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Banks will focus on Parliament Hill in 2004, seeking clear merger rules
CRAIG WONG
Canadian Press
Tuesday, December 30, 2003
Former Liberal finance committee chairwoman Sue Barnes tables her committee's report on bank mergers in the House of Commons on March 27. (CP/Tom Hanson)
TORONTO (CP) - Canada's banking industry piled up record profits in 2003 and expects continued solid results in 2004, but the focus will shift from Bay Street to Parliament Hill.
Bankers are watching for signs that Ottawa will finally give the nod to mergers under the new Liberal administration of Paul Martin. "It's a question of whether Paul Martin the prime minister is going to reverse the position he took as Paul Martin the minister of finance," said Laurence Booth, a finance professor at the University of Toronto.
It was Martin who killed the proposed 1998 mergers between Royal Bank and Bank of Montreal and between CIBC and TD Bank.
"New proposals will first have to demonstrate, in the light of the circumstances of the day, that they do not unduly concentrate economic power, significantly reduce competition or restrict our flexibility to address prudential concerns," Martin said then.
"And overall they would have to be in the best interest of Canadians."
Booth doubts Martin has changed that position.
"Just the image of Paul Martin's face when he came out to tell people that the banks had told him half an hour earlier that they planned to merge," Booth said.
"He was ashen. He was really, really angry."
Bill Procter, manager of two Mackenzie Maxxum dividend funds, said allowing bank mergers might be easier if the banks were in trouble financially.
"It's not a case of helping a struggling industry, like you might think in terms of the steel industry, where you perhaps have to put in policies to prevent companies from going out of business," he said.
"Its more a question of allowing or giving them better flexibility to compete on a global basis."
Combined, the big five Canadian banks earned $10.5 billion in their 2003 financial year ended Oct. 31 as they dramatically cut exposure to bad corporate loans while boosting retail operations, mortgage lending and investment banking.
Royal Bank set a high-water mark for a Canada bank at $3.01 billion, edging out the 1999 profit mark set by TD Bank.
Scotiabank also had its best year ever with a profit of $2.48 billion.
CIBC posted full-year profit of $2.06 billion, Bank of Montreal earned $1.83 billion and TD rounded out the Big Five with $1.08 billion.
In the previous two years, most of the banks had been hit by huge loan defaults amid major corporate bankruptcies including Teleglobe, Global Crossing and Enron. Scotiabank also came to grief in Argentina's economic turmoil.
But loan losses have been gradually declining. TD staged the most remarkable recovery in credit quality after getting hammered in 2002 by the telecom and U.S. utility sectors. It recorded $186 million in credit losses for 2003, a far cry from $2.92 billion in 2002.
Mackenzie's Procter said the banks did well through 2003 and ended with good numbers in the fourth quarter.
"You don't need to see too much improvement from those fourth-quarter numbers annualized to get to your targets for 2004," he said.
Procter added that he sees room for credit-loss improvement at CIBC and Toronto-Dominion, and the banks in general should see better performances from their investment banking and discount brokerage operations.
Andrew Martyn, a portfolio manager at investment firm Davis Rea Ltd., said the banks can probably also increase their profits by cutting costs through technological improvement and branch consolidation.
"Can they be eight or nine per cent revenue growers and 12 per cent earnings growers? That's what you really want to look at," he said.
"Often the biggest companies are the best companies at squeezing out costs and make no bones about it, the banks are great at doing that."
Since the federal government killed the 1998 merger plans, the Canadian banks have looked outside the country for growth.
Royal (TSX:RY) has said it intends to open as many as 60 new branches in the southeastern states under its RBC Centura brand over the next two years, while BMO Financial Group (TSX:BMO) plans to add 50 branches to its Harris Bank unit in and around Chicago.
On the other hand, TD (TSX:TD) has scaled back its U.S. corporate lending and investment banking, and is reportedly interested in doing a deal to find a U.S. partner for its TD Waterhouse brokerage arm.
