How the Banks BLEW IT
It was, without a doubt, the biggest bombshell ever dropped on Bay Street. Bang! Two of Canada's largest banks proclaimed their urge to merge. Jaws fell like Asian markets. And then: Kaboom! Two more banks decided to join them. Merger mania
was one thing. Not even the most brilliant Bay Street visionary had the slightest inkling that it would spread so far as Royal Bank of Canada,
Bank of Montreal, Toronto Dominion Bank and Canadian Imperial Bank of Commerce. What had looked, in
January, to be one of the world’s most stable and successful banking systems was, by the end of April, never going to be the same.
And they thought we wouldn’t notice.
The way the bank’s strategic thinkers saw it, Canadians were not going to make that much of a fuss. Well-educated and financially comfortable, the majority would have nothing to fear from the prospect of one or two fewer banks. They would accept the most explosive and most expansive corporate mergers of the 1990s without a blink. Af-
ter all, as the bankers keep saying, this is a nation of sophisticated consumers. We lead the planet in our love of automated teller machines. We bank by phone. Growing numbers are embracing Internet banking. Thirty-eight per cent of Canadian households own mu-
tual funds; investors are supposed to understand that, these days, a chartered bank, like any multinational corporation, needs to be big to survive.
A disgruntled minority, the banking cranks who are
forever yapping about service charges, executive salaries and branch closures, might be distressed. But the rest could be counted on, so the banks thought, to accept mergers as yet another shift in the changing economic landscape. All the bankers had to do was break the news, make a few promises, lobby like hell behind the scenes and lay low until the dust settled.
What went wrong? So far, just about everything. Take the reaction of the Weston and District chapter of the Canadian Federation of University Women—a group of conventional suburban consumers whom
the big bankers could have reasonably expected to embrace the mergers. But the proposed marriage between the Royal Bank and the Bank of Montreal last January left them too flabbergasted to know what to think. When Toronto Dominion Bank and CIBC followed suit in mid-April, the group decided to get to the bottom of the issue, and fast. “We asked ourselves, who is going to benefit?” says legal secretary and longtime member Mary Louise Ashbourne. Worried that the only benefits would be the kind that show up on the banks’ bottom lines, Ashbourne and four friends called an emergency meeting of their tiny chapter, located in Toronto’s leafy west end.
For two months last spring, the self-proclaimed policy researchers—aged 65 to 75—read everything they could about banking legislation. They studied and then reported on topics ranging from small business lending to the history of financial services regulation, and analyzed corporate concentration in the Canadian and foreign banking sectors. The resolution—presented to the group’s annual meeting in July and passed with a speed and lack of debate that left its authors shaking their nicely coiffed heads—asked the national organization’s members to urge Prime Minister Jean Chrétien and Finance Minister Paul Martin to make sure their decision is in the best interests of the country, not just the banks. “We are not radicals,” says Phyllis Baldwin, a Jessica Tandy look-alike with a fierce glint in her eye. ‘We are sensible. And we did not think mergers would be a good thing, from our common sense point of view.”
It was a shock to the politicians and the public when four banks declared they would merge
The resolution turned 10,000 well-connected women from every province into anti-merger advocates. And it also summed up what so many people have come to feel this year as they confront the prospect of disappearing banks: suspicion over the bankers’ motives; concern about the impact on the cost and availability of banking services; and, perhaps most interesting of all, a sense that what happens to banks—or rather, what chairmen John Cleghorn, Matthew Barrett, Charles Baillie and AÍ Flood are allowed to do with our banks—is about something larger than service charges or branch closures. The Bank of Montreal’s Barrett has been on the rubber-chicken circuit, telling audiences that the merger debate is really about what kind of Canada we want to leave to our children. It turns out Barrett may be right—but not in the way he intended. (As matters stand, sources have told Maclean’s, Barrett may well be asked to step down by his bank’s directors if the mergers are not approved, and Cleghorn could be in trouble at the Royal, too.)
