After decades of steady growth for six big banks, the Canadian banking sector is fast consolidating. The old certainties have been undermined by the announcements of mergers between Royal Bank of Canada and Bank of Montreal in January and Canadian Imperial Bank of Commerce and Toronto Dominion Bank in April. The rush to merge follows a global trend fuelled by the need to cope with increased competition, and was stimulated by the BankAmerica/NationsBank merger in the US. But unlike their US counterparts, RBC/BMO and CIBC/TD have to run the gauntlet of rigorous banking regulation, entrenched political conventions and hostile popular opinion.
The marriage of RBC and BMO, respectively the first- and third-ranking Canadian banks, would create the biggest bank in Canada and the ninth-biggest bank in the world with combined assets of around $337 billion. This was the first bank merger attempted in Canada since the 1961 deal that formed CIBC, and sent shockwaves through political and financial circles.
Fears for jobs, survival of branch networks and quality of customer service were voiced by concerned politicians and consumer groups. But the merging banks' rivals were impressed by the financial logic of the move and started plotting their own consolidation schemes. Rumours of the likely combinations of the four remaining big banks swept down Bay Street. In mid-February, CIBC and TD went to great efforts to scoff at talk that a merger between them was imminent, but both banks' shares rocketed.
Their C$22.7 billion ($16 billion) merger was announced within weeks. CIBC was always known to be interested in a merger, but for TD the pairing was a major policy reversal. The CIBC/TD combination will be an impressive force in retail banking, and with a considerable duplication in branch networks there is great potential for cost-cutting. If approved, the deal between second-ranked CIBC and fifth-ranked TD will produce the second-largest bank in Canada and the world's eleventh-largest.
The two mergers would leave Canada with just three major banks, with Bank of Nova Scotia in third place and the smaller Bank of Canada and Montreal-based Laurentian Bank lagging far behind. Concentration of the already compact sector will be such that the two new banks are likely to control over 70% of banking assets and deposits. Many view this as an unhealthy duopoly.
The debate is polarized by the financial arguments of the bankers and the social perspective of consumers' groups, the public and the press. The banks state that the only way they can compete globally is to combine their powers, enabling them to be more efficient and have more purchasing power to expand out of Canada.
CIBC and TD tried to stir up national pride with their announcement and focused on the threat to Canadian banking from foreign competitors if the mergers do not go ahead. At the moment foreign firms are limited to 10% stakes in Canadian banks, but as reform of banking regulations is widely predicted, they want to be in a strong position to fight off new entrants when the market opens up.
Bank analyst James Keating at Midland Walwyn Capital is convinced by the financial and strategic arguments for the mergers. "These deals are critical to the banks in terms of global competitiveness; not merging would be to follow the parochial view of Canadian banking and would be regressive," he says.
Keating addresses another factor that points to consolidation. Banks must increase their mass to position themselves for the inevitable move towards "mono-line providers of financial services", and to fight off newer rivals with lower overheads such as supermarket and internet banks.
Opposition to the mergers stems from a basic mistrust of the big six banks among Canadians. They already reckon they charge customers too much and make too much money.
Although the law does not expressly prohibit the banks from merging, there has been a long-held understanding that the six banks would stay separate. The pros and cons will be assessed by the MacKay Commission, an independent task force that will report at the end of September.
But the final decision rests with finance minister Paul Martin. He has stated that he will await the MacKay Commission's verdict before making up his mind. Another influence on Martin will be popular and press opinion - he is thought to harbour prime ministerial ambitions and this decision will be the most politically important of his career. The press reception has so far been largely sceptical, but more muted than bankers feared.
One analyst estimates there is a 70% chance of the mergers being approved by Martin and the markets seem to be reflecting this view. But to appease the press and the electorate he is likely to stipulate conditions about job and cost cuts, diluting the market logic of consolidation. Rebecca Bream