The Business of Bank Mergers: A Sound Strategy for Canada

Head Table Guests

Sandra Whiting, President, Black Business and Professional Association and a Director, The Empire Club of Canada; Michael Pan, CAC Student, Eastern High School of Commerce; Reverend Dr. John Niles, Victoria Park United Church; Shelley Charles, Executive Director, ANDPVA, The Association for Native Development in The Performing and Visual Arts; Edward Frackowiak, Vice-President, General Counsel for Canada, First American Title Insurance Company; Gareth S. Seltzer, Vice-President, Guardian Capital Advisors and Immediate Past President, The Empire Club of Canada; John A. Campion, Senior Litigation Partner, Fasken Campbell Godfrey and a Past President, The Empire Club of Canada; G. Montegu Black, Chairman and President, Txibanguan Ltd.; Jasmine Herlt, LL.B., Executive Director, CANFAR, Canadian Foundation for AIDS Research; and Kenneth B. Rotman, Co-President and Managing Director, Clairvest Group Inc. and a Director, The Empire Club of Canada.

Introduction by George L. Cooke

it is my privilege to welcome as guest speaker to The Empire Club of Canada, Mr. Charles Baillie, Chairman and CEO, TD Bank Financial Group.

Having your banker as your guest speaker is always a pleasure. Mr. Baillie's organisation and the company that employs me have enjoyed a business relationship since 1887. Mr. Baillie isn't quite that old. He began his career at TD Bank in 1964 and has occupied various positions within the branch system. On February 1, 1997 he assumed the role of President and CEO, and effective February 1, 1998 he was named Chairman and CEO.

Charlie Baillie has experienced many successes throughout his career, some of which include establishing the U.S.A. Division, and the growth of both Green Line Investor Services (TD's discount brokerage arm), and TD Securities Inc.

Mr. Baillie was born and raised in Orillia. He is married and has four children. In his own words he is a "travel, history and nature buff" and in his spare time enjoys travelling the world to locations off the beaten track with his family. He is an avid reader of American and Russian history and collects antique Canadian history and travel books.

Mr. Baillie is going to talk to us today about the business of bank mergers. It is interesting to note that the TD Bank Financial Group was formed on February 1, 1955 as the result of an amalgamation of the Bank of Toronto and the Dominion Bank. Today, worldwide, TD employs over 32,000 people and provides products and services through a network of approximately 900 branches and subsidiaries. Mr. Baillie, welcome to The Empire Club of Canada.

Charles Baillie

Let me begin by quoting from an article from the business section of the Globe and Mail: "The lack of any further news on the ... merger ... is taken by some to indicate that the proposal ... may be meeting a cool reception in Ottawa, whose approval is necessary before such a merger may be made."

Now, that quote is a bit older than some of you might think. It appeared during the summer of 1954--after the Dominion Bank and the Bank of Toronto had indicated their desire to merge. That article reminds us that opposition to bank mergers has very deep roots.

The quote also reminds us that while the past few decades have been quiet from the point of view of bank mergers, this, in a longer perspective, has been very much the exception, not the rule. In fact, TD and CIBC are the product of 14 separate mergers over the past 128 years. Taken together, the Big Six Banks are the result of over 40 mergers and acquisitions over the same period. Bank mergers may be new news. But they are certainly old history as well.

Of course, as we know, cool heads prevailed in 1955. The merger went through. The sky did not fall. As a matter of interest, the number of staff grew every year following that merger for at least the next decade. Indeed, since its formation, TD's work force has grown from 5,517 to 29,920; and, together with Canada's other major banks, we have helped build one of the most stable, secure and successful banking systems in the world.

And we have done so not by sitting still, but by responding to change and to challenge. Perhaps because the names have not changed for so long, many Canadians see ours as a static business. But consider all that has happened since that year 1955 when TD was formed. Mutual Funds. Discount brokerage. ABMs. Telephone and computer banking. Derivatives. Investment banking. Debit cards and Interac. Full blown securities trading. The ability to enter insurance and trust. All in the space of a generation. All new. All unpredictable. All calculated risks at the time. All critical to meeting Canadians' needs today.

It is that reality, that attitude towards risk and that aptitude to execute well, that lies at the heart of our proposal to merge. I believe strongly this proposal is in TD's interest. I believe strongly that it is in the interest of Canadians. The case for our business is clear. And, I believe, the case for the country is compelling as well. The rationale for this merger is not complex. It is straightforward. It flows from three inter-related trends: globalisation, consolidation and technological change.

Together, those trends form our environment. It is an environment we can't change. Therefore, it is an environment to which we must adapt.

