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Analysis-TD’s $13 billion M&A swoop extends U.S. footprint but raises cost, integration concerns -Breaking


© Reuters. FILE PHOTO – The Toronto Dominion logo (TD) is displayed on a Toronto building, Ontario, Canada, March 16, 2017. REUTERS/Chris Helgren/

Nichola Sainather

TORONTO, Reuters – TD Bank is planning to buy First Horizon (NYSE) Corp at $13.4 Billion. The deal would enable it to gain access in one of the most rapidly growing areas of the United States. But some investors are concerned about the timing of the purchase and its higher cost.

TD’s most important acquisition to date, making it sixth largest U.S. lender, would be supported by investors. It will make it the 6th-biggest U.S. bank in terms of assets.

Analysts and investors cautioned that First Horizon’s excessive total expenses, TD’s lackluster lending in the United States, and a more difficult regulatory environment could pose risk.

TD shares have fallen more than 6% since Monday’s announcement. This decline is compounded by Thursday’s first quarter earnings, which beat expectations but were rated lower than other major Canadian lenders.

Canadian banks index fell 1.7% during that period.

Investors noticed that First Horizon just completed integrating another southeast U.S. lender, Iberiabank Corp (NASDAQ:) Corp. It merged with it in 2020.

Steve Belisle from Manulife Investment Management stated that “you’re purchasing a bank which just underwent an integration, and then you’re putting the other one through it.” It seems that it went very fast… disruption can result.”

TD’s deals have been cautious, however, Avenue Investment Management said that it was still “under pressure” to purchase after missing out on a U.S. sale to Bank of Montreal.

Teich expressed his concern over First Horizon’s merger. She pointed out a nearly quadrupled commercial realty loan book between 2019 and 2020 and a consumer property lending portfolio that was almost two times as large. Despite these concerns, First Horizon still has a loan book that is less than a tenth the size of TD.

According to TD, “First Horizon” is a highly-managed regional bank that has a strong presence across attractive markets in the U.S. Southeast. We have an excellent track record in successful integrations, and we are confident that this deal will be successful.


First Horizon has also higher expenses than the typical peer group, which makes it a less suitable candidate for TD. Christopher Whalen, Whalen Global Advisors, stated in a Thursday research note that First Horizon is not a good fit for TD.

First Horizon had a fourth quarter expense that was not inclusive of one-time expenses. The efficiency ratio, or the percentage of total revenues, was 63.3%. This is nearly 71%. That compared with 59% for its peer group, according to a report from a U.S. regulatory panel. According to TD’s results for the first quarter, U.S. expenditures accounted for 57% revenue.

Ellen Taylor, First Horizon’s Head for Investor Relations, said that most loans to First Horizon are tied at short-term interest rates. This will raise interest income while lowering efficiency, according to Reuters.

Whalen stated that TD’s U.S. lending is not impressive. TD’s U.S. loans accounted for less than one-third of its total assets there, compared with a peer average of 59%, with much of the rest in debt securities, according to a regulatory report

“What’s the use of (TD CEO Bharat Masrani) buying additional retail deposits if TD bankers can fill the existing balancesheet with quality loans?” Whalen asked.

TD might also encounter regulatory issues following U.S. president Joe Biden’s July executive order tightening mergers rules. Also, delays at a major regulator have led to a leadership vacancy. Edward Jones analyst James Shanahan suggested that TD faces these challenges.

But TD’s assurance it will maintain First Horizon locations, invest in retaining staff and make an additional payment to the target’s shareholders if the deal is delayed would curry favour with regulators, said Kingwest & Co Portfolio Manager Anthony Visano.

Kelvin Tran (TD Chief Financial Officer) stated that they have a good relationship with regulators. The regulator must go through the process.

($1 = 1.2668 Canadian dollars)