Canada’s six biggest banks, entrenched as the dominant players in their home market, desperately want to make their presence felt elsewhere on the planet.
The six banks are often accused of holding an oligopoly within Canada’s close-knit financial system. While that may be an exaggeration, they do hold about 60% of personal deposits, control just under half the mortgage business, and manage about a quarter of mutual-fund assets.
The six are led by Royal Bank of Canada, with total corporate assets of C$246 billion (US$177 billion) at July 31, a network of 1,500 branches and 51,000 employees. A close second is Canadian Imperial Bank of Commerce (CIBC) with assets of C$240 billion. Bank of Montreal, Bank of Nova Scotia and Toronto Dominion Bank fall third, fourth and fifth. National Bank of Canada is the smallest of the so-called big six, with assets of C$61 billion.
The Canadian banks are also highly profitable. After taking huge write-offs as a result of bad loans in Latin America in the mid-1980s, and another hit from soured real-estate lending in the early 1990s, they have recovered dramatically in the past few years and are well on their way to reporting record cumulative profits of more than C$7 billion in the fiscal year that ends on October 31.
While several of their names refer to specific parts of the country – Toronto, Montreal, Nova Scotia – those are the locales where the banks sprang from years ago, not their current operating range. Only the smallest, National Bank of Canada, has a significant regional concentration: it has the bulk of its operations in the province of Quebec.
While critics fall short of accusing them of collusion, the public perception is that the six big banks offer a sameness of product and service, and similar pricing and fee structures. That’s not to say they are inefficient. Canada’s banking system is one of the most secure and effective in the world, offering a remarkably complete range of financial services across a vast geographical expanse.
A customer who lives in St John’s, Newfoundland, at one end of the country can, while on vacation, withdraw cash from his account in seconds from a bank machine in Vancouver, five thousand kilometres away. A cheque cashed anywhere in the country clears overnight, in most cases. And for those who eschew cheques, a national debit-card network enables purchases to be paid for instantly at thousands of retailers, by electronic withdrawals from customer bank accounts.
Regulatory changes in the last decade have allowed the big banks to move into previously restricted businesses, and they have leapt at the opportunity to further their hold on other parts of the financial-services sector. Most have purchased investment dealers, or started new ones from scratch. Now, all but one of Canada’s big stockbrokers are owned by banks.
At the same time the banks have made tentative steps into the insurance business, an area they were almost entirely excluded from until 1992. Most of the big banks now have insurance subsidiaries which sell specialized products such as travel insurance or life insurance linked to mortgages. However, a key – and much resented – restriction prevents the banks from selling most forms of insurance through their huge branch networks.
This restriction has hampered the banks’ expansion into insurance, but they continue to lobby government to let them sell in branches, and they are hopeful the rule may change within the next few years. Meanwhile they are searching for new ways to add insurance products, such as buying insurance companies outright.
This summer Royal Bank shocked insurers with a C$2.4 billion bid to buy one of the largest insurance companies in Canada, London Insurance Group. But to the relief of the insurance sector, which desperately wants to limit the expansion aspirations of the banks, a higher offer emerged from Great West Lifeco, one of the largest insurance players in the country.
While the six big banks look for ways to consolidate their stronghold on the mature domestic financial scene, they also gaze longingly over the US border, and across the oceans. Because the domestic banking market is now saturated, it is a slow struggle to add percentage points to market share. Thus, the banks see the greatest potential for expansion in international markets.
Throwing off sameness
The sameness which marks the Canadian banks at home dissipates when they operate in other countries. Each of the big banks has a distinct plan for international expansion, and their sights are set on very different parts of the world.
Bank of Nova Scotia, for example, has for decades operated joint ventures and partnerships in retail banking in Asia and Latin America. It owns 40% of Solidbank Corp of the Philippines, 28% of Chile’s Banco Sud Americano, and 10% of Mexico’s Grupo Financiero Inverlat. Just this year it picked up 25% of Peru’s Banco Sudamericano and boosted its stake in Argentina’s Banco Quilmes from 25% to 100%. The latest move was a deal signed in September to pick up 25% of Venezuela’s Banco del Caribe for US$88 million.
Chairman Peter Godsoe has made it clear that Scotiabank’s international expansion, especially in Latin America, is among its top priorities. “Bank of Nova Scotia is the most dominant Canadian bank in the region, where we’re quickly becoming a rising international force,” he said last month after the Venezuelan deal was signed. The next target, say bank officials, is to pick up a stake in a bank in Brazil, South America’s most populous country.
By contrast, the international expansion at CIBC is concentrated in the capital markets centred in New York. The bank has built up a large investment-banking operation on Wall Street, under the wing of brokerage arm CIBC Wood Gundy. In the past few years it has lured specialists in derivatives and high-yield securities from several rival New York firms.
CIBC’s most recent achievement was the purchase of venerable Wall Street firm Oppenheimer & Co for US$525 million, a deal that will give the Canadian bank expertise to underwrite equities in the US. Analyst Michael Ancell of brokerage Edward D Jones & Co in St Louis describes Oppenheimer as “not exactly the crown jewel of the US investment banking business”, but he suggests it is a “nugget” which will provide CIBC with a useful presence to build on.