I emphasise that bank mergers are not a Canadian phenomenon. Across North America and around the world, there is an unprecedented trend towards consolidation, both in the financial services industry and among the many clients we serve.

And technological change is making market entry and success possible from a distance--with large-scale physical presence increasingly irrelevant to market penetration. The result? We are facing new competition from new players in many of our core businesses. MBNA, BancOne and Capital One in credit cards. Countrywide in mortgages. Wells Fargo in small business loans. ING in electronic banking. Heller, Associates, Finova and Norwest in consumer and commercial finance. Fidelity, Scudder and Templeton in mutual funds.

While these competitors have not yet significantly hurt our business, it is striking that virtually none of them was in the Canadian market even five years ago. For the first time, our core franchise is coming under attack. Many of these competitors have a capital and a customer base that dwarfs ours--giving them advantages of scale. Almost none of them is burdened with the costs of a large brick-and-mortar presence--or anything close to our regulatory costs--giving them meaningful advantages over the Canadian banks.

And virtually all of them are able to do what they do largely through the application of technology. The sheer numbers tell the story. There was a time when TD spent as much on technology as NationsBank. Since then Nations has experienced several mergers with the result that the new NationsBank of America spent the equivalent of Cdn $3.8 billion in 1997 while we at TD spent only $500 million. There was a time when TD spent roughly the same as MBNA on card technology but last year MBNA spent C$150 million while TD spent $6.5 million. NationsBank and MBNA are able to do that because they have a much broader customer base and much higher volumes over which to spread the costs.

Now, that technology is not going to go away. None of us is going to be returning to ledgers. And neither are these new competitors all of a sudden going to shrink or disappear. Their capital and customer base will only get bigger.

This is a growing threat to the very businesses on which our growth and profitability depends--not partly, but entirely. If we lose our most attractive customers, we would become inefficient, unable to make the investments we must in order to provide the services and products our clients want. We would enter a vicious circle of gradual decline, while our competitors would not.

This reminds me of the trust companies. If we, the banks, had declared a decade ago that we wished to buy the trust companies, the response from our governments would have been a categorical and resounding no. Yet a couple of years later, we were part of the solution. The fact is the trust companies failed because they failed to adapt to a changing competitive landscape.

In that world, the current 10-per-cent restriction on the ownership of banks wouldn't matter very much. Mediocrity would make us unattractive to everyone.

Now, none of this would happen overnight, in a month or even a year or two. The process would be gradual. But it would, I believe, be inexorable. The trends I have described are not cyclical or mere hiccups. They are structural and enduring. And they are not merely hypothetical. A year ago we made the decision we could no longer compete in the custody business as we could not justify the investment in technology the business demands. This year we exited the payroll business, again because we could not afford the technology spending.

My responsibility is not to focus only on the next quarter. My responsibility is to look forward to the next decade. In this business, it is almost impossible to recover a lead once it's lost. And it's equally impossible to take the lead without looking ahead. That, for example, is how and why we at TD were able to build the second-largest discount brokerage in the world--planning ahead while many questioned our judgment. And that's how and why, today, we are looking to merge.

What would that merger mean?

It would mean new economies of scale that would allow us to better match the costs of our competitors.

It would mean the ability to make the kinds of large, ongoing investments in technology we need--and to spread that investment over a larger base.

It would mean lower costs for our clients as savings are passed on to them; something the competitive environment will ensure happens.

It would mean more and better services because we would have the confidence and the capacity to be innovative, to take risks--rather than being caught up in the caution and inertia induced by dwindling competitive advantage.

It would mean a new strength in the U.S. market, making us much more likely to be acquirers rather than acquirees in North America.

It would mean better returns for the hundreds of thousands of Canadians who are directly and indirectly our shareholders, relying on our success to help fund their retirement.

And it would mean high-value headquarters jobs kept here and created here, and the kind of robust tax returns to governments that come from doing well.

It was not that long ago that Philadelphia and Los Angeles were major financial centres. Today, they are not. New York is the major financial centre in the United States. And Charlotte, the headquarters of the merged NationsBank and Bank of America, has become a significant financial centre largely as a result of bank mergers. The potential for a parallel development in Canada is real--with one important difference. If Toronto were to decline, another Canadian city would not be the beneficiary. It would be New York, or Charlotte. And make no mistake, the gravitational pull of New York is formidable.

The fact is, allowing the bank mergers to proceed would mean strengthening one of the few successful Canadian-owned and Canadian-headquartered industries remaining in this country. Such a policy would be in keeping with our government's trade and NAFTA policies. Where would Nortel and Bombardier, great Canadian success stories, be today if the government had not supported their global initiatives? We also need the ability to compete effectively in those markets.

