CIBC must improve Privatebancorp's results, or risk joining a hall of shame already filled with Canadian buyers who made flashy acquisitions south of the border.Fred Lum/The Globe and Mail
There's an old line about the dog that catches the car. That's Canadian Imperial Bank of Commerce.
The Toronto-based bank just sunk its teeth into PrivateBancorp Inc., scoring a landmark victory Friday when shareholders in the U.S. bank voted in favour of CIBC's $4.9-billion takeover, an offer that was twice sweetened and very much in doubt until the final ballot was counted.
After spending 11 gruelling months chasing Chicago-based PrivateBancorp, CIBC chief executive officer Victor Dodig doesn't have the luxury of resting. The real work at PrivateBancorp has just begun. The new owner needs to dramatically improve the financial performance from the U.S. bank to make this deal pay off for CIBC shareholders.
Read more: CIBC wins approval for $4.9-billion takeover of PrivateBancorp
The challenge facing Mr. Dodig haunts all the Canadian CEOs targeting U.S. retail banks: They leave a shareholder-friendly home – let's be frank, they enjoy an oligopoly – to enter an American market that's less profitable, more competitive and far riskier.
CIBC, the most domestic and smallest of the Big Five banks, earns an impressive 17.5-per-cent return on equity (ROE), according to data from Bloomberg. That's the highest ROE for any domestic bank, and it underpins a premium valuation on CIBC's share price.
In comparison, PrivateBancorp earns an 11.8-per-cent ROE. And the bank is considered well run, as U.S. peers average an 8.4-per-cent ROE. When a public company that earns high returns pays a premium price to acquire a business with a much lower ROE, as CIBC just did, the buyer either improves performance or sees its valuation drop.
That's why landing PrivateBancorp is less important than the task that now faces Mr. Dodig. He has to improve the U.S. bank's results. Otherwise, CIBC risks joining a hall of shame already filled with Canadian buyers who made flashy acquisitions south of the border, only to walk away when they couldn't make decent returns.
Mr. Dodig has telegraphed his first steps. Once the acquisition receives regulatory blessing – the deal is expected to close by the end of June – CIBC plans to meld in its existing U.S. wealth management business, called Atlantic Trust, and cross-sell loans and advisory services to Canadian and U.S. corporate clients.
But this is organic growth, and it can only take CIBC so far. To really juice up returns on its U.S. investment, Mr. Dodig must get back on the acquisition trail, buying up more banks to achieve economies of scale.
That's the strategy Bank of Montreal has been following in the midwest since the 1980s, what Toronto-Dominion Bank has been doing for the past decade in the northeastern and Royal Bank of Canada is now doing in California. And all of these banks face an uphill battle in the United States when it comes to matching the return they earn on their Canadian businesses.
There's every indication that PrivateBancorp's management team has the skills needed to grow through acquisitions – the classic roll-up strategy – with backing by their deep-pocketed new parent. Terry McEvoy, an analyst at Stephens Inc., said: "I continue to view PrivateBancorp as this big bank that's trapped in a small-bank body."
But again, CIBC faces the challenge of trying to maintain its premium valuation, while snapping up banks with relatively low ROE in a market where every takeover will bound to be contested by far larger financial institutions.
In the Chicago region, where PrivateBancorp does 75 per cent of its business, there are a mind-boggling 208 banks slugging it out. PrivateBankcorp currently ranks as the seventh-largest institution in the sector, with just 3.3-per-cent market share, measured by client deposits, according to Federal Deposit Insurance Corp. statistics.
JPMorgan Chase is the dominant player in greater Chicago, with 22 per cent of the market, while BMO's Harris Bank ranks No. 2 with a 13 per cent share. Northern Trust, considered a premium U.S. franchise, also calls the area home. These are the institutions that CIBC is up against when an attractive acquisition opportunity comes along.
After years of talking up U.S. growth plans, and a long, expensive takeover battle, CIBC is close to landing its prize. But unless Mr. Dodig improves returns from PrivateBancorp, this will be a hollow victory.
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