Continental’s confidence

MICHAEL SALTER November 25 1985

Continental’s confidence

MICHAEL SALTER November 25 1985

Continental’s confidence



The elevator doors slide open to reveal a spacious, well-appointed interior which is designed to resemble the inside of a luxurious mansion. But last week the executive offices of the Continental Bank of Canada on Adelaide Street in downtown Toronto were unusually quiet. The bank’s top executives were all out calling on their major clients, reassuring them that the Continental can reverse a serious loss of deposits which began in mid-October when the Montreal-based Mercantile Bank of Canada was forced to merge with the National Bank of Canada, also of Montreal. The centrepiece of the Continental’s bold strategy —code-named Operation Confidence —is a $2.9-billion support package from the Bank of Canada and the country’s six largest banks which was announced on Oct. 31. According to Continental’s president, David Lewis, two weeks into the bank’s campaign to coax back its depositors, there were already signs of success. Said Lewis: “Operation Confidence is working much faster than we had hoped. But I am not going to jump the gun and declare that our problems are over.”

Still, the bank saw the first clear sign of improvement last week. Maclean's has learned that for the first time in over a month, on several days last week more money was deposited at the Continental than was withdrawn. For his part, Lewis confirmed that there were net deposits at the Continental. He added, “The situation is still in flux, but obviously I am delighted.” Indeed, the Continental’s fight to weather the crisis of confidence that has surrounded Canada’s smaller banks since September is far more than a battle of numbers. Last week Maclean 's learned more details of what is turning out to be a unique event in Canadian corporate history—a high-stakes battle by a group of bankers to convince depositors, politicians, civil servants and others to help save a financial institution by reversing a psychology of fear.

The Continental’s plan of trying to stop the deposit drain by tackling the root cause of the problem—the confidence crisis—in a very public and aggressive manner was developed by Lewis himself. A balding 48-year-old who eschews the banking industry’s

uniform of blue pinstripe and black shoes, Lewis is known as a down-toearth banker. When he called a press conference on Oct. 31 and made public the full extent of the Continental’s deposit loss—$1.2 billion within two months—some members of the financial industry expressed surprise at his unusual candor. But the consensus on Bay Street, said Edward Medland, chairman of Toronto-based investment dealer Wood Gundy Ltd., is that Lewis’s forthright approach in announcing the support package was the right one. Added Medland: “Once confidence begins to erode and you want to restore it, you have to come up with a blockbuster announcement—or else the pencil boys will start second-guessing you.”

Still, many banking analysts say that the Continental’s situation remains serious and that the next three months—the bank’s $1.5-billion line of credit with the Big Six will expire on Feb. 1—will be the critical period. Analysts say that establishment figures clearly want to end the crisis of confidence. But they add that Lewis must turn it around in a few months to avoid a merger.

Financial experts say that the Continental’s deposit drain is the result of actions by large institutional depositors, such as corporations, governments and pension fund managers —not ordinary Canadians. Indeed, as Canada’s seventh-largest bank with assets of $6.2 billion, the Continental, which advertises itself as the place

where the “smart money” goes, is under pressure because it relies on large deposits as its main source of funds. About 85 per cent of the Continental’s deposits are over $100,000—well above the federal deposit insurance limit of $60,000. And since September clients have withdrawn about 25 per cent of the bank’s deposits because they were worried about losing their money if the bank failed.

The turning point in the bank’s campaign may have been reached on Nov. 5, when Toronto Mayor Arthur Eggleton said that he would renew the city’s deposits with the Continental.

On Nov. 1 Toronto’s financial officials had withdrawn $12 million from the bank because they were concerned about its stability. But after meeting with Lewis the mayor said that he was convinced the bank was sound and that Toronto would continue to bank with the Continental.

Last week, in interviews with top-level financial officials of municipalities and corporations, it appeared that the attitude toward the Continental is slowly improving. Jack Pickard, the finance commissioner for Metropolitan Toronto, for one, says that he has no intention of pulling Metro's $51.2 million in deposits out of the Continental. For his part,

Ronald Brooks, commissioner of finance for Sarnia, Ont., said that following conversations with City of Toronto and Metro Toronto officials, he had decided to leave $2 million on deposit with the Continental. Said Brooks: “The worst scenario would be that the Continental would be forced to merge with another bank, and depositors would not be hurt by a merger.” And Brian Segal, president of Ryerson Polytechnical Institute in Toronto, said that after withdrawing $2 million from Continental three weeks ago the school’s board of governors decided to go back to the bank. Ryerson redeposited $1.1 million two weeks ago.

Still, other municipalities remained wary about the Continental. William Munden, treasurer for Mississauga, Ont., said that city officials dropped

the Continental from its list of approved institutions in mid-October, despite calls from bank officials asking them to deposit funds. And John Gazzola, commissioner of finance and treasurer for Kitchener, Ont., said that since the $255-million bailout of the Canadian Commercial last March he has stayed away from all small banks.

Continental executives are urging clients who support them to speak out, in the belief that such statements will help restore confidence. Last week Continental officers asked Alberta of-

ficials to issue a statement of support. Although at week’s end no formal statement had been made, Nancy Betkowski, an executive assistant in Alberta’s treasury department, said, “We have had deposits at the Continental in the past, we do now and we will continue to do so in the future.”

By late last week it was still too early to gauge the impact of another critical element in the the bank’s confidence-building campaign—the attempt to convince money market traders to resume activity in Continental’s shortterm securities. But James Pitblado,

chairman of Toronto-based investment dealer Dominion Securities Pitfield Ltd., told Maclean's:. “We are trading Continental paper again. It will take time to restore the market for the bank’s paper, but we think the trend is growing.”

Before the crisis the Continental obtained 15 per cent of its deposits through the money market, which is a trading system for corporations, governments and other large investors that want to lend or borrow huge sums of cash for a year or less. Each day Continental’s money traders telephone institutional investors and ask them if they want to deposit money at the bank by purchasing interest-paying securities called certificates of deposit or bearer demand notes.

Less frequently, the Continental’s traders raise deposits by asking the money market salesmen at the 10 leading investment houses in Toronto if their clients are interested in buying Continental securities. If the salesmen know of a buyer, a “same day” deal can be quickly arranged. Sometimes, the money market trader purchases the Continental security directly and holds it for sale on the following day. Usually, the trader finances his purchase by obtaining an overnight bank loan, using the security as collateral for the loan.

Maclean's has learned that as the confidence crisis escalated, only Toronto-based Wood Gundy Ltd., continued to regularly trade Continental securities. For one thing, most money market traders could no longer find institutional buyers. And those traders who wanted to purchase Continental securities themselves found that most banks no longer accepted the securities as loan collateral, leaving the dealer unable to finance the purchase.

After two weeks of negotiations, on Nov. 7 at a meeting between Continental executives and top officers from Bay Street’s 10 leading investment houses, the dealers agreed to tell their money market salesmen to start trading Continental notes with their clients. The Continental’s executives also told the dealers that during negotiations with the big banks over the support package they had urged the other bankers to accept Continental securities as loan collateral. Said Ross MacKinnon, money market vice-president and manager for Nesbitt Thomson Bongard Inc., in Toronto: “The Continental’s people told us, ‘If you have confidence that the support package will work, help us out by marketing our paper.’ ” The financial community seems prepared to do just that.