Canadian banks are eyeing acquisitions to bulk up U.S. retail operations, bucking a trend of foreign lenders leaving the market.

Toronto-Dominion Bank, Canada's largest bank, would "absolutely" consider potential U.S. deals, Gregory Braca, its head of U.S. retail banking, said at an investor conference last month. Bank of Montreal is similarly "very interested" in M&A, CEO William White said in September.

The two Canadian banks' U.S. retail ambitions stand in sharp contrast to other foreign lenders, including HSBC Holdings PLC and Mitsubishi UFJ Financial Group Inc., which have exited the market amid regulatory challenges and strategic pressures to either boost scale or bow out. By contrast, the Canadians already have large networks to build on, as well as ample capital, robust valuation premiums and U.S. experience that will help them lean into an economy 10 times the size of their domestic base.

"The opportunity, which is right next door, is too huge to ignore," Ebrahim Poonawala, an analyst at Bank of America, said in an interview.

Canadian lenders have already been active in the U.S. market, and some are eyeing U.S. acquisitions as they wait out restrictions on shareholder capital distributions that Canadian regulators imposed during the COVID-19 pandemic. Among deals involving foreign entities, with values of at least $500 million or involving targets with at least $1 billion of assets, Canadians were the acquirers in five of the last 20 transactions.

TD Bank would now be interested in deals to help boost its operations in the southeast, Braca said in September. The bank would be interested "if the right deal came along for the right reason" in markets it currently serves or in neighboring areas, he said.

The scale that the bank built through previous acquisitions, and the backing of a large Canadian parent, means it is not under the same kind of pressures to add heft and remain strategically viable that have driven much of the recent bank M&A activity in the U.S., he said.

In June, BMO's White pledged to be careful not to pay too much. "You see a track record for us that is North America first, U.S. probable, but discipline, nonnegotiable," he said.

Strategic retreat

While the Canadian banks look for opportunities in the U.S. retail banking market, other foreign banks are stepping back. Mitsubishi UFJ agreed in September to sell most of MUFG Union Bank NA to U.S. Bancorp, saying the new owner would be better equipped to cope with the unit's need for technology and scale. In another deal involving roughly $100 billion of assets, Spain's Banco Bilbao Vizcaya Argentaria SA agreed in November 2020 to sell BBVA USA Bancshares Inc. to PNC Financial Services Group Inc.

The share of U.S. banking assets controlled by foreign banks, including their direct branches in the country, had already fallen to 17.5% in the first quarter of 2021 from 21.8% in 2007, just before the global financial crisis, according to Fed data. The Union Bank and BBVA USA sales would further reduce the first-quarter total of assets held by foreign banks by 13.2%, to $1.372 trillion, with U.S. branches and agencies of foreign banks holding another $2.646 trillion.

"We've seen this gradual — but very real — trend away from foreign banks operating retail businesses in the U.S.,” said Jeremy Kress, assistant professor of business law at the University of Michigan Ross School of Business and a former Federal Reserve lawyer. Foreign banks, he said, "are just retrenching into their home countries to bolster their balance sheets and to shore up where they're strongest."

Tighter Fed regulations in the years since the crisis have also made the U.S. less appealing to foreign banks, especially a rule that requires foreign banks with $50 billion or more of assets outside of direct branches in the U.S. to consolidate those operations under an intermediate holding company. The move brought non-traditional bank businesses, including investment banking, under stricter regulation, and made large operations under the structure less attractive by pressuring foreign-owned U.S. holding companies to retain more capital, Kress said.

Foreign banks remain a huge presence in the U.S. bank market despite the retreat, and banks like Mitsubishi UFJ say the sales will free them to focus on other businesses in the U.S., such as corporate and investment banking. Mitsubishi UFJ had roughly $325 billion of total assets in the country as of June 30: $165.3 billion from its U.S.-insured subsidiary and the rest from uninsured branches.

Others that have backed away from parts of their business in the U.S. have also emphasized opportunities that remain from them in the country. Bank Leumi Le-Israel Corp. couched its agreement to sell Bank Leumi USA in a mostly stock deal that will give it a stronger foothold in the U.S. through a 14% stake in Valley National Bancorp. The Israeli bank expects to feed customers to the combined operation and buy participations in large loans that Valley originates.

HSBC's sale of its retail operations in the U.S., in two transactions, encompassed only a fraction of a $245.44 billion-asset operation in the country that is heavily weighted toward providing dollar funding, investment banking and trading to multinational clients.

Moreover, Kress said that focusing on the retail exits also obscures another dynamic he described in a paper in 2020, in which he argued that foreign banks have broadly shifted U.S. assets to direct branches to escape oversight that comes with the intermediate holding company structure.

"This is a case of regulatory arbitrage, where foreign banks are learning that it is much cheaper to operate through U.S. branches than it is to operate through U.S. subsidiaries," he said.

Southern exposure

Canadian banks are not the only ones expanding their U.S. operations. Banco Santander SA, whose U.S. commercial banking business operates a network of more than 500 branches in the mid-Atlantic and Northeast, agreed to acquire a fixed-income broker/dealer for about $600 million in July, and is seeking to buy the roughly 20% of its U.S. auto loan subsidiary, Santander Consumer USA Holdings Inc., that it does not already own.

Still, the Canadian banks are a unique force in the U.S., and their success in the market and familiarity with the regulatory framework gives them an edge in making deals, Poonawala said. TD Bank has more than $550 billion of assets in the U.S. including its direct branches, while Bank of Montreal has more than $250 billion.

Some foreign banks have opted to retreat from the U.S. after facing key questions about what they stand for, what their brand represents, and how they can compete with U.S. giants like Bank of America Corp., said Jeffrey Marsico, president at the bank advisory firm Kafafian Group.

In contrast, he said, "The Canadian banks seem to have it figured out."