BUSINESS

BANKING ON LESS

CANADIAN BANKS CUT COSTS TO BOOST PROFIT

BRENDA DALGLISH December 6 1993
BUSINESS

BANKING ON LESS

CANADIAN BANKS CUT COSTS TO BOOST PROFIT

BRENDA DALGLISH December 6 1993

BANKING ON LESS

CANADIAN BANKS CUT COSTS TO BOOST PROFIT

BUSINESS

Although Canadian banks have often been accused of having sheep-like instincts, their financial results for 1993 show little evidence of herd behavior. Last week, two of the Big Six banks reported record profits for the year ended Oct. 31, and one reported a turnaround. But two others produced mediocre to disappointing results. The Bank of Montreal invited reporters into its vast boardroom in Toronto last week to hear its president, Tony Comper, proudly explain how it had achieved its fourth consecutive year of record profits. But one day later, the Royal Bank of Canada gathered its 53,000 employees into small groups across the country to watch videotapes of its two senior executives, chairman Allan Taylor and president John Cleghom, sombrely announce plans to cut 4,100 jobs during the next 12 months. Said a grim Taylor: “Many of our clients are hurting and when they hurt, we hurt.” Taylor’s announcement, and the wildly divergent profit results, capped a year of many upheavals in the banking sector. First it was a year that the banks began devouring the trust industry with the same

appetite they showed for brokerage firms in 1987. Toronto-Dominion Bank (TD) opened the year by acquiring the nearly bankrupt Central Guaranty Trustco of Toronto, the country’s third-largest trust company. Then, in September, the floundering, once-great Canadian institution Royal Trustco Ltd., also headquartered in Toronto, was purchased by the Royal Bank after lengthy rescue talks. As well, Montreal-based National Bank acquired General Trust of Canada in July. Last week, speculation spread that the Canadian Imperial Bank of Commerce (CIBC) is poised to announce an agreement to buy Montreal Trust from BCE Inc., the Montreal-based holding company. The banks snapped up the financially distressed trust companies to increase their retail banking market share and economies of scale. And they also acquired trained employees able to provide the special services needed for the investment management responsibilities of the trust business.

In addition to corporate shopping sprees, the most intriguing banking news in 1993 was that for the first time, bank shareholders will be told how much they are paying top executives. When the banks file the detailed executive compensation information now required by the Ontario Securities Commission at the end of December, the most closely guarded secret in a close-lipped industry will finally become public knowledge. Said bank analyst Hugh Brown of Bums Fry Ltd. in Toronto: “We’ll find out whether they get paid for performance, or for size.”

In banking circles, the academic debate about the effect of a bank’s size on its performance is like the medieval philosophers’ pontification about the number of angels that could dance on the head of a pin. But what is becoming increasingly clear is that the biggest banks are no longer necessarily the most profitable ones. This year, the Bank of Nova Scotia, with assets of $108 billion, posted the largest profits of $714 million. The Bank of Montreal, with assets of $117 billion, reported profits of $709 million. They were by most measures the most profitable banks, even though they ranked fourth and third, respectively, in size as measured by the value of assets. By contrast, the Royal, the country’s largest bank, has indicated that in December it will report a profit of just $300 million on assets of about $160 billion, after setting aside a mas-

sive $1.75-billion provision for loan losses for the year. Still, those financial problems did not stop the Royal from growing even larger this year when it added Royal Trust’s one million customers to its existing base of 8.5 million. “Size helps in some ways,” Royal president Cleghom said in an interview. “But bigness can sometimes result in being too complex, too bureaucratic, too slow and not as innovative.”

With the job cuts announced last week, the Royal is finally attempting to get its size under control. “We must face facts: we are an expensive bank to run,” Taylor told employees in the video. “In the 1980s, we added more and more people and we created a base that is bigger than we need.” To begin to address that problem, the bank has cut 3,000 jobs over the last two years—about 400 people actually lost their jobs while the rest of the reductions came through attrition. It also closed about 100 branches and other offices, said Cleghom, while managing to retain nine out of every 10 customers those branches served.

The Royal will cut anoth-

er 4,100 positions in the coming year, including 1,100 from the ranks of Royal Trust. It will also close more branches, including 43 of Royal Trust’s 142 outlets. Cleghorn says that the number of actual layoffs has not been determined yet. But despite the focus on reducing costs, some of the more obvious luxuries of the Royal’s dominant position remain. It continues to maintain two separate executive headquarters: in the bank’s glittering downtown Toronto office tower—gold dust incorporated into the window glass gives the building its unique golden shimmer—and its official head office in Montreal.

The bank’s earnings for 1993, however, reflect more than operating costs. The financial results also underscore which institutions have the most exposure to Canada’s recession-ravaged economy. In particular, CIBC (based on third-quarter information and analysts’ forecasts in advance of yearend results) and the Royal had their earnings dragged down in 1993 by big loan losses, primarily as a result of the weakened domestic commercial real estate market.

The TD Bank has suffered even more than the other two because so much of its business is based in Ontario, where the recession hit the hardest. The TD Bank’s profit fell to $275 million for 1993, the fourth consecutive year its earnings have dropped since it reported record profit of $695 million in 1989. Its profits took an extra beating in 1993 because of restructuring costs related to the acquisitions of Central Guaranty and Marathon Brokerage, a discount broker. The TD Bank is the fifth-largest bank in Canada with assets of $85 billion.

The Montreal-based National Bank, the sixth-largest bank, reported a healthy turnaround profit of $175 million, up from just $1 million in 1992, on assets of $43 billion.

By contrast, Bank of Montreal and Scotiabank have both had more revenues coming from outside Canada to offset higher loan losses and lower revenues at home. “They

suffered a lot in the 1980s because of the Third World debt problems,” said Burns Fry’s Brown. “But now the tables have turned and they’re benefiting from their non-Canadian holdings.”

Indeed, the Bank of Montreal, in addition to being able to recover some of the Third World loans that it had written off earlier, also got a healthy profit boost of $157 million

from Harris Bank, its Chicago-based U.S. subsidiary. In total, Comper said that more than half of the bank’s profits for 1993 came from such non-Canadian sources. Bank of Montreal intends to build upon its 1984 purchase of Harris and to expand its U.S. presence. By the end of the decade, Comper says, the bank hopes to be getting half of its profits from the United States. Because Har-

ris Bank already has a trust business and because of the Bank of Montreal’s own selfbuilt trust business in Canada, Comper says that the bank has no plans to join the others in a rush to buy into the Canadian trust business.

The Bank of Nova Scotia appears to be adopting a similar view of the trust business. Rory MacDonald, chief operating officer of the Bank of Nova Scotia Trust Co., says the bank is building its own trust business by prospecting for suitable clients from its bank customers.

With 1993 behind them, the banks are now looking ahead to only a slightly better economic environment in 1994. But despite a slight improvement in the economy and signs that loan losses will be-

gin to decline, analysts say the banks will continue to be under pressure to keep costs down. Said Brown: “Cost cutting is going to be a way of life for the next four or five years.” And that is going to be especially hard for banks like the Royal, who have become accustomed to living in gold towers.

BRENDA DALGLISH