Hard as they try, the four pro-merger banks have had extraordinary trouble finding any argument that resonates with Canadians, or their elected officials. The decision by Bank of Nova Scotia chairman Peter Godsoe (whose lack of a partner has led competitors to dub him the “lonely Maytag repairman” of the banking fraternity) to
I ASSETS~ PROFITS* EMPLOYEES BRANCHES ATMs (billions) (billions) How the banks compare II I' ILiiIL~ - $182 ________Ls237~ liD_______ $1.21 BANK OF MONTREAL ID BANK $1.55~ $1.35 41,848 1,500 4,271 47,352 1,363 3,491 33,400 1,216 2,069 28OOlt 919t 2,038t
*As at Nov. 1, 1998 **As of Dec. 31, 1997 fl-997 figures
SOURCES: ROYAL BANK, CIBC, BANK OF MONTREAL AND TD BANK
campaign against the mergers has split all the large corporate associations that depend on the chartered banks, from the Canadian Bankers’Association to the Business Council on National Issues. And people like the university women, riding in Godsoe’s slipstream, have transformed a bloodless discussion about globalization and organizational synergies into a grassroots issue that has taken some of the country’s slickest spin doctors by surprise. Says a member of one merger team: ‘They never figured it would come down to this much scrutiny, that the magnifying glass would be so strong.”
The mergers were supposed to be in the bag by this Christmas. Yet here are Canada’s top bankers, $25 million into the sales job of their careers, and instead of catching on, their coveted marriages are heading the way of Kim Campbell and the Charlottetown constitutional accord. Lesser organizations would pack up their lawyers and consultants and go home. But Canada’s bankers, for all their cushy option deals and lousy press, are made of sterner stuff. After 10 months of doing things the nice way—talking, explaining, asking for understanding—the bankers are gearing up for battle. Banking Luddites and Liberal backbenchers beware! They’re talking Plan B. The gloves are about to come off.
Plan A is about mergers. If Plan A goes through, the banks say they will provide more and better jobs, greater customer service, continued human contact and lower prices. The Royal-Montreal promises to
double the amount of money the two banks currently set aside for smalland medium-sized business, to $40 billion by the year 2004. They will reduce service fees by at least 10 per cent, increase staffed outlets from 2,500 to 3,000, and ensure more face-to-face banking. Bank spokesmen have gone so far as to call these “blood promises”; Royal Bank chairman John Cleghorn, one publicist says, is willing to go to jail if he does not keep his word. Cleghorn smiles grimly when this is mentioned—everyone knows PR guys get carried away. But the message remains: if the mergers are approved, the banks will be profitable and happy. Customers will share in their good fortune.
Plan B, unveiled gradually over the past few months, outlines what happens if the government rejects the mergers. The bankers refer to it privately as the “scorched earth” policy. They insist they are not making threats. They are merely pointing out that without mergers, Canada’s banks cannot afford to maintain an expensive and inefficient branch network or continue to provide every customer with full banking services. Customers who buy lucrative services will continue to find bankers at their beck and call. The ones who like to stand in line so they can talk to tellers about their lives will be shown how to use an ATM. “If you want to cash a cheque,” says a senior executive at one of the four pro-merger banks, “you can stick it into a machine.”
From a banker’s point of view, this is a perfectly reasonable choice to lay before Canadian customers. “People think teller services are a God-given right,” the banker says. “It costs the bank $2.” Like others in his profession, he seems genuinely furious at the amount of money wasted on personal interaction. The cost of the branch system drives bankers to distraction; they grumble about it for hours. A big reason for bank mergers is to have larger
technology budgets so they can load up on leadingedge software designed to identify which customers make the bank money and which do not The CIBC calls it “profile banking” and the Royal calls it “unified selling,” but it comes down to the same thing: pampering the high-margin customers at every turn, while pushing people who cost the bank money out into the ATM kiosk—or out the door.
