services arena.”
He said, however, that TD and BMO’s deals aren’t the kind of deal that the Democrats are particularly concerned about, since they don’t seem to raise major antitrust issues or pose significant job losses.
Shanahan said it’s very reasonable for the deals to close by the end of the year as expected, but that they could certainly be pushed back.