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In the U.S. market, TD brands itself as “America’s most convenient bank.”
In the wake of Thursday’s failed takeover of First Horizon Corp. FHN-N, TD TD-T can also claim the title of America’s best capitalized bank. Terminating the US$13.4-billion purchase boosts Toronto-Dominion Bank’s reserves to industry highs, with $20-billion of extra capital. With the sector in turmoil, boasting the fattest wallet can only be a good thing.
The downside of the busted deal for Memphis-based First Horizon is TD now qualifies as America’s least credible bank. Chief executive officer Bharat Masrani couldn’t close a signature transaction, because of opposition from U.S. regulators.
That’s a bad look for a Canadian bank with expansion plans based in part on gobbling up U.S. regional banks. In a report on Thursday, analyst Darko Mihelic at RBC Capital Markets said: “TD’s future ability to close U.S. deals may be in doubt and TD’s credibility as an acquirer has been dealt a blow.”
For years, TD enjoyed a premium valuation among Canadian banks. The glow was based on the growth potential of an Eastern U.S. retail network made up of 10 million customers at what TD calls 1,100 “stores,” rather than branches. Failing to close the First Horizon deal, despite 14 months of lobbying regulators, brings that premium into question.
Confidentiality agreements prevented TD from explaining just where things fell apart. The political landscape shifted after the deal was announced, with U.S. President Joe Biden and Senator Elizabeth Warren coming out against big business mergers, on competition concerns. However, Bank of Montreal did manage to close a transformative acquisition, buying California-based Bank of the West just a few months ago.
Throughout the approval process, TD executives had a consistent line: U.S. regulators never said “no” to the takeover, they simply said “not yet.” TD and First Horizon eventually got tired of waiting.
On Thursday, Mr. Masrani sent an e-mail to employees explaining that while he was “disappointed” with the death of the deal, “given the continued uncertainty on the timing of regulatory approvals, we are confident this is the right decision.” The bank also told investors, in an e-mail, the regulatory issues are “not in any way related to TD’s good faith dealings with our customers.”
The challenge facing Mr. Masrani, eight years into his run as CEO, is how to regain the stock market lustre that comes with consistently increasing profits, if growth through acquisition is off the table.
TD will try to win U.S. customers from far weaker regional banks by aggressively pricing savings, credit and wealth management products. The Canadian bank can also make bolt-on acquisitions, acquiring lines of business or loan books from U.S. rivals that are currently scrambling to raise capital. However, these slow-and steady approaches will disappoint investors who were promised a transformational transaction in Tennessee.
Finding another First Horizon-sized opportunity will be difficult for Mr. Masrani, even if regulators allow TD to wheel and deal.
The recent decline in regional bank valuations, driven by rising interest rates, means most boards would be reluctant sellers, unless pushed into a shotgun marriage similar to last weekend’s sale of California-based First Republic Bank to JP Morgan Chase & Co. Analysts estimate it will take 12 to 18 months for rate increases and an economic slowdown to work their way through the banking system. Until that happens, and there’s stability in bank valuations, the door is closed to M&A.
TD, which built its U.S. franchise on a series of takeovers, is now back to playing a waiting game. For Mr. Masrani, aged 67, buying and integrating First Horizon would have marked the fitting end to a illustrious career, as he ran the bank’s U.S. operation prior to becoming CEO.
The next stage of TD’s growth, the next big deal, likely falls to Mr. Masrani’s successor. There are at least four strong candidates for the top job, running the bank’s U.S. and Canadian divisions. With a First Horizon takeover now off the table, a new generation of leaders will inherit the task of expanding America’s most convenient bank.
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