Last January, the Royal Bank of Canada and the Bank of Montreal stunned most Canadians—including Finance Minister Paul Martin—by announcing their intention to merge. Three months later, the Canadian Imperial Bank of Commerce and the Toronto Dominion Bank unveiled similar plans. If the mergers go ahead, the two new banks would control 70 per cent of Canada’s banking assets. That prospect has alarmed many, including the lone holdout, Bank of Nova Scotia chairman Peter Godsoe, who calls the mergers “anti-competitive. ” The two proposed mergers must still receive regulatory and political approval—and Martin has made it clear the deals must benefit all Canadians, not just bankers, if they are to win approval. Last week, Royal Bank chairman John Cleghorn met with Maclean’s editors to discuss the controversy. Excerpts:
Maclean’s: Critics have argued that you have not provided one single reason why your merger with Bank of Montreal would be a good idea. Can you ?
Cleghorn: Basically, we want to keep our customers, that’s what we’re in business for. The only way we’re going to do that is to make sure that we have comparable quality and costs that are equal to the best in the world. The fastest change taking place on our balance sheet is the reduction of the deposits and the growth of mutual funds. That’s a critical shift taking place. We want to make sure that as our customers move from deposits to mutual funds, we’re going to keep them.
When it comes to things like credit cards, we don’t want [Wilmington, Del.-based] MBNA to gradually use its North American scale to beat us out with our client group. MBNA is very proud to have acquired the alumni card of the University of Manitoba. They’ve got the CFL, they’ve got the NFL, and they’re working with virtually every alumni association of every university in the country. They’re very tough competition. We’ve got five million customers; they’ve got 20 million customers.
Maclean’s: Peter Godsoe doesn’t agree that the mergers are a good idea.
What’s your reaction to his position? Cleghorn: Well, that’s different than what he said to the task force in writing. I can show you this document. He says: ‘In principle, we favor eliminating the 10-per-cent rule and encouraging mergers between large institutions to help create strong, interna-
tionally competitive Canadian companies.’ Maclean’s: He says these mergers wouldn’t be allowed in any other country, because of the level of concentration. Cleghorn: He, I guess, forgets what happened in Holland nine years ago. Holland is a country like Canada; it relies on trade, it has some large companies like Royal
Dutch Shell. And it also has ABN Amro and
ING, [financial institutions] which are ranked in the top 20 in the world by market capitalization, and have a concentration in their marketplace higher than we will after the mergers.
Maclean’s: Will your merger result in job losses?
Cleghorn: Yes, we’ve gone into that. We’ve said that there is going to be an overlap and some job losses—but contained well within our attrition levels. We hired 7,000 people between the two organizations last year, and this year alone just for us to keep up with the turnover, just to hold our employment levels flat, we have to hire 5,000 people, most of them in Canada.
Secondly, we’re saying the experience in the States is that three to five years out, you’re
actually employing more than you did at the time of the merger. So we think we will too. Maclean’s: What will happen in small communities?
Cleghorn: No small town or rural community will lose services as a result of this merger. There are 19 communities in Canada where there’s the two of us, but in many of those there’s a credit union as well. So we’re saying we’ll keep employment in those 19 branches the same for at least five years. Now in some cases we may have to bring the two together because they’re too small to affect a one-stop shop. On the other hand, we have some communities where they’re across the street, so one might be a business centre, one might be a personal centre. There are examples like St. John’s, Nfld., where they literally are side-by-side.
Essentially we’d be looking at something like putting an archway between the two, and there’s several institutions like that.
We have 1,500 branches in total, 450 of them in small communities. We’re not about to drop a bomb on them.
Maclean’s: What does your own survey show about reaction to the merger?
Cleghorn: It’s been pretty steady. Maclean’s: Steadily bad? Cleghorn: No, balanced. [Polling company] COMPAS Inc. did one recently which is interesting: 30 per cent were against and 30 per cent were neutral. But I think the majority said, as long as there’s competition, they’re in favor of it.
Maclean’s: Why haven’t you done a better job of bringing Canadians on-side?
Cleghorn: If it was that easy an issue to understand, you wouldn’t have needed a two-year task force to look into financial services. For people who don’t see the competition as those who are in the business do, it’s a different story. People look at financial services based on their
own personal experience.
Maclean’s: Now you’re saying that the public in general doesn’t understand the nature of this competition?
Cleghorn: No, I think what I’m saying is that it needed a task force with its findings and its recommendations to help people understand the various issues, and a competition bureau looking at it in terms of concentration of competition.
Maclean’s: What happens if the competition bureau turns down the merger?
Cleghorn: It’s a hypothetical question. I wouldn’t pre-judge the competition bureau. I guess in the ultimate the government has to decide whether financial services is a strategic industry and whether we want to be there with medium-sized countries, as well as large countries around the world.
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