The battle beings

Bankers prepare for trouble as a federal task force delivers its report

JOHN GEDDES September 21 1998

The battle beings

Bankers prepare for trouble as a federal task force delivers its report

JOHN GEDDES September 21 1998

The battle beings

Bankers prepare for trouble as a federal task force delivers its report



Bank of Montreal’s Barrett in Calgary; banking in Hillsburgh, Ont. (top): trying to ease fears that mergers will mean poorer service

Eight months after he was written off as a liability in the bank merger battle, Matthew Barrett staged a comeback last week. Back in January, the Bank of Montreal’s chairman and CEO injected his own blend of blarney and machismo into the announcement of his bank’s plan to merge with the Royal Bank of Canada, boasting that the new megabank would “kick ass” in the United States. To the federal politicians who will ultimately decide if the mergers go ahead, it sounded like the deal was being driven by ego. Barrett became a prime target of the merger’s critics. In a speech in Calgary last Thursday, he recovered some lost ground by pledging that the merged bank would set up a stand-alone arm devoted to serving small business—a key government concern—and double the credit available to smaller firms from what the two banks offer now. Even the skeptical small-business lobby group, the Canadian Federation of Independent Business, allowed that Barrett spoke with credibility. CFIB president Catherine Swift said he has long been “a real leader” in improving lending to up-and-coming entrepreneurs.

Barrett’s bid to claim back the high ground was carefully timed as a prelude to this week’s release of a federal task force report into the future of Canada’s financial institutions. Much more is at stake, of course, than one banker’s image. Ever since the proposal to marry the Bank of Montreal and the Royal Bank, which was followed by the April engagement of the Canadian Imperial Bank of Commerce and the Toronto Dominion Bank, the banks have been

feeling political heat. Finance Minister Paul Martin, who holds the power to approve or reject their deals, is at best doubtful. Many backbench Liberal MPs are downright hostile. The report of the task force, headed by Regina lawyer Harold MacKay, is expected to set the terms for a fall packed with debate over the issue. The question is whether it will help clear a path for the mergers or consign them to endless rounds of further study and political wrangling.

MacKay’s tome will be wide-ranging enough to be interpreted both ways. The good news for the banks is that it is expected to stick

to the position of an interim report released in July, 1997, which recommended that Ottawa end its unwritten policy of refusing to allow mergers between big banks. But the report is also likely to undermine the banks’ case for speedy approval from Martin. The bankers’ argument is that growing foreign competition can only be countered if Canada’s banks are allowed to join forces quickly to invest in large-scale, homegrown alternatives. Industry sources said MacKay concluded that the invasion of foreign financial rivals, while real, is not so rapid that Ottawa must make a snap decision. That go-slow position suits those wary of the merger plans. “We would like to first see proof of the other players in the marketplace,” Swift said in an interview. “Let’s postpone this for a couple of years.”

That would be an eternity to the bankers with an urge to merge. David Moorcroft, Royal Bank’s vice-president of public affairs, said it would be a dire mistake to underestimate the pace of change. ‘We believe we have a window of opportunity in which we can meet the new competitive challenges,” he said. “I don’t know how long it will stay open.” In fact, the list of powerful foreign financial institutions taking a run at the Canadian market continues to grow. Last week, Banc One Corp. of

Columbus, Ohio, one of the biggest U.S. issuers of Visa and MasterCard, announced it will begin marketing Visa cards in Canada this fall.

Martin, however, is in no mood to hurry. Maclean’s has learned that he is already contemplating a move, based on the MacKay report, that promises to put off his final

verdict by many months. Government officials said that MacKay will recommend a separate process of public consultations on each merger proposal, and that Martin favors assigning that task to the House of Commons finance committee. “I think you’ll hear from Martin this week that there will never be a merger proposal that is not the subject of a specific set of hearings,” said one Liberal strategist.

The prospect of a committee of highly critical MPs combing through merger plans and hashing them out in public is a daunting one for the banks. Who knows how long that might take?

And such scrutiny would come only after the mergers are subjected to a bewildering array of prior government probing. First, there is MacKay’s task force, looking at a broad range of issues in the financial services sector, including merger policy in general but not specifically examining the two mergers now on the table.

Next, the House finance committee and the Senate banking committee will hold hearings into MacKay’s findings across Canada, likely starting this week, with an inevitable focus on the mergers in question. Both committees will report their conclusions later in the fall. As well, a self-appointed Liberal caucus task force headed by Toronto MPTony Ianno—a group not averse to indulging in a little populist bank-bashing— plans to release its own recommendations sometime next month.

On a parallel track, the government’s antitrust watchdog agency, the competition bureau, is formally examining the mergers to determine how they would affect consumers and businesses.

