BUSINESS

The foreign banks’ setback

ROBERT COLLISON February 21 1983
BUSINESS

The foreign banks’ setback

ROBERT COLLISON February 21 1983

The foreign banks’ setback

There is a tinge of bitterness in the voice of Larry Chamberlin, the 40-year-old president of the Morgan Bank of Canada. Discussing the institution’s performance since it opened for business as a Canadian chartered bank in October, 1981, his prognosis is gloomy. “On balance, it has been a negative experience. We have increased our costs and reduced our flexibility,” he says. Chamberlin’s dispirited mood is shared by many of his counterparts at the 54 other foreign banks that rushed into the traditionally protected Canadian banking field in the past 18 months under new, more liberal provisions of the 1980 Bank Act. The fanfare of gala launching parties with bullish promises of shaking up the subdued, if profitable,

world of Canadian banking has given way to commiserations over year-end results disappointing enough to upset the most thick-skinned money manager.

Clearly, those Canadians who feared that foreign banks would upset the staid domestic system have been proven wrong. Although 1982 was a bad year for almost every bank—foreign or otherwise—it was an abysmal inauguration for the foreign newcomers. Their profits totalled $35.8 million, compared with the $1.5 billion made by Canada’s 11 domestic chartered banks. Indeed, while the overall return on equity for the domestic banks slipped from 17.7 per cent in 1981 to 12.9 per cent in 1982, the return for the foreign banks last year was a meagre four per cent.

Clearly, some of the new banks per-

formed better than others. Chamberlin’s Morgan Bank, for one, made more than $4 million. But 11 of the newcomers actually lost money in 1982.

Banking analysts point out that the foreigners did not pick a propitious time to set up shop as the recession dried up the borrowing needs of corporations, their major customers, causing havoc in the balance books of all banks. As well, Maurice Clennett, special adviser to the federal inspector general of banks, William Kennett, noted that the new banks faced the additional costs of opening up the operations last year. Says Clennett: “It was a difficult year for all banks, and the new banks had considerable start-up costs.” But many of the foreign bankers feel that the system is stacked

against them. As Chamberlin puts it, “It’s blatantly discriminatory.”

The foreign banks also still face a host of regulatory restrictions that are hindering their growth. Under the terms of the 1980 Bank Act, the foreigners are allowed only eight per cent or $19.4 billion of the total banking system’s domestic assets (total loans and investments). In order to dole out this market share, the government grants each new foreign bank a “deemed” capital base. It is the meagre size of these deemed capital bases that has foreign bankers fuming. For one thing, under instructions from the inspector general’s office, no bank can normally lend more than 50 per cent of its capital to any one customer. This means that the foreign banks are effectively blocked from competing with the Canadian-

owned banks for large corporate loans in the $200-million-plus range. Not only that, but each bank is allowed to “lever” its total capital 20 times. (For each $1 of capital, a bank can loan $20. For instance, the Bank of America, with $55 million of capital, can book $1.1 billion of Canadian assets.) It is a brilliant device to control the growth of the new banks, but many of the foreign bankers feel it is unfair since the large Canadian banks may lever their capital 30 times. As Jennings Werner, the president of Continental Illinois Bank (Canada), notes, “The Canadian banks have a competitive advantage.”

For his part, Kennett denies that the system is discriminatory. “The eightper-cent limit is the law,” he says, “and it won’t be changed until the next Bank Act revisions. As for leverage, we treat the foreign-owned banks like other Canadian institutions. The new Canadian-owned chartered banks operate under similar conditions.” But it is Kennett’s insistence on treating the new banks like small Canadian institutions rather than as adjuncts of huge multinational banks that irritates the new bankers. Says Morgan’s Chamberlin: “In no other country in the world but Canada do banking authorities not take into account the capital of the parent in deciding lending limits. They’re trying to make us act like a small bank.”

0 Inevitably, those limits result in the new foreignz owned banks sending much 1 of their loan business back i z to head office. Explains I Werner: “The effects will be to siphon off potential tax income to a non-Canadian

source.

As the frustrating experience of the foreign banks indicates, their new chartered status has worked to the advantage of the domestic banking community. Says Ian Jarvis, foreign bank secretary of the Canadian Bankers’ Association: “There is no doubt that the present banking legislation has reduced the foreign banks’ ability to compete.” Before they were granted charters in Canada, foreign bank branches simply passed on business to their parents or operated as “near” banks. Still, between 1976 and 1980 their assets grew by 347 per cent to Canadian chartered banks’ 81 per cent. Since they have become full banks, the foreigners have grown only twice as fast as their Canadian counterparts. It is no surprise that the newcomers are straining at their regulatory shackles.

ROBERT COLLISON in Toronto.