Ottawa may have rejected some of their merger proposals, but Canada’s Big Six are still ringing up record profits
The banks, one year later
Ottawa may have rejected some of their merger proposals, but Canada’s Big Six are still ringing up record profits
On Manitoba television, a pennysmart 10-year-old girl cross-examines two credit-union managers about the services they provide, and then declares: “I don’t know why I didn’t come here years ago.” In British Columbia, twothirds of TV viewers have become familiar with the antics of a humming bear, a bouncing springbok and a gospelsinging hippo—all of them having abandoned their financial institutions for credit unions. According to the Credit Union Central of British Columbia, this “I Switched” campaign will boost credit-union membership, which has been on the increase since 1995 and now counts one in three B.C. residents as customers. The reason for the optimism is simple, says the union’s market-
ing manager Maria Doyle: “Frustrated users of other financial institutions are relating to the humorous ads.” Frustration is the watchword all around. The big banks are still angry about the defeat of their merger plans one year ago, complaining that their inability to get bigger is hurting them in the expanding global industry. But the six largest banks also have generated controversy by recent announcements of 16,550 job cuts at the same time as they have reported a record $9.12-billion in combined 1999 profits. A year after Finance Minister Paul Martin rejected the Bay Street double wedding— Royal Bank of Canada with Bank of Montreal and Toronto Dominion Bank with Canadian Imperial Bank of Commerce—the banks have drawn inward, reorganizing operations at the cost of
reaching out to the public. Instead of addressing concerns over growing service charges, the banks have faced criticism for introducing new fees. And rather than focusing on service, say detractors, they have cut 163 branches and 1,232 jobs, while unabashedly blaming Martin for the changes. “In the end, the banks really aren’t interested in the common person,” argues the University of Manitoba’s Robert Warren, a marketing professor who has worked with four of the top five Canadian banks. “They all buy the same software program to identify their preferred clients. They’ll keep those customers informed and happy, because that’s where the money is.”
But the banks can take satisfaction that the money, for the moment, is staying with the big banks. Toronto Dominion, Scotiabank and Bank of Montreal all made record profits, with TD Bank benefiting the most in the past year, soaring to a $2.98-billion profit. (Almost half is attributed to special gains, including $1.1 billion from
selling part of its discount brokerage, TD Waterhouse Group Inc.) Yet there are storm clouds on the horizon for the Big Six, which includes National Bank of Canada. The merger spotlight on banks last year opened the banks to unprecedented public scrutiny. The negative reaction to bank practices has eased the way for Martin to introduce thorough financial services legislation, due before spring. Finance officials admit the concerns of a citizens’ group like the Canadian Community Reinvestment Coalition are being taken more seriously in Ottawa. And the big banks’ competitors have been emboldened. As Arkadi Kuhlmann, president of the two-year-old branchless bank ING Direct, says, the fear-mongering by the established banks about competition “might become a self-fulfilling prophecy.”
Overall, though, the banks have rebounded from what Doug Pe-
ters, the former secretary of state for international financial institutions, calls “the worst public relations disaster in Canadian banking history”—an 11-month aborted merger campaign that insiders say cost the four merger-minded institutions $100 million. The debacle began when the Royal and Bank of Montreal kept Martin in the dark about their plans. Then many of their pro-merger arguments were shot down by Scotiabank chairman Peter Godsoe, whose bank was not marriage-minded. As the months went on, say bank sources,
internal polls showed the institutions losing public sympathy. “All of their predictions about plague and pestilence haven’t materialized, which just adds to their lack of credibility,” said Catherine Swift of the Canadian Federation of Independent Business. “They might as well have thrown that $ 100 million out the windows on Bay Street. They would have got a lot more public support that way than paying high-priced PR gums to botch the whole thing.”
The year also saw the departure of the Bank of Montreal’s bon vivant chairman Matthew Barrett, who was replaced by Tony Comper, while John Hunkin took over from Al Flood at CIBC. Bank spokesmen argue that services have expanded for customers, especially over the phone and through the Internet. Rick Kuwayti of the Bank of Montreal says his bank is finding new ways to deliver services, such as twoand three-person boutique
branches in grocery stores. He also contends clients are being offered a broad range of service fees, including some at no cost, depending on the age of the client. The year’s biggest change, yet to be approved, is TD Bank’s purchase of Canada Trust. The framework for that approval process is being included in forthcoming legislation, which will not rule out mergers.
