When it comes to their business prospects, Canadian bankers are in something of a quandary. They want it both ways. They need clients and investors to see them as leading-edge: competitive, profitable, all systems go. But this year of pending bank mergers means they also have to persuade customers and politicians that bankers are a beleaguered bunch who will be left eating the dust of foreign competitors unless they get permission to merge, pronto. For those who are more inclined to believe the bottom line, the latest financial results from the big chartered banks reveal that, whatever the bankers say, their organizations are having no trouble holding their own in both domestic and foreign banking markets.
Quite the contrary—they are doing phenomenally well. Five of Canada’s six biggest banks posted their second-quarter profits last week, and with one exception—the Montreal-based National Bank of Canada— each set a new record. Together, the banks rolled out a total of $1.6 billion in profit for the three months ending on April 30, up a collective 16 per cent from the same period a year earlier. Adding these results to those generated during the previous quarter puts 1998 bank profits at $3.1 billion, 15 per cent higher than last year’s record earnings. (The last bank to report, the CIBC, will announce its numbers this week.)
The big money, moreover, has been made in exactly those areas where the banks claim to be under the most pressure. While traditional deposit-taking and lending businesses are experiencing only modest growth, those results have been dwarfed by this year’s spectacular doubledigit gains from non-interest, fee-generating operations—ranging from credit card and bank service fees to mutual funds (a big source of increased profits for many banks) and especially brokerage and investment
banking businesses. Fee business now accounts for more than 66 per cent of the big banks’ revenues. Canadian banks with large foreign or discount brokerage operations have done particularly well. “Upbeat numbers” was the verdict from John Leonard, who watches Canadian banks for Salomon Smith Barney in London. “Lots of people trading stocks at higher and higher prices means lots of fees.”
Banking spokesmen, old hands at defending their industry’s profitability, were clearly
prepared for trouble. Witness the lightning reflexes of a senior public relations executive from the Royal Bank of Canada—which, as of the most recent fiscal quarter, ranked second in terms of assets to the CIBC among the big chartered banks, and which is determined to merge with third-place Bank of Montreal. A caller barely has time to raise the subject of record bank profits and—‘You know what?” the PR man jumps in before another word is said. “Before you go any fur-
ther, let me just say this. Wouldn’t people be really disappointed if there weren’t records every time? I mean, aren’t earnings supposed to grow? Isn’t that why we are in business to begin with?”
In showing how much surplus value they generate, the big banks have to walk a fine line between what the equity markets want and how much the fee-paying public is prepared to accept. In the early 1990s, for instance, it was considered unseemly for a Canadian bank to make more than $1 billion in a given fiscal year—leading the Royal to find sufficient last-minute provisions and write-downs to bring its 1990 profit down to a more palatable $965 million.
Times have changed. This year, the Royal has cleared $925 million in the first six months alone—and that after setting aside another $375 million in profit to cushion the bank from future increases in bad loans. The Bank of Montreal came in with a $738-million profit after loan-loss provisions, while the Bank of Nova Scotia posted $677 million, the Toronto-Dominion Bank $600 million and the National Bank $195 million. All told, the five institutions set aside $1.2 billion out of their 1998 profits as insurance against bad loans.
Bankers do not like drawing attention to these figures. ‘You have to be careful what you write about provisions,” said Dan Marinangeli, a senior financial executive at the TD. ‘You can’t point to one provision and say that if they didn’t take that, these guys would have made a zillion dollars. This is the wise and prudent thing to do. Times § are so damn good right 8 now that we are not seeing ï many bad loans. But it’s kirn evitable that we will.” u Probably not in 1998, S however. Given the current « health of the economy, the 1 Big Six appear to be on I track to report combined 3 year-end profits of $8.5 bil” lion or more. The most obl vious risk they face is a global stock market slump, which would cut severely into the banks’ revenues from their investment and mutual fund divisions. If that happened, “the banks could take a pretty major hit in the next year or so,” says Ross Healy of Toronto-based Strategic Analysis Corp. The banks’ shareholders wouldn’t like that, but at the very least it might blunt some of the criticism from merger-wary Canadians.
Service with a smile
Increase in bank revenues from fees and service charges* (1998 second quarter versus 1997 second quarter)
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