Customers find this puzzling—especially when they see that the banks are making money hand over fist. The three that have reported 1998 profits have all pulled in more than $1 billion, a number that as recently as the early 1990s was considered so outrageous as to be taboo. The Royal, the most profitable company in Canada, reported a record $1.8 billion,
TD Bank $1.1 billion and, despite advance warnings about the adverse impact of market meltdowns, the Bank of Montreal earned a record $1.35 billion. CIBC is scheduled to report its earnings this week.
Is it any wonder that, as revealed in a new Maclean’s poll, 51 per cent of Canadians believe bank mergers are motivated by greed? Is it any coincidence that half oppose the mergers, up from one-third last spring? The survey, conducted by Toronto-based Northstar Research Partners, found that only 18 per cent of Canadians are in favor of the deals, down from one-third in past months. Thirty-two per cent remain neutral or uncertain (page 36).
Pollsters found that although only one in 12 Canadians is following the mergers closely, 54 per cent care about the outcome. The lowest level of awareness and concern can be found among young Canadians (aged 18 to 29) and residents of Quebec—because younger people don’t think about banking, period, or are leading-edge, computer-literate customers, while Quebec is well served by smaller banks as well as by caisses populaires, the ubiquitous equivalent to credit unions. Those who care tend to be Ontario residents; people aged 45 and up; those with a university education and incomes over $50,000 a year; customers of the merging banks; the self-employed; and, of course, individuals who hate banks to begin with.
In private meetings with clients, Cleghorn
and other Royal executives have been making solid progress selling the benefits of the merger to smalland medium-sized businesses. Self-employed people and entrepreneurs are emerging from roundtable sessions and question-and-answer lunches claiming to be more comfortable and confident about mergers than they had been before they heard what John (as they all seem to call him by the time these events are over) had to say.
But big mainstream companies are notably absent from the merger debate. “People won’t speak for fear of reprisals,” says Toronto economist John Crispo (who has done so anyway). Privately, Godsoe says, “the majority are against it” This is not just the anti-merger forces talking; a number of Bay Street business executives, who asked to remain anonymous, say the same thing. Companies with a financial stake in downtown Toronto real estate fear the possibility of losing two of their five biggest tenants. The rest don’t want to get stuck relying on only three big lenders. “For companies, the issue is really quite practical,” says an influential Toronto-based investment banker with no ties to chartered banks. “They all know from experience that life can get pret« ty rough when your banker turns cold.”
2 Whatever their opinion of bank mergers, 68
I per cent of Canadians believe the government
1 is going to approve them anyway. Right now,
2 this seems far from certain: Chrétien and Mar1 tin are said to be struggling to make the right
decision (page 40). Do they treat banks in the same way as any other multinational company—albeit one of strategic domestic importance—or do they make an exception for national policy purposes? The answers will start to emerge this month as the Liberals dig themselves out from under the policy pronouncements scheduled to be dumped on their desks in the days ahead, including a critical decision by the federal competition bureau.
Meanwhile, it’s post-mortem time. Bankers are poring over poll results and interview transcripts in an effort to figure out exactly who or what is responsible for the blunders—and what, at this stage, can be done to fix them. They are fast to blame each other. TD Bank and CIBC finger Cleghorn and Barrett for “jumping the queue,” as TD Bank chairman Charles Baillie so elegantly puts it, while Royal and Bank of Montreal blast Baillie and CIBC chairman AÍ Flood for sabotaging the process. The way some at RoyalMontreal see it, they are the ones with the great synergies; Baillie and Flood are just also-rans who turned what should have been a quick regulatory nod into a lengthy high-profile fiasco. Baillie, they complain, has made matters worse by refusing to follow the Royal-Montreal lead and declare a moratorium on service cutbacks until the approval process is over. The original partners are particularly incensed that the competition bureau may be looking more kindly on the TD BankCIBC merger than their own.
