Wednesday, February 20, 2008

Global 500 Financial Brands Index

The Globe and Mail, Tara Perkins, 20February 2008

Canada's big banks could all fall into foreign hands if Ottawa doesn't allow domestic mergers before opening the sector up to foreign acquisitions, Bank of Nova Scotia chief executive Rick Waugh warned Wednesday.

“If we can go buy a bank in Mexico or Peru and TD or Royal can go down and buy banks in the United States … eventually [banks in those countries] are going to wake up and say ‘guys, when are we going to be allowed into your market?'” Mr. Waugh said Wednesday in a discussion with The Globe and Mail's editorial board.

“When that happens, if we're in the situation we are in today, we're all gone, all five of us,” he said of Canada's big banks. “We have to prepare for it and hopefully have a number of survivors.”

Mr. Waugh pointed to Italy as an example of a country that has successfully dealt with bank mergers. “While we've been sitting and talking about what to do, the Italians have gone way ahead of us on this one.”

A 2007 report by The Boston Consulting Group said Italy's banking industry managed to boost its five-year total shareholder return from 2.6 per cent in 2005 to 15.7 per cent in 2006 – climbing to third place from No. 9 in a list of countries – as a massive round of consolidation revamped the sector.

Collectively, the merger deals in Italy in 2006 involved nearly half of the banking sector's work force and included both foreign takeovers and domestic pairings. One of the biggest deals was the $38-billion (U.S.) mega-merger between Banca Intesa and Sanpaolo IMI, which created the country's biggest retail bank when the deal closed in early 2007.

That merged brand, Intesa Sanpaolo, climbed up the ranking of financial institution brands that was released Wednesday by Brand Finance PLC. Before the deal, Banca Intesa ranked 49th on the Global 500 Financial Brands Index, which measures a host of factors ranging from the brand's presence to its market share, while Sanpaolo didn't make the top 100. But the combined entity hit No. 19 on the 2007 ranking, Brand Finance noted in yesterday's report, illustrating the extra oomph a brand can gain from increased scale.

“We expect this trend to continue with a focus on emerging markets brands in the future,” it said.

Canadian banks have a relatively low percentage of brand value to market valuation, at roughly 7 to 10 per cent, while the leading global banks are typically 15 per cent or more, said Andrew Zimakas, managing director of Brand Finance Canada. That might be because Canadian banks' brand values are being constrained by their lack of global scale, which is directly related to domestic merger and ownership restrictions, he said.

Royal Bank of Canada was the highest-ranking Canadian bank on Wednesday's list, at No. 31. Toronto-Dominion Bank climbed from No. 47 to No. 43, Canadian Imperial Bank of Commerce climbed from No. 48 to No. 46, Scotiabank rose from No. 57 to No. 50, and Bank of Montreal held steady at No. 65. National Bank of Canada, the country's sixth-largest bank, dropped from No. 92 to No. 133.

David Haigh, CEO of Brand Finance, said he expects to see rapid consolidation in the global banking sector over the next 12 months.

In a recent note to clients, UBS Investment Research analysts in Italy said they believe the consolidation sweeping their domestic sector is giving it an edge over international peers. They estimate that mergers will result in savings of 5 per cent of the sector's costs in the next two years.

As globalization changes the banking landscape, Mr. Waugh is calling on Ottawa to allow Canadian banks the option to merge before the banking sector is opened up to foreign acquisitions. When it comes to mergers, “it's not if, it's when, and when is because of politics,” he said. “I would hope that good policy would make good politics.”

The current federal government has repeatedly emphasized that bank mergers are not among its priorities.