BIG FIVE, SMALL PLAYERS

Our banks have missed the global express train* It’s time to catch up.

Peter C. Newman January 10 2005

BIG FIVE, SMALL PLAYERS

Our banks have missed the global express train* It’s time to catch up.

Peter C. Newman January 10 2005

BIG FIVE, SMALL PLAYERS

Peter C. Newman

Our banks have missed the global express train* It’s time to catch up.

CANADA’S FINANCIAL sector is aflame with speculation about its future. The expected transformation has barely started, but once in train it will mean a radical rejigging of the industry’s key elements, especially banking, which has failed spectacularly to establish the international clout it requires to compete in the 21st century. The banking community’s realization that, having so far missed the global express train, it must catch up or surrender its claim to greatness is prompting some dramatic new thinking. If the banks can’t break out of their comfortable but confining status quo, they’re toast.

Until recently there was something vaguely un-Canadian about the financial sector going international: if our bankers displayed excess energy and imagination abroad, they might be expected to behave with equal dash at home. That would never do; with their domestic monopolies guaranteed by legislation, they have done little more than count their profits and raise their service fees.

Suddenly, they’re in fight and flight mode, desperately searching to secure their future by expanding outside Canada’s borders, mainly in the broiling U.S. market, where the mega-banks have turned themselves into giant fiscal ecosystems that defy the confining boundaries traditional to their trade. Money flows are no longer tied to the exchange of tangible goods and services, but to the mysterious movements of wealth and leverage that determine global realities.

In Canada, we still regard the chairmen of the Big Five as corporate titans; on a world scale they’re gnats, hardly considered serious players. Their record south of the 49th is dismal: “With the possible exception of the Bank of Nova Scotia’s foray into Mexico, the Canadian banks’ international strategies have been an exercise in value destruction and a protection racket for Bay Street’s closed club.” So conclude York University’s Schulich School of Business professors Charles McMillan and James Darroch in a tough chapter written for the revised edition of Canada and Globalization: The New World

Economic Order, being published this spring. “It seems ironical that

given the Canadian banks’ pathetic financial performance, their failed efforts in the U.S. market and a growing list of possible scandals, Canadian firms like Manulife Financial Corp. and Power Corporation of Canada have become global superstars. The world is increasingly a single online system. Financial services is its biggest industry, larger than oil, autos and consumer electronics combined.”

The only sensible approach to this paradigm shift, the bankers contend, is to reduce the Big Five to a Big Three, so that we

create our own banking superstars, with the most likely mergers being the Bank of Montreal with the Bank of Nova Scotia, while the Toronto-Dominion Bank puts the Canadian Imperial Bank of Commerce out of its misery. That would leave the Royal Bank of Canada in splendid isolation, which it has no intention of occupying.

The bankers are still regularly flying to Ottawa, trying to persuade the current finance minister to bless the essential rationalization of their industry. But they know that he can’t and won’t move on the issue, since Paul Martin, who turned down the amalgamation of Canadian banks in 1998 (when the Liberals had a solid majority), now oc-

cupies the Prime Minister’s Office with a shaky minority. He is not about to risk having to move out of 24 Sussex, just to please the Canadian Bankers Association.

Faced with that immovable obstacle, the bankers have come up with what they believe would be a more sensible—and more doablesolution. Their strategy has been set: to advocate that the next revision of the Bank Act, due in 2006, permits cross-pillar mergers that would allow, to pick a random example, the Royal and Manufacturers Life Insurance (Manulife) to marry and form a killer combo that would ideally fit the dimensions of the new global economy.

There have been no negotiations and all of the principals deny any intent, but the example isn’t exactly random. The key animator is expected to be not a banker at all, but Dominic D’Alessandro, the savvy and ambitious head ofManulife, whose dynamic take-no-prisoners management style has revolutionized a once-sleepy enterprise into Canada’s 21st-century template for aggressive, competitive initiative. His leadership of the galloping Manulife colossus, whose third-quarter earnings in 2004 were up 81 per cent from the previous year, compared with the Royal’s 37-per-cent year-overyear drop in net income during its fourth quarter. (In that period the Royal lost $175

THEY’RE now talking cross-pillar mergers. Imagine the killer combo of a bank and an insurance company.

million on its U.S. operations, which originally involved a $7-billion investment.)

The link-up of the Royal and Manulife, if it happens, would become the test case on the cross-pillar fertilization process. As yet, no one knows whether it would be a genuine amalgamation, which rarely happens, except in heaven and news releases, or an outright takeover. D’Alessandro would have a personal reason for wanting to emerge as the grand fromage of any such deal. In 1988, when he was executive vice-president, finance, at the Royal-one of the youngest ever—he was passed over for the bank’s chairmanship in favour of John Cleghom. An accountant who worked in Paris and the Middle East, D’Alessandro

joined the bank in 1981 and rapidly climbed its promotion ladder. When he didn’t get the top job, he resigned and became CEO of Montreal’s small but rambunctious Laurentian Bank, taking over Manulife in 1994. He has since demutualized the company, moving its market capitalization from $9 billion to $44.5 billion, and expanded its activities on every continent. His greatest coup was his purchase this spring of Boston’s John Hancock Financial Services Inc., now a wholly owned subsidiary ofManulife.

Canadian banks are already active in most of the financial pillars. That includes automobile leasing, insurance and trust companies, which they have absorbed or put out of business, and especially investment dealing, where they have taken over just about every Bay Street brokerage that matters. What sticks in their craw is that even though they can own insurance companies (the Royal, for example, ranks in Canada’s Top 10 in its life insurance underwritings), they cannot cross-sell such products. (In the U.S., the industry has been almost completely deregulated, allowing banks to sell insurance over their counters and wiping out the remaining differences between commercial and investment banking.)

Amalgamation of some kind is in the air, and this time the politicians may not be able to stop it. Bank of Canada governor David Dodge has hinted that scale does matter and that “efficiency must be at the heart of the debate.” In the end only two banks are safe from mergers: food banks and sperm banks. The future of every other Canadian bank is on the table, open for bids.

Peter C. Newman’s column appears monthly. pnewman@macleans.ca