Southbound?

Consequently, the Big Five banks are stockpiling excess capital–collectively more than $10.5 billion–but because this capital is not being deployed, it is not generating returns for bank shareholders. The banks are also hesitant to give the money back to shareholders through large dividend increases. So while the government continues to drag its feet on the merger question, investors are getting impatient.

If Canadian mergers are put on hold, says the executive, who requested anonymity, then at least some of the banks will move quickly to the U.S. market, because Canadian bank share valuations are equal or superior to those of their U.S. counterparts for the first time in many years.

"Their stock prices have moved up to the point where they can look at U.S. acquisitions without them being dilutive to current shareholders," he says. "It's caused U.S. acquisitions to be looked at in a much more favorable light. Everybody laughed when Bank of Montreal bought Harris Bank; they said they overpaid. But today others would kill to buy Harris at that valuation."

Investment advisors at brokerages that end up being acquired by a Canadian or other foreign bank apparently have little to fear. RBC's Moorcroft says any time it adds another firm underneath its umbrella, it offers incentives for the newly-acquired employees to stay.

"When you buy a firm, you put in retention bonuses for usually all of the brokers. That's true within the market or cross-market. The disruption of being bought by somebody else can lead brokers to say, 'I'll leave and go somewhere else.' If they get a retention bonus, the hope is they'll stay long enough to like what's going on," Moorcroft says.

O'Neill says the financial incentives for investment advisors working for companies that are bought out will be better in the next year or two than they would have been during the recent three-year bear market.

"You want to retain the high-quality talent. Often the most important asset you have isn't the equipment but the brains working that equipment. You want to make sure if you're buying human resources they're going to stick around after you make the purchase. The last thing you want is to have them leave, then you haven't got what you paid for," he says.

Sooner Rather Than Later

Colin Litton, a partner in KPMG's financial services practice in Toronto, says there is some urgency to gain scale for Canadian banks because they have fallen behind in terms of scale with many of their global competitors since their initial merger plans fell through. "Some of the Canadian banks were among the biggest in the world at one stage; Royal Bank was once in the top 10. Since then, there's been consolidation all over the world and that's made it a difficult challenge to keep up," he says.

Litton, however, thinks all the recent merger activity in the U.S. has raised the cost of future acquisitions. "As a consequence, it's increasingly difficult for these investments to be financial successes. The challenge of the moment is finding opportunities for expansion in the U.S. in a very competitive environment where prices are high," he says. "But we're talking about some very confident, well-established organizations with very creative management, so maybe there is a way (for the Canadian banks)."

Anybody who doubts whether Canadian banks will head to the U.S. for growth if their domestic merger plans are quashed need only look at what transpired after the events of 1998.

Since then, RBC has spent more than $6 billion to gain significant footholds in the U.S. brokerage, banking, and insurance fields. Its key acquisitions include Minneapolis-based brokerage Dain Rauscher and Tucker Anthony Sutro in Boston. Combined under the RBC Dain Rauscher banner, they are the eighth-largest full-service retail brokerage in the country, with 1,750 investment advisors and more than $100 billion in assets under management.

It also acquired North Carolina-based Centura Bank, now known as RBC Centura with 242 retail branches, as well as Admiralty Bank Corp., Eagle Bancshares, and the Florida branch network of Provident Financial Group. It also bought Prism Financial Corp. and Sterling Capital Mortgage and merged them to create RBC Mortgage, a national firm doing mortgage originations.

Three of the other Big Five Canadian banks have been active as well. Bank of Montreal bought Harris Bank, TD has become one of the dominant players on the discount side with TD Waterhouse, and CIBC has a significant investment banking presence with CIBC World Markets. Only Scotiabank has failed to make headway in the U.S. so far.

Capgemini's Battista says he is absolutely convinced Canada's banks will be given the go-ahead to merge because the global consolidation trend can't be fought forever.

But that trend might also present some opportunities for U.S. and other foreign players in the Great White North. He says that at the same time the Canadian banks are permitted to merge, he expects regulatory changes will be enacted that will enable foreign banks to increase their ownership stakes in the Big Five or have more viable operations in Canada.

It is also possible that U.S. banks will have further opportunities in Canada if the federal government's merger guidelines mandate that Canadian banks divest certain parts of their operations, such as their full-service brokerages, before the mergers will receive government approval.

Geoff Kirbyson is a business reporter at the Winnipeg Free Press in Winnipeg, Manitoba, and a frequent freelance writer covering the financial services beat on both sides of the 49th parallel. He can be reached at [email protected].