Financial Post, Eoin Callan, 27 April 2009
In the executive suites of Bay Street's bank towers, industry chieftains have been huddling with their top managers to make tough calls about which units within their banks should get the lion's share of capital -- a scarce commodity since the onset of the credit crisis.
Participants in these internal bank negotiations tend to agree that managers who run the street-level branch networks have been gaining the upper hand.
With a premium on retail deposits as a reliable source of funding in uncertain times, most of the country's top banks have been favouring their retail franchises.
But some are going further, putting their riskier trading operations on a crash diet, starving them of cash as part of a strategy to shrink the units down to a more manageable size.
Leading this trend are Ed Clark, chief executive of Toronto-Dominion Bank, and Gerry McCaughey, chief executive of Canadian Imperial Bank of Commerce, who have positioned themselves at the crest of a wave sweeping the global banking industry.
As international policymakers prepare to force banks to reduce risky trading activity and embrace a more balanced business model, TD and CIBC are taking the leap on their own.
TD's Mr. Clark says his bank is going to give up the industry-wide practice of placing casino-like bets with the bank's own capital. The 61-year-old's decision to halt this profitable-but-risky activity -- known as proprietary trading--makes TD one of only two big banks in the world to make such an explicit pledge, along with Germany's Deutsche Bank.
Mr. Clark says the "wholesale" side of his bank, which advises institutional clients and handles market trades, should not behave like "a hedge fund in disguise."
He wants to stick to activity that produces economic value as the core of new banking model that is emerging from the financial crisis
"Our simple test is to ask: Would the Gross National Product of Canada go down if we eliminated our wholesale activity?" he says.
Under Mr. Clark's direction, the proportion of the bank's income derived from capital market operations has undergone a staggering drop.
Last year it fell from a peak of more than 50% to a mere 2% amid cutbacks and investment losses.
The bank's internal target for the future is thought to be below 15%, with retail banking pegged to account for a whopping 85% of income.
This same big shift from wholesale to retail is also underway on the other side of Bay Street at CIBC, where top managers are working on transforming the bank into a business that looks more like a "utility," according to a person familiar with executives' thinking.
Retail operations accounted for all of last year's profits as Canada's fifth-largest bank wrote off investments, and the contribution from wholesale banking appears set to hug low double digits for the foreseeable future.
The idea behind this model is that banks will perform steadily during economic downturns, benefit from updrafts and be spared the periodic blowouts that have plagued Bay Street for decades.
In theory, this kind of stability is what Canadian institutional investors crave, and there is some evidence that banks such as TD are winning backing for their strategy.
When the Ontario Teachers' Pension Plan recently revealed its biggest stock holdings, all of the usual Bay Street suspects were missing, save TD.
This is a sign the $100-billion pension fund views the bank as promising the best return for the least risk, despite TD's heavy exposure to beleaguered U. S. consumers.
The downside for investors is that as banks become more like utilities they will sacrifice growth.
As others beat a hasty retreat, Royal Bank of Canada has shown it is not afraid to step forward and grab market share on Wall Street from weakened foreign rivals. Pride in having the biggest and the best capital markets operation among Canada's banks remains a strong part of its internal culture.
The country's largest bank saw the contribution of wholesale banking to income reach levels above 40% in the first quarter of 2009, according to the bank's adjusted figures.
RBC also appears likely to apportion a healthy share of capital to the profitable unit as world markets recover. Yet the bank remains firmly committed to a long-standing target under Gord Nixon, chief executive, of deriving 20% to 30% of income from wholesale banking, and 70 to 80% from retail.
"We believe the model of 25/75 is extremely appropriate for the new world," Mr. Nixon says.
The RBC model is designed to allow the bank to remain a competitive global player while minimizing earnings volatility and keeping liquidity risk under control -- and may be a template for U. S. banks.
"We think a lot of banks are going to move toward that model," Mr. Nixon says.