Now, of course, the case I have made is not without its critics, to say the least. Some of those critics will never change their minds. They are decided. They dislike banks. Therefore they dislike bank mergers. End of argument. However, others are more open, although they too have concerns.

It is therefore the best thing that the decision on mergers is now part of the public-policy process--as it should be--with the Competition Bureau, with the Office of the Superintendent of Financial Institutions, with the Minister of Finance and, ultimately, the Parliament of Canada itself. I support that process because I believe that the best decision will emerge once all perspectives are brought together and all stakeholders have their say.

Today, I would like to raise several issues which I believe are relevant to this debate--and do so by responding to some of the questions and criticisms that have been made.

Some say that mergers are not necessary, not needed. That Canada's banks are doing very well today, thank you. That they can continue to succeed as they now are. Well, maybe those who say that are right. But I do not believe that they are. And speaking as CEO of TD, I must be blunt: "I may be wrong about the need to merge." But, in the end, that is my and my Board's judgment to make. This is my and my Board's responsibility--to operate the business, on behalf of our shareholders. Others may have a different view about how this bank should be run. But at some point it must be said: "They do not have a responsibility to our shareholders."

A second and related issue. Some say prove you are right. Prove this is absolutely necessary. Prove this is better for shareholders. Prove this is better for employees, for customers, for Canadians. Well, I can put forth arguments and I have and will continue to do so. But I cannot prove any of this. No one can. This is not science. To ask for absolute proof demonstrates either a profound misunderstanding of the nature of business or an intentionally unfair standard set by people who know it can't be met.

One is tempted to say: "Rather than my proving I am right, perhaps others might be asked to prove that I am wrong." That is a particularly appealing approach given the extent of bank mergers taking place around the world.

A third issue--on competition. Critics say the mergers would lead to an unacceptable loss of competition in the financial services industry. On this issue, I would say the following. We believe that a decision can be reached which meets reasonable and accepted standards of competition. In that, I am confident.

Next, rather than the critics calling for some kind of pre-emptive strike based on a self-declared expertise on competition issues, I simply say: "Let the process unfold. In this country, we have a very clear process and a Bureau equipped with clear guidelines and considerable expertise. Let them do their work."

Finally, on the substance of the issue, it must be asked: "Is the U.S. better served by a larger number of banks?" The answer very clearly is no.

Rather, a country is best served by the greatest number of solid, innovative and efficient banks it can support. And that number should, I believe, be considered in relation to the size of the market served. The fact is, a market can only sustain so many banks over the long haul, and it is arguable that in Canada, as elsewhere, because of technology and capital that number is now fewer than it once was.

I would point out that on a population basis the states of California and Florida are more comparable to Canada than is the entire U.S. Goldman Sachs has noted that after the proposed mergers, the three largest banks in Canada would control 55 per cent of deposits. In California, today, the three largest banks control 52 per cent of deposits. In Florida, the figure is 59 per cent. And mergers continue in those jurisdictions.

A further issue--the importance of size. I am convinced more than ever that in the face of the new trends towards consolidation and foreign penetration of our markets, size is an important defensive and offensive strategy. Others, of course, say size doesn't matter much at all.

Well, this can be a nice, analytical debate. But it misses a major point--that for an increasing number of our clients, size does matter. They believe it is important. They rule people in--and rule people out--on that basis. After all, many of them are themselves implementing or considering their own consolidation. Now, they may be wrong. But that doesn't matter much when our success hinges on that judgment.

Another example: TD has an enviable record in leading loan underwritings. We just ranked number two in the U.S. in leveraged deals and number seven in all loans. No other non-U.S. bank was in the top 10. But last quarter we saw NationsBank commit to two loans of almost $4 billion each. At our size, we could only commit to roughly half that amount on a single loan. The fact is, as more and more of our clients merge, they will be seeking larger loans. And larger banks are better positioned to provide these loans.

To suggest that banks need not grow--or indeed should not grow--in tandem with their clients is simply counter to common sense. And TD has been there before. In the 1950s, the Bank of Toronto and the Dominion Bank were rapidly losing their largest customers--because those customers were outgrowing the capacity of two mid-sized banks. When those banks merged in 1955, we were able to keep pace with both our customers' needs and our competitors'. We are at the same crossroads now. And we want to keep pace. We want to meet our customers' changing needs and compete against the global giants.

Next, the point is made that mergers will come with a cost--that branches will close, that jobs will be lost. I do not dispute that mergers will have consequences. After all, if they didn't, why merge? I believe it does a disservice to Canadians to pretend otherwise. Now, we have made a very clear commitment to keep job losses to a minimum--and have said that normal attrition will carry much of the burden. I am personally proud of our record as a model employer. It is a record we will maintain. We have made it clear that we will ensure a presence in smaller rural communities where we now operate. And we have made the argument that a more efficient bank is bound to lead to lower, not higher fees.

