Canadian banks seen hitting U.S. acquisition trail

By Lynne Olver

TORONTO (Reuters) - Canada's big banks have weathered the credit crunch in relatively good shape and should swoop in to buy some ailing U.S. banks, observers say.

Royal Bank of Canada (RY.TO), the country's largest bank, and Bank of Montreal (BMO.TO), the fifth largest by market value, are best positioned to make U.S. acquisitions, CIBC World Markets analyst Darko Mihelic said on Friday in a research note entitled "Fish or Cut Bait."

The banks have excess capital to use and relatively clean balance sheets, Mihelic noted.

"Perhaps now is the time to think big," he wrote.

U.S. banks have taken a beating, with the KBW Bank index .BKX down by more than 40 percent in the past year. Over the same period, the S&P/TSX banks index .GTSX401010 of large Canadian banks is down 17 percent.

Considered another way, the Canadian bank stocks trade at about 2.1 times book value, while the median of seven U.S. large-cap regional bank stocks is right at book value, according to RBC Capital Markets.

Eric Bushell, chief investment officer of Signature Advisors within Toronto-based CI Investments, told a conference this week that Canadian banks will come out of the credit crunch episode as bigger and more global players.

"The Canadian banks came into this situation extraordinarily well capitalized and have essentially twice the amount of return on weighted assets as the U.S. banks," Bushell said at a Toronto conference organized by research firm Morningstar.