Is bigger really better?

JOHN SCHOFIELD February 9 1998

Is bigger really better?

JOHN SCHOFIELD February 9 1998

Is bigger really better?

The evidence from past bank mergers is mixed

Charles Baillie was doing his best to sound scrappy. Sporting a white cowboy hat, the pinstriped chairman of the Toronto Dominion Bank told shareholders in Calgary last week that he is ready to wrestle with the banking monolith that will be formed if Ottawa approves the $39-billion merger of the Royal Bank and the Bank of Montreal. By bobbing and weaving around its larger competitors, he added, TD, the smallest of the country’s Big Five banks, will endeavor to prove that bigger is not necessarily better. “We outperformed all the banks last year—we had the best earnings growth,” Baillie said. “Being the size we are, we’re nimbler.”

It was a curious comment coming from a bank that was born of a merger between the Bank of Toronto and the Dominion Bank in 1955—a huge corporate marriage by the standards of the time. But even as he trumpeted the virtues of smallness, Baillie declined to rule out any future mergers involving his company. His counterpart at the Bank of Nova Scotia—which has undertaken six major acquisitions in its 165-year history—took a similar tack. “Everybody is looking at everybody,” Scotiabank chairman Peter Godsoe said in Ottawa after his bank’s annual meeting.

That much is clear. What is not clear, analysts say, is whether bank mergers offer any benefits for consumers, bank employees or shareholders. Officials of the Royal and the Bank of Montreal say that if they are allowed to pool their resources, they will be

able to compete more effectively abroad. In addition, they say a merger would make it easier in Canada to fend off foreign giants that specialize in specific areas, such as mortgage lending or credit cards. ‘Well lose our own identity if we’re not masters of our own identity,” says Royal chairman John Cleghorn.

In the end, however, Canadian consumers and some bank employees could pay the price for financial sovereignty. In the United States, studies point to a growing gap between fees charged by big banks and their smaller competitors. One recent survey found that consumers paid an average of 15 per cent more to maintain a chequing account at one of the 300 largest U.S. banks than at a smaller competitor. “Bigger banks should have lower costs, but they’re not passing them on to consumers,” says Ed Mierzwinski of the Public Interest Research Group, a Washington-based consumer orga-


In 1993, the Royal Bank swallowed Royal Trust, at the time the country’s second-largest trust company. Since then, Royal Trust's branch network and payroll have both shrunk.

Then Now


Employees 5,000 4,350

nization that conducted the study.

Canadian banks counter that their service charges are 50 per cent lower than those south of the border. Yet fees and service levels are still a sore point. In a survey of 10,300 people last fall by the Consumers’ Association of Canada and the Toronto-based National Quality Institute, banks were ranked 17th out of 22 sectors for overall service quality. “I think for a lot of people this merger could be the last straw,” says CAC executive director Marnie McCall.

A larger bank would almost certainly spell trouble for some bank workers. Recent mergers involving big U.S. banks have led to thousands of layoffs. While Cleghorn and Bank of Montreal chairman Matthew Barrett declined last week to rule out any job cuts, they said they will attempt to keep the reductions to within normal attrition levels of eight to 10 per cent annually. They also point to a recent study by the Federal Reserve Bank of Cleveland examining 200 bank acquisitions between 1984 and 1994. Two or three years after a merger, the study states, banks typically employ between five and seven per cent more workers than before the acquisition. (In Canada, there is evidence pointing the other way. In 1993, just after its $1.6-billion acquisition of Royal Trust, the Royal Bank had 52,745 employees. Its payroll dropped to 49,208 a year later and is now 50,719.)

Despite the job cuts, studies by the U.S. Federal Reserve Board and by a government-appointed inquiry in Australia show that in many cases bank mergers do not result in improved efficiency or profitability. “The odds are against it,” says Tom Brown, a bank analyst with the New York City brokerage Donaldson, Lufkin & Jenrette Securities Inc. He adds that the problem is often a lack of strong leadership: ‘The company becomes adrift because one side of the bank is still fighting with the other side. Execution is much more important than size.”

Brown, a noted critic of bank mergers, is nevertheless optimistic that the Royal and the Bank of Montreal will avoid the mistakes of other combined banks. The Royal, he says, is a North American leader in marketing to individual demographic groups, while the Bank of Montreal excels in new forms of electronic and small-branch banking. “If you put these two companies together,” says Brown, “there may be an opportunity here * for somebody to finally realize some benefits 1 from size.” Ultimately, shareholders will be looking to Cleghorn and Barrett to prove “ that big can be beautiful.