But there is a larger issue that must be faced. And it is this. I do not believe that smaller, separate and weaker banks would, in the long term, be a very good guarantee of jobs, particularly good jobs. I do not believe that smaller, separate and weaker banks would, in the long term, be a very good guarantee against branch closures. I do not believe that smaller, separate and weaker banks would, in the long term, be a good guarantee of service to small business--service which requires major investment in systems and people. And I do not believe that smaller, separate and weaker banks would, in the long term, be a very good guarantee of customer service or low fees.

We don't live in a world of unlimited choices. And I happen to believe that a larger, stronger, merged bank would be a better long-term guarantee of jobs, of service, of branch presence than the alternative. That certainly was the experience of the Bank of Toronto and Dominion Bank merger.

Let me conclude on a point I believe must become a larger part of this debate. There is very clearly a view on the part of some that banks have a responsibility, in effect, to be agents of social policy--whether in terms of job creation or regional development or support for those in need. And that approval of the mergers should hinge on our playing that role.

Let me be clear. I accept the notion that Canada's banks do have a special obligation. We provide liquidity to the entire economy. We have a responsibility to ensure broad access to our system. And we are custodians of other people's money. These are obligations we take very seriously indeed.

But surely there are limits. The millions of Canadians who are our shareholders--directly or indirectly--have not purchased our shares in order to see us run surrogate governments. They want us to run a competitive, successful bank. The millions of Canadians who entrust their money to us want us to invest it and safeguard it in a way that enhances their financial well-being.

What is more, we are ill-equipped to function as social agencies--and would probably fail if forced to do so. Social policy is the role of government. That, after all, is why our shareholders and our customers pay taxes to the government.

Surely we have learned enough from the experiments and the errors of the 60s and 70s and early 80s to have a clear understanding of what the respective roles of government and the private sector ought to be. Surely, much as it might be emotionally satisfying to some and politically convenient to others, we don't need a National Energy Policy for the banks.

"Banking is not a right; it is a privilege." That statement is profoundly revealing--and profoundly wrong. Yes, I consider it a privilege to be in a position to help guide the future of one of Canada's major banks. It is the same sense of privilege--and of obligation--shared by anyone in private or public life who has the opportunity to lead--and to also serve--whether that be the president of a university, the head of a computer firm or, indeed, a member of Parliament. But if being a banker is a personal privilege, it is also a public right.

Laws and regulations exist to set the rules according to which that right can be exercised. Although the unique nature of financial institutions brings unique regulations, this does not detract from the fact that as with any other business, we should be able to conduct our affairs freely--within the law and without interference.

This is not a narrow and invalid point. It goes to the very heart of how we conceive ourselves as a democratic, free-market society. Indeed, I believe it is telling to note that the only countries in which operating a business is considered to be a privilege--and not a right--are, in fact, totalitarian.

I would ask others in the private sector in this country to consider what is at stake here. This is about their future too. There is something called precedent. The imposition of enforced competitive weakness is a very odd approach to employment and service delivery. It is contrary to logic. And it is certainly contrary to some very hard and real lessons we have learned from Canadian history.

We can all understand the controversy around the merger issue. This is, after all, about a very fundamental restructuring of what is the backbone of the Canadian economy. And I understand, as well, the emotions that have been generated. Canada's banks may never be loved.

But there is something perverse in an attitude which implies it is wrong for a successful enterprise to want to be more successful. That it is wrong when you are profitable today to want to safeguard your shareholders' profits for tomorrow. And that it is wrong for two successful institutions to want to pool their strengths together. Perhaps to some it is un-Canadian to say so, but we are planning for success, for Canadian success.

I do not fall down before the altar of globalisation and technological change. But I do accept them for the forces that they are. In an ideal world--in a dream world--we might wish that mergers were not on the agenda. We would like to be able to ignore the foreign competition we now face which will grow more fierce every year. But we can't.

Nostalgia may be nice. But it's no way to run a bank--or a country.

We have a strategy--one I believe will work--for TD Bank and for Canada.

Banks around the world are merging and will be free to compete in Canada. What is the logic in denying to Canadian banks the ability to merge and therefore the ability to compete against these much larger financial institutions which are reaping the advantages of scale? My plea is: "Give us a chance to succeed; let us compete."

The appreciation of the meeting was expressed by John A. Campion, Senior Litigation Partner, Fasken Campbell Godfrey and a Past President, The Empire Club of Canada.