And the bureau is not dithering: it has issued

subpoenas to the Royal Bank and Bank of Montreal to make sure it gets the documents it needs in time to meet its November deadline for reporting to Martin. Under its rules, if either of the two merged banks command more than 35 per cent of a certain market for a financial service, such as credit cards in one city or home mortgages in another, the bureau will assume that competition is jeopardized. It would also consider a situation in which any four companies have more than 65 per cent of the market to be too much concentration. Finally, the government’s banking regulator, the office of the superintendent of financial institutions, is gearing up to take its own look.

The banks’ tacticians will need flow charts to keep track of all the inquiries. But at the end of the day, what matters is what Martin makes of it all. One thing is clear: if the mergers are eventually allowed, approval will come with strings attached. Government and banking sources agree that Martin will only consider giving the banks a green light if they can make solid commitments in three areas: access to banking services in rural communities and small towns, more favorable lending conditions for small business, and maintaining employment levels.

Barrett’s speech was aimed squarely at satisfying the small-business worries. By 2004, he vowed, the merged Royal Bank and Bank of Montreal would have 2,500 bankers working in a separate “new bank for small business,” with an aim of lending $40 billion to small companies and investing another $1 billion through a venture


One reason that four of the country’s big banks say they must be allowed to merge is to compete with powerful foreign rivals using

new technology to break into the Canadian market. But a study by the consulting firm Ernst & Young found that the Canadian financial sector, far from being a vulnerable laggard, is out in front when it comes to exploiting new ways to reach customers, including use of the Internet One finding: 78 per cent of those Canadian financial firms responding to the survey planned to offer services through electronic channels, compared with only 30 per cent of U.S. financial companies. The report, released last week, surveyed more than 100 banks, mutual funds, insurance companies and other financial institutions in 26 countries. In Canada, 15 companies participated. They were found to be spending nine per cent of their total information technology budgets on developing electronic commerce compared with

just three per cent overall for their foreign rivals. “Canadian institutions are not necessarily innovators, but they are fast adopters of new technology.” said Ali Hamza, a partner at Ernst & Young.

While banking over the Net

is becoming more common, the automatic banking machine remains the favorite way for Canadians to do their electronic banking. In Canada, there are six ABMs for every 10,000

people, compared with fewer than five in the United States, and fewer than four in Britain and Germany. (Japan is far ahead with more than 10 ABMs for every 10,000 people.) Ernst & Young found that 80 per cent of Canadian financial companies plan to make more sophisticated transactions possible through electronic tellers.

But what if the future of electronic banking is in the kitchen? Britain's NCR Corp., a leading manufacturer of automatic banking machines, last week unveiled its latest product: the microwave bank. The combination microwave oven and home-banking computer uses voice recognition technology, eliminating the need for a keyboard. NCR contends that as “the working centre of the home,” the kitchen is the logical place for an Internet-linked banking device.

Can Orville Redenbacher brand preapproved mortgages be far behind?


capital unit. Barrett was also precise on the issue of access to banking services. “Let me repeat a commitment we made right back in January,” he said. “No small town, no rural area, no remote location will lose branch service as a result of the merger.”

On the critical issue of jobs, though, Barrett shifted from making solid promises on behalf of the banks to expressing his own vision. “Personally, I expect that the [merged] bank in 2004 will be employing more people than the two banks together do now,” he said, “and that they will be significantly more senior and better paid.” He did not mention that, in the short term, Bank of Montreal and Royal Bank have estimated about 9,000 jobs would be eliminated out of their combined workforce of more than 80,000. That is not good enough for the Liberals. A senior federal official, who asked not to be identified, said a scenario under which the mergers would lead to immediate layoffs, with a vague long-term plan to step up hiring in the future, is “just not on.”

How deeply Ottawa can pile up conditions on the mergers before the deals collapse is far from clear. Last week, CIBC chairman AÍ Flood said shareholders would reject a merger burdened with “onerous conditions.” Politicians unconvinced that the mergers make sense in the first place might well shrug off that warning. But last week also saw the first sign of what might be termed the banks’ Plan B: spelling out the downside of blocking the mergers. A report from Bank of Montreal chief economist Tim O’Neill said that without the mergers, Canada’s banks will have to concentrate on niche markets to survive in a world of heightened international competition. That would mean fewer banks with extensive, national chains of full-service branches. Instead, one bank might concentrate on credit cards and consumer mortgages, another on lending to business and marketing mutual funds. “We could end up, paradoxically, with less competition in some areas,” O’Neill told Maclean’s.

While the four banks with mergers in the works try to generate a sense of urgency behind their plans, the Bank of Nova Scotia, the only big bank without a merger partner, is encouraging the government’s tendency to be skeptical. Scotiabank released a study last week arguing that if the mergers proceed, Canada will end up with 66 per cent of domestic banking assets in the hands of the two megabanks. That compares with 40 per cent for the top two banks in Netherlands, another country with a high level of ownership concentration, and just 26 per cent for the biggest two U.S. banks. Numbers like those serve as reminders of how big Canada’s banks already are, and will make it harder for them to plead that they are vulnerable in the marketplace. In the political arena, though, there is no denying that they are about to come under siege. □