The Nation’s Business

Why the big banks need to get bigger

We must set the banks free to expand their domestic asset bases so they can fully compete for global business

Peter C. Newman July 14 1997
The Nation’s Business

Why the big banks need to get bigger

We must set the banks free to expand their domestic asset bases so they can fully compete for global business

Peter C. Newman July 14 1997

Why the big banks need to get bigger

The Nation’s Business

We must set the banks free to expand their domestic asset bases so they can fully compete for global business

Peter C. Newman

Although he is the top executive of Canada’s top bank, John Cleghorn is far from a satisfied man. Cleghorn has launched himself on a crusade to turn the Royal into a European-style mega-bank, but is being held back by Ottawa regulators who think small. His recent $2.4-billion purchase of London Insurance Group is only the latest foray in his ambitious program to transform the Royal Bank from being the dominant giant among Canada’s financial institutions to a significant international player. In 1971, the Royal was the world’s 12th-largest bank as measured in terms of assets; now it ranks 60th, which, in the kind of competitive edge that counts, is nowhere.

Canadian banks are constantly being accused of being too large and too profitable. That’s a valid criticism if they’re judged strictly as domestic institutions that hog the financial marketplace. (The

Royal does business with nearly one out of every two Canadians and last year earned profits of $1.43 billion, the highest ever recorded for any Canadian enterprise.) Ottawa cannot keep out such competing financial giants as the American financial colossus GE Capital Corp. (which is financing the Eaton’s rescue effort); the ING Groep NV, the Dutch-owned conglomerate that, through ING Direct, its Canadian virtual banking arm, opened its doors to consumers earlier this year; and California’s Wells Fargo—all currently in the process of invading Canadian banking and insurance markets. We should not try to preserve the bank’s past domestic dominance by holding back these invaders, but we must set Canadian banks free to consolidate and expand their domestic asset bases, so they can effectively compete for global business.

This is no ideological argument; it is a fact of 21st-century life, and it is why the chairmen of Canada’s Big Six banks are bent on at least doubling their assets within the next decade. Cleghorn is leading that parade. Unlike Matthew Barrett of the Bank of Montreal, for example, he has not gained a high profile, but Cleghorn—who also negotiated the bank’s $1.6-billion purchase of Royal Trust in 1994—is on an expansion rampage, currently concentrating on some major U.S. prospects. The clue to Cleghorn, a shy intellect who loves Canadian history and knows the value of feeling vulnerable in a world that’s changing by the minute, is the fact that he played centre with the legendary McGill Redmen football team that won the national championship in 1960. Centres do not grab headlines, throw the glamorous passes or make the dramatic touchdowns. They hunch over the ball, snap it to the quarterback, then hurl themselves into the opposing team’s front line. They are human missiles who don’t admit defeat or diversion—and that is John Cleghorn, very much a new 1990s-style Canadian banker.

His role model is either the French Exocet missile, or more likely, England’s mighty Lloyd TSB Group, which has $295 billion in assets, compared with the Royal’s $250 billion. Their size may be similar, but their profits aren’t even close. Lloyd’s last year managed to earn $5.5 billion, an astonishing 34 per cent on its revenues, nearly twice the Royal’s rate of return. The British bank, which boasts 15 million clients, recently bought the huge Abbey insurance group and has grown rapidly in size and influence in what it calls the “bancassurance” business, which includes companies specializing in both banking and insurance.

As it is, the Royal’s reach is astounding. It serves more than 10 million customers in 35 countries, and with its London Life acquisition will employ 66,000 people, putting the Royal right behind BCE as the country’s second-largest private-sector employer.

London Life is Canada’s largest individual life insurance

provider, with more than three million clients worldwide. It’s been called an independent company, but in fact it has been saddled with being a subsidiary of the Toronto-based Trilon Financial empire, which called all the shots. Within an hour of the announcement, Cleghorn made a big point of flying (economy, of course) to London, Ont., to assure the staff that “the London Insurance Group will remain a vibrant, going concern, with its own management, employees, distribution network and headquarters, based right here in London.” This, he pledges, will be different from the Royal Trust and Dominion Securities takeovers, which have been largely submerged within the bank. “In the case of London Life,” Cleghorn points out, “there is very little overlap with our present operations, so when I say it will be a partnership instead of a merger I mean there will be two separate companies operating under the same roof. London Life has a tremendous brand value,

and we don’t intend to lose it.”

In an interview last week, he added: “It became obvious that if we were going to do anything internationally, we needed a strong insurance infrastructure. London Life has a sales force of more than 3,000—a third of them already licensed to sell mutual funds—so this can eventually be an important link for distributing our products.” (What Cleghorn does not say is that once Ottawa sees the light, he plans to sell insurance through his bank branches as well.)

“You can’t just go out and make international acquisitions,” he continues, “without a strong domestic base. Every one of our businesses must have an international strategy. The problem with global expansion is that it’s sometimes difficult to get synergies. So we’ll think of alliances and joint ventures, as well as buyouts. But for sure, we can’t be sitting comfortably north of the 49th parallel without becoming global players. We must have the scale to compete.”

Bet on it.