21 November 2006

Banks to Add 250+ Branches Over 5 Years

Bloomberg, Sean B. Pasternak & Doug Alexander, 21 November 2006

A month before Royal Bank of Canada opened a new branch in Toronto's King West Village, manager Neil Joshi donned a hockey jersey bearing his bank's logo and hit the streets and cafes to drum up business.

His efforts paid off: 79 people and 19 companies signed accounts in the first month after the branch opened in September in an old industrial area where condominiums have sprung up.

"This is a hot neighborhood," Joshi, 35, said. "The bank has made the right choice coming here."

For the first time this decade, Canada's five biggest banks are adding branches. Barred from pursuing domestic mergers and unwilling to make costly acquisitions abroad, lenders such as Royal Bank are turning to their domestic branch network for predictable earnings growth. Combined, the banks plan to add at least 250 branches over five years, an increase of 5 percent, after six years of closings.

"Retail branch banking in Canada is about one of the most boring things, but also one of the safest, most profitable," said Gavin Graham, chief investment officer at Guardian Group of Funds in Toronto, which owns banks among the equivalent of $5.1 billion it manages. "Boring is good."

With profits rising and their stocks near record highs, the banks need somewhere to put their excess cash, which National Bank Financial analyst Robert Wessel estimates at about C$9 billion ($7.9 billion). The 39-member Standard & Poor's/Toronto Stock Exchange Financials Index has risen 13 percent this year, compared with a 10 percent gain in the S&P/TSX Composite Index.

Investing in consumer trade has proven more lucrative than investment banking for companies such as Toronto-Dominion Bank, which relied on retail banking and asset management for 76 percent of profit in the fiscal third quarter. At Canadian Imperial Bank of Commerce, the two areas accounted for 74 percent of net income, up from 59 percent two years ago.

Canadian banks, which begin reporting fourth-quarter results Nov. 28, may increase profits by an average 10 percent from a year earlier, led by consumer lending and capital markets fees, according to UBS Canada analyst Jason Bilodeau.

"For a while there was a big focus on expansion outside Canada," said Lindsay Gordon, chief executive officer of HSBC Holdings Plc's Canadian unit. "Many of the Canadian banks have retracted from that and are focusing in-market."

The Vancouver-based bank, with 127 branches, says it plans to open 20 new outlets in the Toronto area by the end of 2008 and 10 in the western province of Alberta.

Royal Bank, the biggest lender, may build as many as 112 outlets in the next four years to add to its 1,117 branches, Chief Operating Officer Barbara Stymiest said at an Oct. 4 investor conference. Bank of Nova Scotia, the third-largest bank by assets, plans to open 30 branches next year. CIBC aims to open or expand 70 in the next five years. Toronto-Dominion, the No. 2 bank, opened 19 branches in October alone and says it expects to open 30 more each year. Bank of Montreal plans to add 16. All five banks are based in Toronto.

Incentives are emerging along with new branches. Toronto-Dominion began offering Apple Computer Inc.'s iPod music players last year to clients who opened new checking accounts, and its latest promotion is a free portable DVD player. Next year, Scotiabank will start a loyalty program that will include movie tickets. The bank offered free North American flights for new accounts opened in September and October.

"Some customers still like to have a premium for bringing their business over,'' said Tim Hockey, co-chairman of personal banking for Toronto-Dominion.

Some bankers said the expansion isn't needed. Canada ranks seventh in the world with 46 offices for every 100,000 people, according to a 2005 World Bank study. Spain ranked first with 96, followed by Austria, Belgium, Italy, Portugal and Germany. The U.S. had 31 per 100,000.

Michel Tremblay, senior vice president of personal banking and wealth management at Montreal-based National Bank of Canada, said that, outside of Quebec, Canada is "over-branched and over-banked'' most of the time. National Bank plans to open no more than a few new branches.

Earlier this decade, Canadian banks focused on expansion abroad. Royal Bank and Bank of Montreal bought lenders in North Carolina and Chicago, while Toronto-Dominion and CIBC increased lending to U.S. telecommunication and technology companies through their investment banks. CIBC retreated from its U.S. retail strategy four years ago, while Royal Bank last year sold its unprofitable U.S. mortgage unit.

Today, banks are betting on growing demand for investment advice and mutual funds from an aging population, especially in expanding suburbs.

"There's a lot of new and high-growth areas, particularly in cities like Toronto, Vancouver, Calgary, Edmonton, and that's where you're seeing most of the banks focus," Royal Bank CEO Gordon Nixon said in an interview.

The banks are also targeting areas of increased immigration. Last year, Bank of Nova Scotia bought the Canadian unit of National Bank of Greece SA, while Bank of Montreal has agreed to buy the local arm of Banco Comercial Portugues SA for about C$41 million.

Banks closed branches this decade because of a rise in Internet banking. Still, most Canadians will visit a branch for some needs.

"People will go shopping on the Internet for a mortgage, but they want to deal with a person," said Raymond McManus, CEO of Montreal-based Laurentian Bank of Canada. "I would say you've got to have both, and that's what the banks have discovered."