the US subprime meltdown ripple across global financial markets,
retail banking heads in neighbouring Canada remain cautiously
optimistic, despite ongoing concerns about the Canadian
government’s policy banning major bank mergers, says Douglas
Blakey.
The annual Canadian Bank CEO Conference, held in Toronto on 15
January, featured presentations by the heads of four of Canada’s
largest banks – Royal Bank of Canada (RBC), Toronto-Dominion (TD),
Scotiabank and Bank of Montreal Group (BMO) – all of whom remained
cautiously optimistic about the year ahead. The only one of the
Canadian Big Five not present was CIBC, the bank with the largest
US loans write-off to date (around $2.5 billion).
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Although acknowledging that the looming threat of a US recession
has undoubtedly changed the market, Gordon Nixon, CEO of RBC,
nonetheless said he believed that Canada will continue to
outperform the US. While not immune to a slowdown, in particular an
economic downturn in Quebec and Ontario’s manufacturing sector,
“Canada will continue to buck the trend with respect to the US
slowdown,” said Nixon.
His bank has invested heavily in its retail arm in recent years,
funding the implementation of new technology initiatives, opening
150 new branches and adding almost 2,000 new sales people, notably
mobile sales representatives and investment/retirement planners.
Nixon stressed that this investment, alongside the diversity of
RBC’s business, has created an unparalleled distribution network
that remains the core strength of the bank.
RBC has also invested heavily in the US and Nixon did not rule out
further US expansion for RBC, perhaps even acqusitions. “We do have
an environment where unexpected opportunities may present
themselves and we’re in a position to take advantage of those,” he
said.
Indeed, in a sign of its commitment to its US franchise, RBC is
undertaking a complete rebrand of its US operation, changing its
name from RBC Centura to RBC Bank with effect from April. “As we
grow it’s more important than ever to build brand awareness in the
US,” said RBC Centura’s chairman and CEO, Scott Custer, in a
statement.
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By GlobalDataRick Waugh, Scotiabank president and CEO, was also positive about
his bank’s prospects for 2008, largely as a result of its diverse
revenue streams and the sustainable growth they offer. While the
latter half of 2007 saw greatly compressed margins for the bank,
Waugh noted that the bank was able to post healthy figures from
volume alone. Notably, Scotiabank was able to take market share
last year in several product ranges. “We are traditionally one of
the smaller market share banks in Canada, so that gave us great
leverage,” he said. “I don’t see a recession in the US,” added
Waugh, “but you have to put it into your parameters.”
Formidable international growth
The bank reported formidable growth in its international business,
which posted healthy earnings of over 20 percent in 2007.
Waugh highlighted the relative strength of the financial sector in
several emerging markets: “If you go back to the Asian crisis of
1997, they didn’t have balance sheets, they had net deficits and
they had fixed exchange rates. Today, whether you look at Mexico,
Thailand, Chile, Peru and obviously both China and India – their
foreign exchange reserves are high. The underlying strength of
those countries is in their banking sectors,” said Waugh.
But Ed Clark, president of TD, said it is the unexpected second or
third round effects of a downturn that keep him cautious. “You may
not be on the train, but if you’re standing by looking on while
there’s a train wreck you might still get hurt,” he
said.
In the US in particular, Commerce Bancorp, which TD agreed last
year to buy for $8.5 billion, and Banknorth Group, which TD bought
in 2005 and renamed TD Banknorth, will certainly be hurt if the US
banking crisis evolves into a general economic downturn, he
warned.
There has been one initial benefit, however, of the US crisis. TD,
owner of a 40 percent stake in US online broker TD Ameritrade, has
benefited from the troubles at rival broker E*Trade (see “News
digest”). TD Ameritrade has estimated that one dollar in four
of the $9.2 billion of net new assets in the first quarter came
from disenfranchised E*Trade customers, and was reporting profits
for the first quarter of fiscal year 2008 up 67 percent.
A less upbeat assessment from the CBA
The Toronto conference coincided with a less upbeat assessment from
the Canadian Bankers Association (CBA). In a submission to the
Federal Competition Policy Review Panel, the CBA said the Canadian
government’s policy banning domestic bank mergers – current
regulations cap bank ownership stakes at 20 percent – represent a
constraint to growth that restricts both competition and consumer
choice and hinders the country’s lenders’ international ambitions.
“At a time when the financial sector around the world has been
going through massive restructuring and consolidation, the
structure of the financial sector in Canada – at least among the
large players – has been frozen.”
Current policy dates back to 1998, when the government blocked
proposed mergers involving RBC and BMO, and CIBC with TD.
The freedom of Canadian banks to make acquisitions of their own has
also become limited in the face of increasingly monolithic external
competitors, the association added. The CBA said that 4,200 bank
mergers took place in the US between 1994 and 2006.
