With Laurentian Bank reportedly up for sale, is a wave of consolidation on the way?
Laurentian Bank’s announcement last week of a review of strategic options sparked speculation that the bank, Canada’s ninth largest, could be gearing up for a possible imminent sale.
That would mark the latest in a round of consolidations in the banking space, with RBC having agreed a multibillion-dollar purchase of HSBC’s Canadian assets and Smith Financial inking a deal to acquire Home Capital, parent company of Home Trust.
South of the border, the high-profile collapses of Silicon Valley Bank (SVB) and Signature Bank sent chills through the financial system and raised expectations of a spate of bank mergers as a result of the growing turmoil.
Still, it’s important to recognize that this is far from an SVB-type scenario – and that Canada’s banking system is very different to that of the US, according to the Canadian managing director of an international consulting and business advisory firm.
Shilpa Mishra (pictured top) of BDO Canada told Canadian Mortgage Professional that with Canada’s banking space dominated by its five largest players, opportunities for inorganic growth in a saturated market were inevitable – and what’s more, those institutions operate in an environment that’s intensely scrutinized by regulators.
“The Canadian banks are very, very highly regulated,” she explained. “The large five Canadian banks [also] have a very large and very diversified customer base. SVB did not, and potentially Laurentian – being a smaller bank – probably does not either. So that problem does not exist in our banking sector.
“Also, Canadian banks have to comply with Basel III standards. As a result, a bank has to maintain capital and liquidity buffers that help to withstand any kind of economic downturn or an episode of market stress.”
Why a U.S. commercial financing company is a key to the sale of Laurentian Bank https://t.co/qgDLxSTZD4
— The Globe and Mail (@globeandmail) July 17, 2023
How would the Canadian banking system fare in an economic downturn?
The Bank of Canada sounded a cautiously upbeat tone on the ability of Canadian banks to weather a severe recession in its latest Financial System Review, referencing those Basel III standards as a strong bulwark against potential economic meltdown.
“Previous work from Bank staff shows that, in a stress-test scenario with a severe recession, the capital position of major Canadian banks would be weakened but would not breach minimum requirements,” the central bank said.
Mishra noted that in a sector dominated by the large five banks, smaller entities like Laurentian may have faced challenges in the current volatile economic climate, and said further acquisitions of those players by the banking giants might be expected to continue.
“Smaller banks have a less diversified customer base, so I do think there’s going to be a wave of consolidation in the Canadian banking sector,” she said.
“I think it’s too early to say, but… [for] the large banks, it’s a very saturated market, so any opportunity for growth would be welcomed. I think our sector is stable and the banks are well capitalized – and Laurentian’s size is the challenge.”
What’s next for the Canadian economy?
While many observers expected Canada to have fallen into a recession by this stage, its economy has proven surprisingly resilient in the face of headwinds, and Mishra said a recovery could be expected to transpire by early- to mid-2024 – providing businesses retain access to capital and continue to focus on the fundamentals.
That’s in spite of a rising-interest-rate environment that most recently saw the Bank of Canada hike its benchmark rate by 25 basis points last Wednesday, although inflation is also ticking steadily downwards.
“If you take a look at the mid-market businesses… they’re continuing to perform very well. They still have cash, and good strong balance sheets,” she said. “Looking forward, in terms of what we’re telling our clients, large corporate and mid-market businesses need to focus on liquidity.
“They need to focus on cash flow, forecasting, they need to demonstrate strong balance sheets… and businesses have to continually now manage the risks related to cash management and conduct risk assessment.
“But overall, the way the market economy continues [with] consumer spending going well and mid-market businesses continuing to perform… a recovery is probably likely sometime in the spring or summer of next year.”
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