Up at the top of Bay Street, Bill Downe, chief executive of Bank of Montreal, agrees.
"I have a very strong view. I think that the universal banking model is a necessary model," says the head of Canada's fourth-largest bank.
He says this model of having a healthy balance between a retail and wholesale banking operation combines the "virtues of a secure deposit base" with a "capacity for innovation."
"The Canadian banking system is the best example I can think of, of the universal bank functioning well," he says.
Next door on Bay Street, a similar view is taken by Rick Waugh, chief executive of Bank of Nova Scotia.
The head of Canada's most international bank has been extolling the virtues of the traditional Canadian banking model to international policymakers like Paul Volcker, the former Federal Reserve chairman who is advising U. S. President Barack Obama on redesigning the U. S. financial system.
"I have had direct talks with Paul on this," Mr. Waugh says.
Scotiabank's international orientation means it has a somewhat different risk profile than the other Bay Street institutions, with an emphasis on building retail chains in emerging markets such as Latin America and Asia.
This has prompted it to elevate risk management to the highest level within the organization, earning it a ranking as one of the top 10 most stable banks in the world, according to Oliver Wyman, the financial services consultancy.
When viewed from outside the country, analysts tend to see all of the Canadian banks as clustered relatively close together, with broadly similar models, despite degrees of difference in strategy.
Yet in executive suites on Bay Street, the credit crisis has created intense internal debate over allocation of capital as bankers place their bets on the way forward following one of the most testing periods in history for the industry.
"At our management committee level, the engagement around that allocation process has to be high," Mr. Downe says. "The last 24 months have been an exciting time, because management action will have consequences, and if you're on your toes, will have positive consequences."
In the executive suites of Bay Street's bank towers, industry chieftains have been huddling with their top managers to make tough calls about which units within their banks should get the lion's share of capital -- a scarce commodity since the onset of the credit crisis.
Participants in these internal bank negotiations tend to agree that managers who run the street-level branch networks have been gaining the upper hand.
With a premium on retail deposits as a reliable source of funding in uncertain times, most of the country's top banks have been favouring their retail franchises.
But some are going further, putting their riskier trading operations on a crash diet, starving them of cash as part of a strategy to shrink the units down to a more manageable size.
Leading this trend are Ed Clark, chief executive of Toronto-Dominion Bank, and Gerry McCaughey, chief executive of Canadian Imperial Bank of Commerce, who have positioned themselves at the crest of a wave sweeping the global banking industry.
As international policymakers prepare to force banks to reduce risky trading activity and embrace a more balanced business model, TD and CIBC are taking the leap on their own.
TD's Mr. Clark says his bank is going to give up the industry-wide practice of placing casino-like bets with the bank's own capital. The 61-year-old's decision to halt this profitable-but-risky activity -- known as proprietary trading--makes TD one of only two big banks in the world to make such an explicit pledge, along with Germany's Deutsche Bank.
Mr. Clark says the "wholesale" side of his bank, which advises institutional clients and handles market trades, should not behave like "a hedge fund in disguise."
He wants to stick to activity that produces economic value as the core of new banking model that is emerging from the financial crisis
"Our simple test is to ask: Would the Gross National Product of Canada go down if we eliminated our wholesale activity?" he says.
Under Mr. Clark's direction, the proportion of the bank's income derived from capital market operations has undergone a staggering drop.
Last year it fell from a peak of more than 50% to a mere 2% amid cutbacks and investment losses.
The bank's internal target for the future is thought to be below 15%, with retail banking pegged to account for a whopping 85% of income.
This same big shift from wholesale to retail is also underway on the other side of Bay Street at CIBC, where top managers are working on transforming the bank into a business that looks more like a "utility," according to a person familiar with executives' thinking.
Retail operations accounted for all of last year's profits as Canada's fifth-largest bank wrote off investments, and the contribution from wholesale banking appears set to hug low double digits for the foreseeable future.
