Nobody on Bay Street was shocked this summer when Burgundy Asset Management Ltd. and Guardian Capital Group Ltd. GCG-A-T agreed to friendly takeovers.
What surprised the finance crowd is that Toronto-Dominion Bank TD-T didn’t step up as the buyer of either money manager.
Bank of Montreal BMO-T snapped up Burgundy and the $27-billion it oversees for some of the country’s wealthiest families, while Desjardins Group doubled the size of its wealth management platform by purchasing Guardian’s $164-billion of institutional assets.
TD would have been a natural buyer of Burgundy and Guardian for a variety of reasons, all of which make the country’s second-largest bank the most likely candidate to buy an asset manager in the not-too-distant future.
For newly-named TD chief executive Ray Chun, who will host his first investor day as CEO at the end of September, expanding the bank’s wealth management platform is a surefire way to win back shareholders who fear TD has lost its mojo.
Last October, TD’s well-documented problems with money laundering in its New York branches resulted in regulators putting an asset cap on its U.S. retail division. The penalty killed TD’s proven expansion strategy: acquiring regional U.S. banks.
At TD’s investor day, Mr. Chun needs to articulate a new growth plan. He needs to walk a fine line between what’s achievable and what’s aspirational. Buying a money manager ticks both boxes.
In Canadian banking, management mojo comes from the elusive ability to squeeze more profits from a mature sector. Look at Royal Bank of Canada boss Dave McKay. He’s got serious mojo after buying HSBC’s Canadian business for $13.5-billion last year.
Mr. McKay doubled down on what RBC does best: running a dominant domestic banking business. As a result, RBC’s valuation soared.
In June, BMO boss Darryl White got his mojo rising with the $625-million Burgundy purchase. For shareholders, there’s no better place for the bank to put its capital to work.
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BMO’s wealth management business posted a 35-per-cent return on equity (ROE) in the most recent quarter. In other words, for every dollar Mr. White invests in a business such as Burgundy, the bank gets back 35 cents each year.
For comparison, BMO’s U.S. retail business earned an 8-per-cent ROE in the last quarter, which explains why improving performance at the U.S. division is Mr. White’s priority.
While TD has U.S. regulatory issues that will take years to work out, Mr. Chun has a great deal going for him as he weighs opportunities in other sectors.
For starters, TD is awash in capital, courtesy of the US$14-billion sale of its stake in U.S. discount broker Charles Schwab Corp. in February. Mr. Chun has the money do make acquisitions while also rolling out an aggressive share buyback program.
Mr. Chun already leads a large, profitable money management team that has integrated large acquisitions.
TD’s wealth management division had a 45-per-cent ROE in the last quarter, and assets under management of $1.15-trillion. The platform includes clients from Regina-based Greystone Managed Investments Inc., which TD purchased seven years ago for $792-million. Building on a business where the bank already has scale and expertise will win Mr. Chun fans.
Which money manager is TD likely to buy?
There are a number of businesses similar to Burgundy and Guardian Capital in this country, with billions in client assets run by aging founders who are willing to exit at the right price.
One intriguing target is Fiera Capital Corp., with $161-billion of assets. The 22-year-old firm has seen a fair degree of management turnover, with founder and executive chair Jean-Guy Desjardins still running the show. A generation back, Mr. Desjardins sold the first firm he founded, TAL Global Asset Management Inc., to Canadian Imperial Bank of Commerce.
It is telling that Desjardins sold a stake in Fiera last year, then turned around and spent $1.67-billion to buy Guardian Capital this year.
The challenge for Mr. Chun is getting the culture right. TD needs to buy an asset manager run by executives willing to stay at the bank and ensure their clients stick around.
Mr. Chun is in the honeymoon stage as a new CEO, when he can make a major acquisition and set the tone for his tenure. No one should be surprised if TD tries to get its mojo back by buying a money manager.