And Scotiabank (TSX:BNS) "stood down" a two-year search for a bank to take over in the United States, outgoing CEO Peter Godsoe said recently. It was unable to find an acquisition that would be both affordable - in the range of $2 billion to $3 billion - and large enough to be competitive.
Altaf Nanji, an analyst with Dominion Bond Rating Service, said that in the long term, growth in the United States is key to the banks' strategies.
"It's a slow process to build operations with scale in the States, operations that can meaningfully add to your bottom line," Nanji said. "Longer term, that's where their focus is."
However, uncertainty over the future of mergers in Canada and Bank of America's richly valued $47-billion takeover bid for FleetBoston Financial have put a chill on Canadian hopes for growth in the U.S.
"You're probably not going to get really good banks at a cheap price, and you may not even get mediocre banks at a cheap price," Procter said.
"And if you do decide to pay up what appears to be the going rate, then your stock will probably go down."
On the domestic front, the banks argue that mergers are not about losing jobs and branches, but having companies that can go out and compete with global banking behemoths.
Ottawa is expected to have a new bank merger policy by next summer and has said it won't consider any merger proposals before September.
A Commons finance committee report in March recommended job cuts should be limited in any mergers and banks should be required to increase loans to small and mid-sized businesses.
Earlier, a Senate committee concluded in December 2002 that a limited number of mergers would be "a valid business strategy" and "would contribute to Canadian growth and prosperity."
Confronting the issue will be new Finance Minister Ralph Goodale - with guidance from the head of the cabinet table.
Howard Leeson, head of political science at the University of Regina, said Goodale may have inherited a pervasive Prairie suspicion of Bay Street but has expressed few views about bank mergers.
"I would anticipate, given his relative lack of background on the matter of banks, that he will be pretty strongly guided by the prime minister on this."
© The Canadian Press 2003
Copyright © 2003 CanWest Interactive, a division of CanWest Global Communications Corp. All rights reserved.
Optimized for browser versions 4.0 and higher.
Banks will focus on Parliament Hill in 2004, seeking clear merger rules
CRAIG WONG
Canadian Press
Tuesday, December 30, 2003
Former Liberal finance committee chairwoman Sue Barnes tables her committee's report on bank mergers in the House of Commons on March 27. (CP/Tom Hanson)
TORONTO (CP) - Canada's banking industry piled up record profits in 2003 and expects continued solid results in 2004, but the focus will shift from Bay Street to Parliament Hill.
Bankers are watching for signs that Ottawa will finally give the nod to mergers under the new Liberal administration of Paul Martin. "It's a question of whether Paul Martin the prime minister is going to reverse the position he took as Paul Martin the minister of finance," said Laurence Booth, a finance professor at the University of Toronto.
It was Martin who killed the proposed 1998 mergers between Royal Bank and Bank of Montreal and between CIBC and TD Bank.
"New proposals will first have to demonstrate, in the light of the circumstances of the day, that they do not unduly concentrate economic power, significantly reduce competition or restrict our flexibility to address prudential concerns," Martin said then.
"And overall they would have to be in the best interest of Canadians."
Booth doubts Martin has changed that position.
"Just the image of Paul Martin's face when he came out to tell people that the banks had told him half an hour earlier that they planned to merge," Booth said.
"He was ashen. He was really, really angry."
Bill Procter, manager of two Mackenzie Maxxum dividend funds, said allowing bank mergers might be easier if the banks were in trouble financially.
"It's not a case of helping a struggling industry, like you might think in terms of the steel industry, where you perhaps have to put in policies to prevent companies from going out of business," he said.
"Its more a question of allowing or giving them better flexibility to compete on a global basis."
Combined, the big five Canadian banks earned $10.5 billion in their 2003 financial year ended Oct. 31 as they dramatically cut exposure to bad corporate loans while boosting retail operations, mortgage lending and investment banking.
Royal Bank set a high-water mark for a Canada bank at $3.01 billion, edging out the 1999 profit mark set by TD Bank.