The idea behind this model is that banks will perform steadily during economic downturns, benefit from updrafts and be spared the periodic blowouts that have plagued Bay Street for decades.
In theory, this kind of stability is what Canadian institutional investors crave, and there is some evidence that banks such as TD are winning backing for their strategy.
When the Ontario Teachers' Pension Plan recently revealed its biggest stock holdings, all of the usual Bay Street suspects were missing, save TD.
This is a sign the $100-billion pension fund views the bank as promising the best return for the least risk, despite TD's heavy exposure to beleaguered U. S. consumers.
The downside for investors is that as banks become more like utilities they will sacrifice growth.
As others beat a hasty retreat, Royal Bank of Canada has shown it is not afraid to step forward and grab market share on Wall Street from weakened foreign rivals. Pride in having the biggest and the best capital markets operation among Canada's banks remains a strong part of its internal culture.
The country's largest bank saw the contribution of wholesale banking to income reach levels above 40% in the first quarter of 2009, according to the bank's adjusted figures.
RBC also appears likely to apportion a healthy share of capital to the profitable unit as world markets recover. Yet the bank remains firmly committed to a long-standing target under Gord Nixon, chief executive, of deriving 20% to 30% of income from wholesale banking, and 70 to 80% from retail.
"We believe the model of 25/75 is extremely appropriate for the new world," Mr. Nixon says.
The RBC model is designed to allow the bank to remain a competitive global player while minimizing earnings volatility and keeping liquidity risk under control -- and may be a template for U. S. banks.
"We think a lot of banks are going to move toward that model," Mr. Nixon says.
Up at the top of Bay Street, Bill Downe, chief executive of Bank of Montreal, agrees.
"I have a very strong view. I think that the universal banking model is a necessary model," says the head of Canada's fourth-largest bank.
He says this model of having a healthy balance between a retail and wholesale banking operation combines the "virtues of a secure deposit base" with a "capacity for innovation."
"The Canadian banking system is the best example I can think of, of the universal bank functioning well," he says.
Next door on Bay Street, a similar view is taken by Rick Waugh, chief executive of Bank of Nova Scotia.
The head of Canada's most international bank has been extolling the virtues of the traditional Canadian banking model to international policymakers like Paul Volcker, the former Federal Reserve chairman who is advising U. S. President Barack Obama on redesigning the U. S. financial system.
"I have had direct talks with Paul on this," Mr. Waugh says.
Scotiabank's international orientation means it has a somewhat different risk profile than the other Bay Street institutions, with an emphasis on building retail chains in emerging markets such as Latin America and Asia.
This has prompted it to elevate risk management to the highest level within the organization, earning it a ranking as one of the top 10 most stable banks in the world, according to Oliver Wyman, the financial services consultancy.
When viewed from outside the country, analysts tend to see all of the Canadian banks as clustered relatively close together, with broadly similar models, despite degrees of difference in strategy.
Yet in executive suites on Bay Street, the credit crisis has created intense internal debate over allocation of capital as bankers place their bets on the way forward following one of the most testing periods in history for the industry.
"At our management committee level, the engagement around that allocation process has to be high," Mr. Downe says. "The last 24 months have been an exciting time, because management action will have consequences, and if you're on your toes, will have positive consequences."
__________________________________________________________
Financial Post, John Turley Ewart And Eoin Callan, 27 April 2009
When William Downe moved into the corner office at First Canadian Place in downtown Toronto two years ago, he decided he didn't like the view at the country's fourth-largest bank.
"The visibility of the service we provided was so low it was like a grey institution," recalled the chief executive of Bank of Montreal in a recent interview.
So Mr. Downe-- who was catapulted to the helm of the country's oldest bank on the winds of change --decided to spruce things up.
Today, a visit to a BMO branch finds new blue signage and open-concept branches where staff patrol the floor looking for clients to assist.
The fresh strategy for the bank's branch network entails organic growth and expansion aided by good old-fashioned retailing skill.
