Toronto-Dominion Bank may have caught a lucky break in the current banking turmoil centred on America’s regional banking sector.
In February 2022, TD announced the biggest takeover in its history, a planned $13.4-billion U.S. acquisition of Memphis-based regional bank First Horizon Corp.
But early this month, two prominent U.S. regional banks, Silicon Valley Bank (SVB) and Signature Bank, abruptly failed. They were victims of sudden bank runs that rendered them insolvent.
In a nutshell, many big deposit-holders at U.S. banks are fleeing to investments that, due to the past year’s sharp rise in interest rates, offer a better return than bank deposits.
Some U.S. banks also suffer a mismatch between the low interest rates on their long-term bond holdings and the higher rates they must now pay depositors.
The stunning collapse of SVB, Signature and Silvergate Capital Corp., a California crypto bank that shut its doors on March 8, has poisoned investor regard for U.S. regional banks. Their stock valuations have plummeted by 20 per cent to 40 per cent.
First Horizon is among the hardest hit. Its stock now trades nearly 40 per cent below what TD offered to pay for it.
As things stand, TD has a deal to pay $13.4 billion for a bank the market now values at just $8 billion.
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What to do?
TD has only two options. It can try to negotiate a massively reduced price for First Horizon and hope to win shareholder approval for the drastically altered deal at both banks.
Or it can walk away from the deal entirely.
That second option has enough merit to outweigh TD’s goal with First Horizon to become America’s sixth-largest bank.
TD is already one of America’s biggest banks. Adding First Horizon’s assets would not make that much difference.
And First Horizon’s depositor base has eroded by an estimated 10 per cent over the past two quarters. Which means First Horizon’s problems pre-date the current crisis.
First Horizon “is seeing deposit pressure, and at a worse rate than the industry average,” banking analyst Paul Holden of CIBC said in a recent client note.
That scenario, in which TD must first recapture First Horizon’s lost deposits before launching its growth plans for the bank, recalls Royal Bank of Canada’s futile effort in the 2000s to succeed with its purchase of Centura Bank, a fixer-upper regional bank in the Carolinas.
RBC spent a decade trying to repair Centura before shedding the albatross.
The First Horizon deal has looked shaky for months. U.S. regulators have repeatedly delayed approval of the deal, originally scheduled to close Jan. 31.
The two banks are negotiating yet another deadline after First Horizon warned this month that regulatory approval can’t be expected by the latest May 27 deadline.
With an estimated 200 U.S. regional lenders vulnerable to bank runs that could imperil them, U.S. regulators won’t be rushing to approve the TD-First Horizon deal.
Bank of Montreal, by contrast, was able to secure U.S. regulatory approval in January for its $16.3 billion purchase of San Francisco-based Bank of the West, a deal unveiled about two months before the TD-First Horizon deal was.
Investors have lately penalized both TD and BMO for their increased exposure to U.S. regional banking. Their shares are down this year by about 11 per cent and 6 per cent, respectively, while other Big Six bank stocks have seen no change or increased slightly in value.
By the time a TD-First Horizon deal is approved, the Biden administration will likely have begun rolling out stricter regulations on the regional banking sector.
How much those new regulations will constrain TD’s original growth ambitions for First Horizon is a big unknown.
On Mar. 2, Bharat Masrani, TD’s CEO, still seemed determined to get the deal done. He described the takeover to analysts as “a great transaction that offers scale and new capabilities to our U.S. franchise.”
But that was long ago, before 11 of America’s biggest banks were compelled to extend a $30-billion lifeline to another troubled regional lender, San Francisco’s First Republic Bank.
It came before top U.S. financial regulators, in an equally unusual step, created a multibillion-dollar emergency fund for troubled banks to draw on.
It came before the regional banks’ trade association, to which First Horizon belongs, started begging for two years of Federal Deposit Insurance Corp. coverage of all deposits, including uninsured ones, to halt the outflow of depositors’ funds.
And it came before the bank-run contagion migrated abroad, with the forced merger last weekend of an effectively insolvent Credit Suisse Group AG, among the world’s biggest banks, with its sole Swiss rival, UBS Group AG.
Buying First Horizon was supposed to be the capstone of Bharat Masrani’s seven-year CEO tenure at TD, a megadeal that was urged on him for years by Bay Street.
It can now be seen that Masrani was wise to hold off and now has reason to regret ultimately submitting to that pressure.
Masrani might have to settle for a legacy of pulling TD back from the brink of a big ill-fated takeover. There are worse things to be remembered for.