One of the banks’ more common arguments was that foreign-based competitors could set up branchless banks—as ING Direct, whose parent is Dutch, has done—while
Canadians would still expect their national banks to provide branches on street corners across the country. Kuhlmann says it is a joke that the national banks see ING as a threat—it has only one-quarter of one per cent of the estimated trillion-dollar Canadian banking market. At the same time, his company, now in its 29th month in Canada, has finally turned a profit. It has $2.5 billion in assets, and its clients have grown by 110,000 in the past year, to 250,000—mainly, he says, because the big banks do not compete. “In most industries, you provide value through innovation or uniqueness or reduction in costs, or consumers go to the alternatives. Financial institutions are the only ones who do it the other way around—consumers have to pay for their restructuring costs, but the shareholders can keep marching along.”
ING is just one of a number of alternatives attempting to capitalize on dissatisfaction with the chartered banks. Vancouver-based Citizens Bank of Canada, another branchless operation that received its charter in January, 1997, portrays itself as 1 a bank with a heart and I a soul—it offers lower % interest rates, makes only so-called ethical investments and is already turning a profit with more than 50,000 new customers in the past year. “The biggest threat to the majors is not foreign banks,” says Citizens Bank president Linda Crompton. “It is that the big banks are all the same.” Other anti-bank movements are percolating in the West. “If you live in Manitoba, you see deterioration in the level of service,” says Warren, who is director of his university’s Asper Centre for Entrepreneurship. “Decisions on agricultural loans, which have been made here for 100 years, have been moved to Ontario.” That’s why the trade organization for Manitoba’s 67 credit unions, whose members operate in 51 communities not serviced by banks, came out with its TV ad campaign.
Finance Minister Martin wants profitable banksand a system that is responsive to customers
Finance Minister Martin is pleased the banks have remained strong because of their integral role in the Canadian economy. “Every dispassionate observer said that the inevitable outcome of the mergers would have been a greater loss of employment than what we’re now seeing,” he told Macleans. His proposed legislation, a review of the entire financial services sector, allows for “the strongest banking system possible. That means profitable banks, but we want a banking system that is responsive to people’s needs.” The review, which began in December, 1996, and became known as the MacKay task force, led to last June’s policy paper, which Martin wants to turn into legislation by March.
The delay in drafting legislation, he says, is not out of the ordinary. But critics like Duff Conacher, chairman of the Canadian Community Reinvestment Coalition, a group of 110 organizations that advocate more bank accountability,
How the banks stack up at century’s end
No. of Change Future 1999 Canadian from cuts Profits branches (positions) Toronto Dominion $2.98 4,900 billion over three years due to merger of Canada Trust Royal Bank $1.76 4,000-6,000 billion over two years Scotiabank $1.55 none billion Bank of Montreal $1.38 1,450 billion CIBC $1.03 l,338t -21t 45,998 -1,173 4,200 billion National Bank $417 649 +3 12,175f +134 none million * includes special gains such as $1.1 billion for selling part of TD Waterhouse t includes foreign branches **62 due to National Trust merger f excludes brokerage arm
says the delay has allowed banks to carry out their branchcutting exercise without impediment. After the legislation becomes law, it is expected that financial institutions will be required to consult with communities and give them up to six months’ notice.
Conacher is pleased that Martin appears poised to adopt threequarters of his group’s financial reform recommendations, which were based on similar legislation in the United States. But he is disappointed the bill will stop short of any review of bank lending—which in the United States has caused banks to commit funds to assist the construction of affordable housing. Nor is Martin expected to seek penalties for discriminatory lending practices. Martin says banks have a role to play in a wide range of both economic and social areas, but he doesn’t believe “adopting a cookie-cutter approach to U.S. legislation is the way to go in Canada. We have our own problems and we will have our own solutions.”
Some of those Canadian solutions are
now being applied to the British banking system thanks to one of the casualties of the merger debate, Matthew Barrett. The former Bank of Montreal CEO, who resigned in February, was named the new head of London-based Barclays Bank PLC, the world’s 24th-largest bank in assets, in July. But Barrett was embroiled in controversy before he officially began earning his $6-million salary, excluding bonus and stock options, in October. Britain’s largest bank-machine network was free to all customers. Now, Barclays has declared it will charge clients of other banks $2.35 per transaction to use its machines, angering depositors who felt it was not cricket to have to pay for access to their own money.
But Barrett is expected to shepherd in a whole new wave of electronic banking. With more emphasis on telephone and Internet banking, he approved the closure of200 Barclays branches and the cutting of500 jobs; these were in addition to the 7,000 layoffs Barclays announced before Barrett took charge.
In the end, says the Citizens Bank’s Crompton, the failed merger attempts at least inspired Canadians to debate what kind of financial system they want. “People are questioning how far the banks have strayed from their original purpose—over the years the interests of banks have diverged from the interests of society at large.” People are asking, she continues, “ ‘Is it OK for banks to post enormous profits and at the same time and in the same breath lay off X number of people?’ Once people start to question, you can’t control how far that scrutiny goes.” That is an issue confronting the banks as they try to balance the demands of their shareholders with those of the public. 63
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