KIMBERLEY NOBLE December 7 1998


KIMBERLEY NOBLE December 7 1998


For every bank argument, their opponents have a reply

Over the past year, executives from the Royal Bank of Canada, Bank of Montreal, Toronto Dominion Bank and Canadian Imperial Bank of Commerce have argued that merging four banks into two is necessary for a variety of reasons. What they’ve said—and how the critics have responded:

Bigger is Better. The banks cite the need for $5 billion worth of productivity gains that would be easier for larger organizations to achieve. They also note the ability of New York City-based Citigroup Inc. to underbid the Royal on the federal government’s Visa credit card business as proof that larger firms can beat out smaller ones.

Opponents quote studies showing that few efficiencies have come from U.S. bank unions. They also point out that tiny National Bank of Canada was awarded the bigger MasterCard portion of the federal government rf 1 credit card contract, beating out the Bank of Montreal.

Competing Abroad. Global pressures mean Canada’s financial institutions have gone from being big fish in a medium-sized pond to small fish in a global ocean, the banks say. To stay competitive, they need to be bigger to offer winning rates for large international loan and investment syndication deals, generate export earnings, and help Canadian companies finance foreign operations.

Hogwash, say the critics: all the banks want to do is expand into the United States.

The pro-merger banks say there is no reason they can’t expand in the United States and move more forcefully into the global arena at the same time. Royal Bank, for one, wants Bank of Montreal’s Chicagobased Harris Bank as the platform for a continent-wide financial services empire.

Defending Home Turf. Royal Bank’s biggest theme this fall has been the threat posed by new foreign competition in domestic markets for credit cards, small-business loans and leasing. It even made a video identifying foreign “category killers,”

such as American Express, Wells Fargo, and MBNA Corp., that have targeted the Canadian market.

Merger opponents scoff, calling these competitors “ankle biters.” They argue that some of the companies have operated in Canada for decades, are not operating here at all, or will never be a serious threat. Banks counter that even small inroads by many foreign players will chip away at profits. Their best argument is the July purchase of Midland Walwyn Inc. of Toronto by New York-based Merrill Lynch & Co., and the company’s potential to become a dominant player in the Canadian investment business.

The Technology Angle. Before they zeroed in on the ankle biters, the banks said technology was their most important challenge. They’re right: the better the software, the better they can identify the best customers and manage risk. The MacKay task force on financial services points out that the top three U.S. banks spent $7.7 billion on technology in 1996, whereas the top three banks in Canada spent only $2.4 billion.

This is a contentious issue: some merger opponents say Canadian banks spend less because they are a decade ahead of the U.S. industry in transaction clearing and ATM technology. Others think Canadian banks should be prepared to join forces to handle big projects. Pro-merger banks say the systems they need now cannot be shared with competitors.

Branches and Jobs. This is the big concern for the public and for bank employees. Economists Doug Peters and Arthur Donner created a

stir in September by estimating that between 20,000 and 40,000 employees will get the post-merger chop. The banks insist they will eliminate “jobs, not people” through the use of attrition and retraining.

As for branches, each bank is different. TD is experimenting with teller-less branches; CIBC is building and refurbishing; the Bank of Montreal and the Royal are waiting to see what happens. All have been opening new outlets in supermarkets. The Royal and the Bank of Montreal say they will increase staffed outlets to 3,000 from 2,500 if they merge. Peters and Donner predict the four banks will ultimately close 1,000 of 5,000 branches if mergers go through.

Exit Strategies. Ultimately, a great swath of the financial community believes the mergers are taking place in part because both Bank of Montreal chairman Matthew Barrett and the CIBC’s AÍ Flood want to retire. Without a merger, Flood has no viable successor to take the helm at his profitable but troubled bank. Barrett honestly believes that merging with the Royal will be the best long-term solution for his organization but has made no secret of his wish to pursue other interests, such as a desired diplomatic posting and the company of his younger wife.