Bankers agree, however, that they would all be further ahead had they held off until Regina lawyer Harold MacKay’s task force on financial services tabled its report in late September. As it stands, the banks look like they tried to force the hands of both Martin and MacKay— which, of course, is what they did. “Matt sweet-talked John and they both jumped the gun,” the investment banker says. “They took the high-risk gamble and decided to spring it on Paul, because if they went to Ottawa privately he would have told them to wait for MacKay. They de-
DWARFING THE COMPETITION
1,322 [194,800 COMPANIES TOTAL ASSETS* I EMPLOYEES (BILLIONS) $1,230 Canadian-owned banks __________ Foreign banks ___________ All banks Trust companies** 22,900 Credit unionst 2,289 107 61,600
*Assets for 1997 **Excludes bank subsidiaries flncludes caisses populaires
SOURCE: MACKAY TASK FORCE
cided it might be worth getting Paul angry, if they could force the government’s hand and push it through.” He blames Barrett. “This is definitely Matt’s style. He’s a swashbuckler.”
Officials at the Royal refuse to knock Barrett, but admit to being spooked into making a quick decision. “With what we know now, would we have done it differently?” asks David Moorcroft, the Royal’s man in charge of damage control on the campaign front. “It’s possible.” What motivated the bank to move so fast? “Fear,” Moorcroft says. “Fear of what U.S. competitors are doing in our markets. Fear that the Bank of Montreal would not be there if we waited a year.”
It might still have worked if Godsoe hadn’t butted in, merger advocates say. The Bank of Nova Scotia chairman, who is definitely persona non grata in bankers’ association circles this fall, insists he did not start out to build a case against his competitors’ plans. But when he was invited to appear before various federal committees studying the deals, Godsoe
says he felt obligated to express his honest views. What’s the rush? Godsoe asked. We have a fabulous banking system. It’s safe, it’s profitable, it’s competitive and it’s technologically advanced. Financial services are essential to the country, and the merger talk has overshadowed intelligent debate about bigger issues. Let’s all slow down and think this through. Pro-merger forces, who have been searching for the “defining moment” to give the campaign momentum, hoped to create it by inviting Godsoe to debate Cleghorn and Barrett. So far, he has refused, saying it would serve no purpose. Besides, as far as business is concerned, Godsoe has already won. The consensus is that he makes the more logical argument.
Yet, reduced to its basics, the merger debate is not being won or lost on the strength of any particular argument. Instead, it has be come an emotional issue. The women’s federation members boned up on all the facts and figures. They sound like Cleghorn when they talk about economies of scale and the inroads foreign companies are making into the Canadian market. But this is not what they care about. When they really get going, these women talk about how they just don’t trust bankers to look after people who depend on them. “We may not be typical of the people who will be hurt,” says Sheila Mcllraith. “But our concerns go beyond ourselves.” A few astute bankers have picked up on this emotion and are attempting to analyze it in their own peculiar terms. These days, they are attributing their troubles to what Moorcroft calls a lack of social capital. Remember Stephen Leacock’s story about being rattled and belittled at the bank? Like elephants, unsatisfied customers never forget. “This is probably the biggest single reason this merger is becoming so difficult for us,” Moorcroft says.
But larger factors are at work. Opposition to bank mergers may, in fact, not even be about banking. Some people suggest it is happening because Canadians need to feel they still have some control over their lives; others say it is a protest against the forces of globalization. Ultimately, it seems to be about something deeper—a collective reaction to a decade of upheaval and loss. This sentiment is expressed in an editorial from the Oct. 2 Moose Jaw Times Herald. “Rural residents must surely feel as though they have walked this merger path many times before,” wrote Herald associate editor Joyce Walter. “They have watched the merger of school districts and the closure of their schools; their hospitals have closed; church congregations have amalgamated; post office outlets have been replaced by community boxes—the list goes on.” Banks, as we know them, may be destined to disappear, too. Not just now, Canadians seem to be saying. Not just now.