"We have opened 40 new branches, we have redeveloped over 60, and we have done major renos on 60 [more], and that is a major change from what we were doing in the early part of this decade," says Frank Techar, head of Bank of Montreal's personal and commercial bank in Canada.
All of this is Mr. Downe's way of declaring BMO is back in the retail banking market.
The chief executive said staff morale is also being lifted by efforts to put a different face on a bank that operated for a decade with a giant for-sale sign out front.
Ten years have passed since a bid by BMO to merge with the Royal Bank was dismissed by the Liberal government of Jean Chretien. In the months before the decision, the future of BMO was painted as bleak.
The bank's then-CEO Matthew Barrett warned that the Bank of Montreal "would no longer be a nationwide full-service bank with an ubiquitous community presence" if the merger was rejected.
Bank of Montreal would become, said Mr. Barrett, "the remarkable shrinking bank. "After the decision, it was as if the bank was determined to fulfill that prophecy. The bank's retail branches languished, many were closed. BMO "Investstores" were opened, tiny branches tucked away in grocery stores that were staffed by one or two employees and equipped with an ATM.
"Can a bank change?" was the theme of a Bank of Montreal television ad campaign in the mid-1990s. After another failed merger attempt in 2002, with Scotiabank, BMO had no choice but to try and prove it.
Change was the main theme of Bill Downe's first speech as BMO's incoming president and chief executive officer in 2007. "What I heard most strongly was our largest competitors saying that they were taking our business from us and they were going to continue to do that, and that did catch my attention," he said.
"Reversing market share erosion was the No. 1 assignment," he added.
It was an objective that Mr. Downe said he had no trouble selling to BMO staff as he embarked on a coast-to-coast tour of branches.
To turn things around, BMO launched an advertising campaign and customer-service strategy driven by extensive research showing customers find banking confusing and would like it to be simpler.
Mr. Techar said BMO is making a promise to customers "to provide them the clarity they need to have more confidence in their financial decisions." The chain is "going back to basics," he adds.
The head of retail points to one of BMO's newer branches on Church Street in Toronto -- open seven days a week and powered by green energy -- as a model for the makeover that has altered the bank's image over the past two years.
During a visit to the branch, Mr. Techar gestures approvingly to the vivid hues of blue that stand out amid the rainbow of storefronts in Toronto's gay village.
"With respect to our branch network, we had a little bit of catching up to do," he said.
Before the change, Mr. Techar admits, BMO was "not getting to enough customers" and many of its rivals were "counting it out" of the retail banking market. They had cause. The retail unit's revenue growth, net income growth and internal customer loyalty scores at the end of 2007 put the bank in fourth or fifth place compared with its peers.
While the bank is still far from being an industry leader, those key measures of its retail performance -- customer loyalty scores, revenue growth, net income growth -- at the end of 2008 suggest BMO is moving into the middle of the pack.
BMO also sees opportunities to grow the bank's U. S. footprint by building on its Harris Bank unit, which is based in Chicago. Over the next one or two years, said Mr. Downe, "there will be consolidation opportunities" in the United States. "What we don't want to do is buy someone else's loan portfolio that is struggling, but what we would like to do is buy a loyal customer base that values high service and that fits in with our business model.
According to Mr. Downe, "the chance to grow market share with our existing facilities is one we cannot miss."
Back at the Church Street branch, staff are working to make the strategies of Mr. Techar and Mr. Downe have meaning for customers. In the cafe next door, the clientele offer some encouragement for the bank's new approach, giving the bank's bright-blue makeover a half-hearted thumbs up. Its not a return to the former glory of the country's oldest bank, but it's a start.
;
When William Downe moved into the corner office at First Canadian Place in downtown Toronto two years ago, he decided he didn't like the view at the country's fourth-largest bank.
"The visibility of the service we provided was so low it was like a grey institution," recalled the chief executive of Bank of Montreal in a recent interview.
