16 October 2006

Foreign Banks in Canada

Investment Executive, Rudy Mezzetta, 16 October 2006

Foreign banks are playing an important role in Canada’s financial services industry. Despite the challenges of competing against established domestic banks, they are slowly gathering a growing slice of the market.

They have done so, experts say, by concentrating on distinct product and service offerings, or by focusing on the needs of a particular customer segment.

“We have seen some successes among the foreign banks,” says Diane Kazarian, a partner at PriceWaterhouseCoopers LLP in Toronto. “We have seen that success usually when they’ve done excellent target marketing; when they’ve provided an excellent product, in terms of origination, servicing and selling; and when they’ve done so at low cost.”

The three biggest foreign bank subsidiaries, as of July 30, are: HSBC Bank Canada, with $53.1 billion in total assets; ING Bank of Canada, with $22.7 billion; and Citibank Canada, with $14.7 billion. According to a Statistics Canada report released earlier this year, foreign banks’ share of the Canadian banking market, in terms of value of services produced, rose to 7.9% in 2004 from 5.7% in 1997.

Still, the foreign banks’ presence here remains relatively small. National Bank of Canada, by far the smallest of the so-called Big Six Canadian banks, is roughly twice as large as HSBC Bank Canada, the seventh-largest bank in Canada.

And foreign banks have more to contend with than just the size and brand recognition of the Big Six. They also have the Canadian regulatory environment to cope with.

Foreign banks can choose to incorporate themselves as a separate Canadian bank subsidiary, known as a Schedule II bank, or as a foreign bank branch, known as a Schedule III bank.

Schedule II banks have all the powers of a domestic bank but, as separate entities from their parents, they aren’t able to leverage fully the parent bank’s lower cost of capital.

Schedule III banks are subject to key restrictions, which in effect limit them to providing only investment banking services, usually to companies in their home country that are doing business here.

Some foreign banks have both Schedule II and Schedule III entities.

Over the years, many foreign banks have come and gone. Last November, Bank of Nova Scotia bought NBG Bank Canada, the Canadian subsidiary of National Bank of Greece SA, for an undisclosed amount. In August, Bank of Montreal acquired Bcpbank Canada, the Canadian subsidiary of Portugal’s Millennium Bcp, for $41 million. Both deals gave the big Canadian banks a fairly inexpensive way to enter a niche market.

“Customers are tough to acquire,” says Kyle Murray, professor of marketing at the Richard Ivey School of Business at the University of Western Ontario in London, Ont. “When you can get them cheap, it’s better than an ad campaign.”

“The reality at the retail level is this is an extremely competitive market,” says Raymond Protti, president and CEO of the Canadian Bankers Association. “[Foreign banks] are competing against five, six, seven active, aggressive players in the market. To do that successfully, you have to have a really specialized niche or a parent with an enormous amount of capital.”

Vancouver-based HSBC Bank Canada, a subsidiary of London-based HSBC Holdings PLC, has prospered by leveraging the global expertise of its parent, by acquiring more than dozen smaller banks over the years and by focusing on the mid-market and not just corporate and institutional business, says the firm’s COO, Sean O’Sullivan.

Because of its links with its parent, HSBC Bank Canada, which started in 1981, can also draw on a loyal base of Asian-Canadian customers. But, O’Sullivan says, a foreign bank can’t survive in Canada over the long term if its sole focus is serving an ethnic niche.

“A niche market eventually goes away,” says O’Sullivan, who argues that as an immigrant community matures, its need for a bank all its own diminishes. “A niche is good place for a foreign bank to start, but you can take it only so far.”

O’Sullivan believes that in the retail marketplace, any new foreign-bank entrant would have a very tough go. “Given the regulatory environment, the competition from the Big [Six] and us, it is almost impossible to compete [in the retail space] unless you can make a major acquisition,” he says.

ING Bank, a subsidiary of Holland-based ING Groep NV, entered Canada in 1997 and shook things up by leading with one key product — a high-interest savings account — a branchless set-up and an effective marketing campaign. Today, ING Bank offers other products, including mortgages and mutual fund distribution.

New York-based Citigroup Inc. has both a Schedule II bank, Toronto-based Citibank Canada, and a Schedule III entity, Citibank NA, the latter of which has $9.4 billion in assets. Citigroup has roots in Canada going back 50 years, and offers credit cards, consumer finance, and private and retail banking, among other products and services. It is also active in the corporate and institutional marketplace.

“If I were giving advice to a foreign bank entering Canada, I would say be completely customer-centric,” says Grant Rasmussen, president and CEO of UBS Bank Canada, the Toronto-based subsidiary of the Swiss banking giant. “If you look at what ING did, for example, it came out with a much better offering than there had been previously. It caught the attention of the marketplace.”

UBS Bank Canada and its Schedule III sister, UBS AG Canada Branch, are involved in investment banking, global asset management and private wealth management for high net-worth (more than $1 million in assets) and ultra-high net-worth (more than $50 million) clients.

The entry and retreat of foreign banks have often followed business cycles, experts say. But there may be another reason a foreign bank would want to gain a toehold.

“If mergers between the Big Six were to become more of a possibility,” Murray says, “and banking regulations were to change, it wouldn’t be a bad idea, if you were a foreign bank, to have a brand identity here.”