Scotiabank also had its best year ever with a profit of $2.48 billion.
CIBC posted full-year profit of $2.06 billion, Bank of Montreal earned $1.83 billion and TD rounded out the Big Five with $1.08 billion.
In the previous two years, most of the banks had been hit by huge loan defaults amid major corporate bankruptcies including Teleglobe, Global Crossing and Enron. Scotiabank also came to grief in Argentina's economic turmoil.
But loan losses have been gradually declining. TD staged the most remarkable recovery in credit quality after getting hammered in 2002 by the telecom and U.S. utility sectors. It recorded $186 million in credit losses for 2003, a far cry from $2.92 billion in 2002.
Mackenzie's Procter said the banks did well through 2003 and ended with good numbers in the fourth quarter.
"You don't need to see too much improvement from those fourth-quarter numbers annualized to get to your targets for 2004," he said.
Procter added that he sees room for credit-loss improvement at CIBC and Toronto-Dominion, and the banks in general should see better performances from their investment banking and discount brokerage operations.
Andrew Martyn, a portfolio manager at investment firm Davis Rea Ltd., said the banks can probably also increase their profits by cutting costs through technological improvement and branch consolidation.
"Can they be eight or nine per cent revenue growers and 12 per cent earnings growers? That's what you really want to look at," he said.
"Often the biggest companies are the best companies at squeezing out costs and make no bones about it, the banks are great at doing that."
Since the federal government killed the 1998 merger plans, the Canadian banks have looked outside the country for growth.
Royal (TSX:RY) has said it intends to open as many as 60 new branches in the southeastern states under its RBC Centura brand over the next two years, while BMO Financial Group (TSX:BMO) plans to add 50 branches to its Harris Bank unit in and around Chicago.
On the other hand, TD (TSX:TD) has scaled back its U.S. corporate lending and investment banking, and is reportedly interested in doing a deal to find a U.S. partner for its TD Waterhouse brokerage arm.
And Scotiabank (TSX:BNS) "stood down" a two-year search for a bank to take over in the United States, outgoing CEO Peter Godsoe said recently. It was unable to find an acquisition that would be both affordable - in the range of $2 billion to $3 billion - and large enough to be competitive.
Altaf Nanji, an analyst with Dominion Bond Rating Service, said that in the long term, growth in the United States is key to the banks' strategies.
"It's a slow process to build operations with scale in the States, operations that can meaningfully add to your bottom line," Nanji said. "Longer term, that's where their focus is."
However, uncertainty over the future of mergers in Canada and Bank of America's richly valued $47-billion takeover bid for FleetBoston Financial have put a chill on Canadian hopes for growth in the U.S.
"You're probably not going to get really good banks at a cheap price, and you may not even get mediocre banks at a cheap price," Procter said.
"And if you do decide to pay up what appears to be the going rate, then your stock will probably go down."
On the domestic front, the banks argue that mergers are not about losing jobs and branches, but having companies that can go out and compete with global banking behemoths.
Ottawa is expected to have a new bank merger policy by next summer and has said it won't consider any merger proposals before September.
A Commons finance committee report in March recommended job cuts should be limited in any mergers and banks should be required to increase loans to small and mid-sized businesses.
Earlier, a Senate committee concluded in December 2002 that a limited number of mergers would be "a valid business strategy" and "would contribute to Canadian growth and prosperity."
Confronting the issue will be new Finance Minister Ralph Goodale - with guidance from the head of the cabinet table.
Howard Leeson, head of political science at the University of Regina, said Goodale may have inherited a pervasive Prairie suspicion of Bay Street but has expressed few views about bank mergers.
"I would anticipate, given his relative lack of background on the matter of banks, that he will be pretty strongly guided by the prime minister on this."
© The Canadian Press 2003
Copyright © 2003 CanWest Interactive, a division of CanWest Global Communications Corp. All rights reserved.
Optimized for browser versions 4.0 and higher.