ANALYSIS-Two Canada banks top list of Allied Irish suspects

* Canadian banks have cash to buy stake in Allied Irish

* Fits RBC strategy best but it denies interest

* TD is in best position to make deal if RBC is out

* CIBC named as suitor by two media outlets

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By Andrea Hopkins

TORONTO, Aug 14 (Reuters) - When Allied Irish Banks confirmed it had received an approach from a third party interested in taking a minority stake, it didn't take long before eyes turned to Canada.

After Royal Bank of Canada , Canada's largest bank, denied it was the suitor, No. 5 Canadian Imperial Bank of Commerce and No. 2 Toronto Dominion Bank have emerged as the most likely candidates for a potential deal, which still could takes months to seal.

At least two media are reporting CIBC is the bank in question, citing unnamed sources, but most analysts point to TD as the bank that's in the best position to wade deeply in the Irish market if RBC is ruled out.

Canada's big five lenders have emerged relatively unscathed from the financial crisis that has hobbled or bankrupted competitors around the world, with fat capital ratios and an eagerness to make inroads into foreign markets.

"When a rumor or speculation kicks up, it's always 'What about the Canadians?'" National Bank Financial analyst Robert Sedran said of the Toronto-based based major banks.

"They are going to get named for a lot of these different opportunities simply because they have the ability to do it if they so choose," he said.

None of Canada's big five banks -- RBC, TD, Bank of Nova Scotia , Bank of Montreal and CIBC -- took a government bailout or aid during the credit crisis, and all have remained more or less profitable despite some big write-downs.

All have expressed interest in building their foreign presence, whether in retail banking, capital markets or wealth management.

When Ireland's No. 2 bank said it had been approached with an early but serious offer, the first instinct of many observers was to look to RBC, whose CEO in June said he'd like to build the bank's international wealth management business.

"If you look at the acquisitions we've made over the last two to three years, RBTT in the Caribbean, we've made a couple of acquisitions in the UK in the private banking space, so those areas would be more natural for us to look at from an acquisitions perspective," Chief Executive Gord Nixon said in an interview with Reuters.

But just as speculation was ramping up that RBC was the likely suspect, a spokesperson denied the bank was involved.

So the guessing game continued. Irish state TV and Canada's Globe and Mail national newspaper reported CIBC was the bank in question. CIBC, like BMO, TD and Scotiabank, declined to comment.

The smallest of the five, CIBC had been mostly seen to be retrenching after taking far-larger writedowns on U.S. credit exposure than the other four and stumbling on previous expansion efforts.

Dundee Securities analyst John Aiken said RBC and TD have the greatest ability to make a purchase without hurting regulatory capital levels, which are high in Canada, but noted that TD has made it pretty clear it is focused on building its U.S. retail presence down the U.S. eastern seaboard.

"Based on our calculations, Royal and TD have the most amount of excess common equity," Aiken said. "I would have to believe that TD would be more interested in the U.S. than Europe."

No. 3 Scotiabank is the most international of Canada's banks, but focuses firmly on less developed countries for expansion, especially in Latin America and the Caribbean.

Sedran summed up the possible suitors: "TD has clearly decided they are a U.S. bank. Scotia has got the emerging market focus -- international, for sure, but not in the mature parts of the banking world. And the other two? I don't even know what to say. So it's not exactly brain surgery to suggest Royal was more likely," he said.

The Irish bank offers some reward for a Canadian bank -- an inroad into European consumers and wealth management -- as well as some risk as it struggles with rising loan losses and too much leverage. It has received 3.5 bln euros ($5 billion) in state funds in return for a 25 percent indirect stake.

Allied Irish said talks with the foreign bank were in early stages, and not expected to progress until there was more clarity on the National Asset Management Agency (NAMA), a "bad bank" set up by the government to remove banks' risky assets.

The bank, Ireland's No. 2, has a stake of M&T Bank in the United States, a large regional bank in the U.S. Northeast. Since TD is also a big player in the U.S. Northeast and looking to expand, taking a stake in Allied Irish could offer a backdoor entry to an eventual M&T acquisition.

But one analyst, who declined to be named, said the intense speculation may simply be a product of overheated imaginations fired by long summer days and a exploratory phone call by a Canadian lender to a troubled Irish bank.

"This could all have come from a one-hour conversation that's gotten completely out of hand," he said. (Additional reporting by Andras Gergely in Dublin and Steve Slater in London; Editing by Frank McGurty)