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Canadian banks look abroad to grow at home

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Facing limited domestic growth options because of their inability to merge, Canadian banks are finding opportunity to build domestic market share in the troubles of capital-challenged European and U.S. banks.

Toronto-Dominion Bank (TD-T) and National Bank of Canada (NA-T) have both bought Canadian assets from foreign-based banks that are trimming down operations to boost their capital positions. And observers say more deals are likely.

"I think there's a lot of need to shed non-core assets by global banks," said Juliette John, a portfolio manager at Bissett Investment Management.

"The Canadians I think are in a very good position."

The deals announced to date are hardly blockbusters, but they are allowing domestic banks to gain market share in a sector where growth opportunities are scarce.

Canadian banking is dominated by six large lenders, who have been prevented from merging with each other since the government stopped two blockbuster deals in 1998.

Since then, most of the banks have turned to international expansion to drive growth, but all covet an increased presence in the highly profitable and economically stable Canadian market.

OPPORTUNITY

Banks in the United States and particularly Europe, however, are facing a rough economic environment and worries about sovereign debt. Their path has been made bumpier by the requirement to raise capital levels to meet tougher new regulations put in place to forestall a repeat of the financial crisis.

"When you look at the Canadian operations of these players, they're not material contributors," said Barclays Capital analyst John Aiken.

"So it's: 'Why bother with this headache when we need capital to either shore up our (capital) ratios or deploy in areas that are showing better growth?"'

TD Bank recently agreed to buy Bank of America's (BAC-N) $8.6 billion US Canadian credit card portfolio as the U.S. lender moved to rebuild its battered capital base.

And National Bank recently picked up three mortgage portfolios from banks located in Europe, Asia, and the United States.

Speaking on a conference call to discuss the bank's earnings last week, National Bank Chief Executive Louis Vachon said divestitures of Canadian assets by foreign banks was a "major trend" in Canadian banking.

MORE DEALS LIKELY

HSBC Holdings Plc, the foreign bank with the largest Canadian presence, is in talks to possibly sell its Canadian wealth management unit-seen valued at $200 million to $300 million-as part of a restructuring effort, a source said last week.

And National Bank CFO Patricia Curadeau-Grou told Reuters last week that several foreign banks still hold credit portfolios in Canada, and some are actively shopping the assets.

Continued global economic uncertainty means the pace of deals could increase.

"I think you're seeing a lot of banks taking a sober second look at some of the businesses that they've been operating in the past," said John MacKinlay, lead banking adviser at PricewaterhouseCoopers in Toronto.

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