CIBC’s expansion strategy was summed up by John Hunkin, president of the bank’s investment-dealer arm, when he said: “The New York capital markets have become so significant in the context of global finance that one must have a strong capability in New York or one will lose ground in one’s home country and everywhere else.”
The Oppenheimer purchase has not yet closed, but is expected to be completed by the end of the year.
The US is also the focus of the international ambitions of Bank of Montreal. It bought Harris Bankcorp, a regional midwestern bank based in Chicago, in 1984. This turned out to be a prescient move; the prices of US banks skyrocketed in the 1990s. Harris gave Bank of Montreal a solid foot in the door of the US retail banking market, and it allowed the bank to set the stage for a three-country North American strategy.
The next big step was its purchase, just over a year ago, of a 16% equity stake in Grupo Financiero Bancomer of Mexico. With Canada, the US and Mexico now well into the fourth year of a free-trade arrangement, Bank of Montreal has decided it will try to become the one bank on the continent that can effectively offer a full range of banking services in all three countries. The bank’s efforts have pushed its non-Canadian profits to 52% of its total income, making it the first Canadian bank to earn more money outside Canada than internally.
Toronto Dominion Bank, meanwhile, has impressed banking observers with its well-timed move into the US discount brokerage business. In 1996 it spent C$726 million to buy Waterhouse Investor Services of New York, one of the biggest discount brokers in the US.
Already the dominant player in Canada’s burgeoning discount brokerage business through its Green Line brand, Toronto Dominion has transferred its expertise in computerizing back-room brokerage functions to Waterhouse. The purchase now looks to have been a clever move, as discount brokerage is growing rapidly, and profitably, in the US.
The bank now plans broader international expansion of its discount brokerage expertise to countries where discounting has had a slower start. Last spring it bought Australia’s biggest discounting firm, Pont Securities, and late last month it opened a joint Waterhouse/Green Line office in London.
Royal, Canada’s largest bank, has taken a different approach, one that brings it substantial international revenue, while giving it a low profile outside of Canada.
Royal does virtually no retail banking outside its domestic market, except in the Caribbean. It concentrates on trade finance and treasury services for multinational clients, a lucrative business that brings in close to half its profits. It is active in three dozen countries and has representative offices around the globe. Royal is also a big player in European private banking, providing planning and investment services to high-net-worth individuals.
One of the frustrated desires of the bank’s chairman, John Cleghorn, is to make a bigger mark in the US. The bank has looked far and wide for an acquisition target in the wealth-management sector, but the seller’s market in the US has pushed prices too high. Royal turned its sights away from the US briefly when it decided to go after Canada’s London Insurance Group, but with that bid now lost, it may turn its radar screen to the south once again.
Itching to consolidate
While Royal and the other Canadian banks have the heft to make substantial foreign acquisitions, their size has become the centre of debate in Canada.
Some of the banks have begun a lobbying effort to convince Canadian politicians and citizens that they need to be bigger in order to keep their place as substantive players on the world stage. Royal, in particular, has pushed the view that Canadian banks must be bigger if they are to get a share of large commercial syndications, and a seat at the table for the largest financing deals.
The statistic most often trotted out in defence of this view is that in 1970 Royal was the world’s 12th largest bank by assets, and CIBC was 19th. Their standing has slipped sharply, however, with neither bank ranking in the top 60 by the mid 1990s. The argument is undermined somewhat by the fact that Royal and CIBC have this year risen in the tally to 50th and 54th place respectively.
Still, Canadian banks are well down the list compared with many Asian, American and European rivals. And that, Royal argues, means that it may be time to consider allowing Canadian banks to merge to keep them competitive on the international scene.
But many Canadian citizens and politicians are nervous of bank mergers. It has been more than 35 years since the last merger among the biggest banks (when CIBC was formed from two smaller entities), and the Canadian regulatory environment is designed to make it tough to get together.
One of the most important barriers is a rule that major banks must be widely held, with no one shareholder owning more than 10% of a bank’s stock. This piece of legislation, originally put in place to prevent takeovers of Canadian banks by US investors, does not necessarily block mergers, but makes them much more difficult to arrange.
The other barrier is less formal. For many years Canada’s central government operated an unwritten banking policy usually described as “big shall not buy big”. Exceptions were made only when a financial institution appeared to be failing, such as when Royal Bank was allowed in 1993 to buy a large trust company, an unrelated firm called Royal Trust.
Because the anti-merger rule is unwritten, it is not clear whether it is still the policy of Canada’s federal government. The situation may become clearer after the government receives the recommendations of the task force it established to examine regulatory changes in the Canadian financial sector. Modelled loosely on Australia’s Wallis commission, which reported its results in April, the Canadian task force has a broad mandate to look at many regulatory issues, including mergers, and to suggest changes to the laws governing banks.
But the task force has had a bumpy ride so far, especially on the merger issue. This summer, when the Royal Bank/London Life merger proposal was announced, and another merger between Bank of Nova Scotia and a smaller trust company called National Trustco came to light, the federal government asked the task force to give a very quick summary of its thoughts on mergers. This was a rush job. The task force is not supposed to issue its final report until September 1998.
While the task force emphasizes that it will not present a definitive and detailed view on financial sector mergers until next year, many in the industry say that events are overtaking public policy decisions. Merger proposals – between banks and insurers, banks and banks, and banks and other financial service providers – may force the government’s hand before it gets the final recommendations of its task force.