So Mr. Downe-- who was catapulted to the helm of the country's oldest bank on the winds of change --decided to spruce things up.
Today, a visit to a BMO branch finds new blue signage and open-concept branches where staff patrol the floor looking for clients to assist.
The fresh strategy for the bank's branch network entails organic growth and expansion aided by good old-fashioned retailing skill.
"We have opened 40 new branches, we have redeveloped over 60, and we have done major renos on 60 [more], and that is a major change from what we were doing in the early part of this decade," says Frank Techar, head of Bank of Montreal's personal and commercial bank in Canada.
All of this is Mr. Downe's way of declaring BMO is back in the retail banking market.
The chief executive said staff morale is also being lifted by efforts to put a different face on a bank that operated for a decade with a giant for-sale sign out front.
Ten years have passed since a bid by BMO to merge with the Royal Bank was dismissed by the Liberal government of Jean Chretien. In the months before the decision, the future of BMO was painted as bleak.
The bank's then-CEO Matthew Barrett warned that the Bank of Montreal "would no longer be a nationwide full-service bank with an ubiquitous community presence" if the merger was rejected.
Bank of Montreal would become, said Mr. Barrett, "the remarkable shrinking bank. "After the decision, it was as if the bank was determined to fulfill that prophecy. The bank's retail branches languished, many were closed. BMO "Investstores" were opened, tiny branches tucked away in grocery stores that were staffed by one or two employees and equipped with an ATM.
"Can a bank change?" was the theme of a Bank of Montreal television ad campaign in the mid-1990s. After another failed merger attempt in 2002, with Scotiabank, BMO had no choice but to try and prove it.
Change was the main theme of Bill Downe's first speech as BMO's incoming president and chief executive officer in 2007. "What I heard most strongly was our largest competitors saying that they were taking our business from us and they were going to continue to do that, and that did catch my attention," he said.
"Reversing market share erosion was the No. 1 assignment," he added.
It was an objective that Mr. Downe said he had no trouble selling to BMO staff as he embarked on a coast-to-coast tour of branches.
To turn things around, BMO launched an advertising campaign and customer-service strategy driven by extensive research showing customers find banking confusing and would like it to be simpler.
Mr. Techar said BMO is making a promise to customers "to provide them the clarity they need to have more confidence in their financial decisions." The chain is "going back to basics," he adds.
The head of retail points to one of BMO's newer branches on Church Street in Toronto -- open seven days a week and powered by green energy -- as a model for the makeover that has altered the bank's image over the past two years.
During a visit to the branch, Mr. Techar gestures approvingly to the vivid hues of blue that stand out amid the rainbow of storefronts in Toronto's gay village.
"With respect to our branch network, we had a little bit of catching up to do," he said.
Before the change, Mr. Techar admits, BMO was "not getting to enough customers" and many of its rivals were "counting it out" of the retail banking market. They had cause. The retail unit's revenue growth, net income growth and internal customer loyalty scores at the end of 2007 put the bank in fourth or fifth place compared with its peers.
While the bank is still far from being an industry leader, those key measures of its retail performance -- customer loyalty scores, revenue growth, net income growth -- at the end of 2008 suggest BMO is moving into the middle of the pack.
BMO also sees opportunities to grow the bank's U. S. footprint by building on its Harris Bank unit, which is based in Chicago. Over the next one or two years, said Mr. Downe, "there will be consolidation opportunities" in the United States. "What we don't want to do is buy someone else's loan portfolio that is struggling, but what we would like to do is buy a loyal customer base that values high service and that fits in with our business model.
According to Mr. Downe, "the chance to grow market share with our existing facilities is one we cannot miss."
Back at the Church Street branch, staff are working to make the strategies of Mr. Techar and Mr. Downe have meaning for customers. In the cafe next door, the clientele offer some encouragement for the bank's new approach, giving the bank's bright-blue makeover a half-hearted thumbs up. Its not a return to the former glory of the country's oldest bank, but it's a start.
