Their names are dusty relics from Canada’s financial past: the People’s Bank of Halifax, Standard Bank, Banque Ville Marie and dozens more. They flourished in the years after Confederation, and by 1874 there were more than 50 large and small banks scattered across the fledgling nation. Not all were paragons of probity: by the First World War there had been 26 bank failures, 19 resulting in criminal charges against senior executives or employees. By then a gradual shakeout was under way. Now, only five major institutions remain, and many industry officials believe the number will decline further as a result of a worldwide wave of consolidation and the banks’ own drive to become bigger. “Canadians are living in the last years of their old Big Five banks,” Bank of Montreal chairman Matthew Barrett wrote recently in a letter to senior employees. ‘We should make it easier to make acquisitions abroad or be acquired at home.”
This fall, Barrett and his counterparts have lined up to preach that free-market message to a task force on the future of the financial services sector. If the industry has its way, the 10-member panel, led by Regina corporate lawyer Harold MacKay, will recommend that Ot-
tawa remove the last remaining barriers to expansion when it delivers its report next September. Among those obstacles is the so-called 10-per-cent rule, a regulation that discourages mergers or foreign takeovers by barring any one stockholder from owning more than onetenth of all the shares. In addition, the banks want the federal government to abandon its “big-shall-not-buy-big” policy, an informal guideline that for years has prevented banks from buying other large financial institutions. Provided the task force agrees, the stage could be set for a series of banking mega-mergers that would dramatically reshape Canada s financial landscape. “I think mergers are inevitable, says Bruce Barker, a veteran banking lawyer with the Toronto law firm of McMillan Binch. “The band is warming up, and when the music plays they’ll all be on the dance floor. Who ends up with whom will largely come down to personality and cultural similarities.” Watching from the sidelines, Canadian consumers might be forgiven for thinking that Canada’s banks are already powerful enough. Profits for the country’s five biggest banks are expected to total $7 billion for fiscal 1997,18 per cent higher than in 1996. Last week, the Bank of Montreal announced a record $1.3-billion profit, up 12 per cent from last year, while the Bank of Nova Scotia
boosted its bottom line 42 per cent to $1.5 billion. At Toronto Dominion Bank, net income climbed 19 per cent to almost $1.1 billion, the highest in its history. Year-end figures for both the Royal Bank of Canada and the Canadian Imperial Bank of Commerce—which is rumored to be considering a takeover bid for Canada Trust, the country’s larget trust company—are due this week.
Measured by their bottom lines alone, Canada’s banks stack up well against their international rivals. A recent study of the world’s major banks by University of Toronto finance professor Lawrence Booth found that the CIBC, the Bank of Montreal and the Royal are all in the top 16 in profitability, each with earnings equalling nine per cent of total revenues. This year, a large share of the banks’ profits came from their investment banking, brokerage and mutual fund businesses—a reflection of the surging stock market. Loan revenues also rose on the back of a stronger economy. “They’ve basically been firing on all cylinders,” says Nigel Heath, an analyst with Toronto-based Dominion Bond Rating Service.
Yet despite their profits, the banks maintain they are losing ground globally. In 1970, the Royal was in 12th place, with the
CIBC close behind at 19. In 1995, they were in 61st place and 62nd, respectively. The result, industry players say, is that Canadian banks are becoming more vulnerable to foreign competition. “I think the evidence is increasingly clear on the threat to the system from emerging behemoths in the United States, Barrett said last week. ‘You see it almost every day in the newspapers—some major U.S. bank looking north.”
Canada’s banks fear they will fall even further if the Geneva-based World Trade Organization reaches an expected deal to free up trade in financial services. During the negotiations, Ottawa promised to encourage wider competition by allowing foreign banks to open branches without setting up separate Canadian subsidiaries. The federal government also agreed to remove a requirement that the 43 foreign banks that already have Canadian subsidiaries seek federal permission before opening new branches.
By raising the red flag of foreign domination, the industry hopes to convince Ottawa of the need for a transition period during which Canadian banks could merge before facing the full force of international competition. “Simply removing all the rules on financial services would be naive,” CIBC chairman AÍ Flood wrote in a recent submission to the MacKay task force. “It would quickly lead to major global players buying up all of Canada’s financial institutions, threatening thousands of jobs, billions in tax revenue, and turning our industry into a branch-plant system.”
Privately, industry officials say that both Finance Minister Paul Martin and Prime Minister Jean Chrétien—a former member of TD Bank’s board of directors share their position on the need for domestic bank mergers.
Political considerations, however, make it highly unlikely that Ottawa would sanction a marriage involving either of the country’s two major financial institutions—the Royal, with $251 billion in assets, or the CIBC, with $228 billion. The reason is that mergers on such a huge scale typically spell the elimination of thousands of jobs. A $17.1-billion deal announced last month between First Union Corp. of Charlotte, N.C., and Corestates Financial Corp. of Philadelphia is expected to trigger at least 3,000 layoffs. Fearing the creation of an uneven playing field, Ottawa may be reluctant to allow the two biggest banks to expand at all.
A more likely scenario, some experts say, would involve a merger between TD Bank and Scotiabank. Scotia is one of Canada’s most international banks, while Toronto Dominion’s presence abroad is relatively minor. As well, TD Bank’s branch network is concentrated in Ontario, while Scotiabank is prominent in Atlantic Canada. The two banks are also roughly equal in size, a factor that might smooth negotiations since neither party would feel at risk of being swallowed up. The total value of Scotiabank’s shares is $15.2 billion, compared with TD Bank’s $15.3 billion. Combined, they would form the country’s largest bank, with $358 billion in assets. Even so, the consequences would be painful for many workers. “Mergers will result in job losses, because that is the whole idea of cutting your costs,” Robert Chisholm, Scotiabank’s vice-chairman, told Maclean’s last week. “But if you really want a strong financial foundation based in this country, ultimately mergers will have to be allowed.” The biggest loser in any consolidation wave would likely be the Montreal-based National Bank of Canada, the country’s sixth-largest bank with $61 billion in assets. National’s problem is that most of its business—and roughly 500 of its 661 branches—are in Quebec. “That could come with a time bomb,” says one banking analyst, referring to the climate of political uncertainty that surrounds the province. With another referendum on sovereignty possible by the year 2000, the bigger banks may be unwilling to invest so heavily in Quebec. A similar referendum chill surrounded efforts by Montreal-based Desjardins-Laurentian Financial Corp. earlier this year to sell its 57.5-percent stake in Laurentian Bank of Canada. In October, after an unsuccessful five-month search for a buyer, Desjardins sold its interest in the country’s seventh-largest bank at a loss to a syndicate of underwriters. Perhaps because it fears being left alone at the altar, National is the only major bank that favors maintaining the regulatory status quo.
Outside the industry, that view appears widely shared. “The banks have always been a target of public and political criticism,” notes Susan Cohen, an analyst with Deacon Capital Corp. in Montreal. Some of the criticism comes from the government’s own benches. Last spring, Manitoba Liberal MP David Iftody introduced a private member’s bill that would amend the Bank Act to explicitly prevent hostile takeovers among banks. Such mergers, he argues, would reduce competition and hurt consumers. Says Iftody: “There are fears among the small business community and the retail sector that they have enough trouble already getting adequate terms from their bankers.” For the moment, at least, Canadian consumers seem less afraid of foreign banks than they are wary of domestic ones. Until that changes, Barrett and his colleagues may have a hard time convincing their customers of the need for even fewer big banks.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.