Analysis-TD’s $13 billion M&A swoop expands US footprint but raises cost and integration concerns

FILE PHOTO: The Toronto Dominion (TD) bank logo is seen on a building in Toronto
FILE PHOTO: The Toronto Dominion (TD) bank logo is seen on a building in Toronto, Ontario, Canada March 16, 2017. REUTERS/Chris Helgren/

March 4, 2022

By Nikolaus Saminather

TORONTO (Reuters) – TD Bank’s proposed $13.4 billion purchase of First Horizon Corp would give it access to one of the fastest-growing regions in the United States, but some investors have expressed concerns about the timing of the transaction and the higher costs of the target company.

TD’s largest-ever acquisition, which would make it the sixth-largest US lender by assets, found support from investors for the constructive use of its excess capital of CA$22 billion (US$17.4 billion), the highest among the Canadian banks.

But First Horizon’s high overall cost compared to peers, TD’s low level of lending in the United States and a tighter regulatory environment could pose risks, analysts and investors said.

TD shares are down over 6% since the deal was announced on Monday, a decline compounded by Thursday’s first-quarter earnings that beat estimates but were rated below other major Canadian lenders.

The Canadian banking index lost 1.7% during this period.

Investors noted that First Horizon had just completed the integration of fellow Southeast American lender Iberiabank Corp, with which it merged in 2020.

“You buy a bank that just went through one integration and you do another,” said Steve Belisle of Manulife Investment Management. “It seems like it was done very quickly… it may cause some disruption.”

While TD has been wary of deals, it was “under pressure to go out and buy,” said Avenue Investment Management’s Bryden Teich, after it missed another US deal with Bank of Montreal in December.

Teich also expressed concern about First Horizon’s recent merger, citing a commercial real estate loan book that nearly tripled between 2019 and 2020 and a nearly doubled volume of consumer real estate loans. Despite this, First Horizon’s loan book size remains less than one-tenth of TD’s total.

“First Horizon is an extremely well-managed premier regional bank with a strong presence in highly attractive markets in the US Southeast,” TD said in a statement. “We have a proven track record of successful integrations and we strongly believe that this will also apply to this transaction.”


First Horizon also has higher spend than its typical rivals, making it a questionable fit for TD, Christopher Whalen of Whalen Global Advisors said in a research note on Thursday.

First Horizon’s spend excluding one-time items as a percentage of revenue — the efficiency ratio — was 63.3% in the fourth quarter and nearly 71% overall. According to a report by a US regulatory body, it was 59% in the comparison group. TD’s U.S. spending accounted for 57% of its revenue, its first-quarter results showed.

The majority of First Horizon’s loans are tied to short-term interest rates, which will increase interest income and lower the efficiency ratio if interest rates rise, the bank’s head of investor relations, Ellen Taylor, told Reuters.

Whalen also said that TD’s lending in the United States is underwhelming. TD’s U.S. lending accounted for less than a third of its total assets there, compared to a peer average of 59%, with most of the rest in debt, according to a regulatory report

“What’s the point of (TD CEO Bharat) Masrani buying more retail deposits if the TD bankers can’t fill the existing balance sheet with quality loans?” Walen asked.

TD could also face regulatory challenges after US President Joe Biden tightened rules on mergers and acquisitions in July, and delays in filling a senior position at a key regulator, said James Shanahan, an analyst at Edward Jones.

But TD’s assurances that it will retain First Horizon’s sites, invest in employee retention and make an additional payment to the target company’s shareholders if the deal is delayed would meet with regulators’ approval, Anthony Visano said , portfolio manager of Kingwest & Co.

“We have a very good relationship with the regulator,” Kelvin Tran, TD’s chief financial officer, said in an interview. “The regulator has to go through their process.”

($1 = 1.2668 Canadian Dollars)

(Reporting by Nichola Saminather; Additional reporting by Jonathan Stamp; Editing by Richard Pullin) Analysis-TD’s $13 billion M&A swoop expands US footprint but raises cost and integration concerns

Caroline Bleakley

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