From bloomberg

July 25 (Bloomberg) — Canada’s seven-year ban on bank takeovers, a restriction that left the country’s biggest lenders dwarfed by foreign rivals, may be ending.

The government plans to introduce guidelines by the end of the year that would permit mergers among Canada’s five largest banks. To ensure they get broad political backing, the regulations contain an antitrust clause that prevents any one lender from having too large a share of the market by revenue, said people who have seen the rules.

The change, delayed for more than a year by Finance Minister Ralph Goodale, is likely to spark the first round of consolidation in the Canadian bank industry in more than four decades. With the market-share cap preventing a merger between Royal Bank of Canada and Toronto-Dominion Bank, the two biggest lenders, No. 4 Bank of Montreal and No. 5 Canadian Imperial Bank of Commerce, are more probable targets, analysts said.

“It’s going to be wide open,” said Alex Zivic, who helps manage about $12 billion for the Signature Group at CI Fund Management Inc. in Toronto. “I wouldn’t count anyone out.”

Mergers would help make Canada’s banks more competitive after the government in 1998 stopped No. 1 Royal Bank from buying Bank of Montreal and scuttled a merger between Toronto- Dominion and CIBC. At the time, Royal Bank was about half the size of Citicorp. Today, its $350 billion in assets is dwarfed by Citigroup $1.5 trillion.

Competition

While allowing mergers, Goodale needs to preserve enough competition among Canada’s 68 banks to win support from opposition parties. U.S. regulators limit banks to 10 percent of the nation’s deposits, a cap that Bank of America Corp., the second-biggest U.S. lender, is close to breaching.

“This is a reasonable condition that has precedence in other countries,” said Zivic, who has been buying shares of CIBC and Bank of Montreal in anticipation of mergers.

Bank of Nova Scotia Chief Executive Officer Richard Waugh has campaigned for the freedom to make domestic acquisitions, saying they’re needed to reduce costs and boost returns and to compete for business outside Canada.

“The guidelines must be finalized to give banks greater flexibility in domestic and international markets,” Waugh, 57, wrote in a submission to the federal government last week.

Royal Bank stunned Canada’s bank industry in 1998 with its surprise agreement to buy Bank of Montreal in a transaction then valued at more than $13 billion. Toronto-Dominion and Canadian Imperial Bank of Commerce unveiled a merger of their own four months later. Paul Martin, then finance minister and now Goodale’s boss as Canada’s prime minister, blocked both deals.

Expansion

Stymied at home, Canadian banks spent more than $12 billion on acquisitions in the U.S. during the past five years.

Bank of Montreal CEO Anthony Comper in February said he was willing to spend as much as $2 billion to purchase U.S. rivals. Toronto-Dominion on July 12 agreed to buy Hudson United Bancorp of Mahwah, New Jersey, for $1.9 billion.

Unlike the U.S., which still has almost 10,000 banks, the Canadian market is highly consolidated. The five biggest banks account for about two-thirds of deposits and 88 percent of the industry’s C$1.9 trillion ($1.6 trillion) in assets.

CIBC, the product of a 1961 merger by Canadian Bank of Commerce and Imperial Bank of Canada, has almost triple the assets of No. 6 National Bank of Canada and more than 17 times the assets of No. 7 Laurentian Bank of Canada.

Market Value

Shares of Bank of Montreal have risen 2 percent this year, the worst performance of the country’s five biggest banks. The bank has a market value of C$29.5 billion. CIBC has gained 7 percent, lifting its market value to C$26.2 billion.

The last successful Canadian bank merger was Toronto- Dominion’s 2000 purchase of Canada Trust’s parent CT Financial Services Inc. for C$8 billion. The government allowed it because CT wasn’t one of the five biggest lenders. Federal law also protects Canadian banks from foreign takeovers, ruling out incursions by the likes of Citigroup or HSBC Holdings Plc.

Goodale last month said he wants to release his guidelines before yearend, provided his government secures broad political backing for the initiative.

He plans to send letters to his opponents in Parliament seeking written assurances that they’ll hold “constructive debate” on bank mergers and won’t change positions before the election scheduled for early next year, said John Embury, a Finance Ministry spokesman.

Opposition

The Conservative Party and Bloc Quebecois, the country’s two largest opposition parties, have said they support bank mergers. The New Democratic Party is opposed.

Any proposed merger would be reviewed by Canada’s Parliamentary finance committees, the Competition Bureau and the Office of the Superintendent of Financial Institutions. Goodale would have the final say.

Royal Bank may be the most restricted by a provision limiting the size of combined banks. The Toronto-based lender holds almost a quarter of Canada’s bank assets, according to the Canadian Bankers Association. Combining with Toronto-Dominion or No. 3 Bank of Nova Scotia would leave Royal Bank with about 40 percent of the banking market by assets.

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