On Bay Street, it's a new generation's turn.
In the span of one year, three of the country's Big Five banks have installed or named new leaders who they expect to take their institutions to great heights over the next decade. Brian Porter took the helm of Bank of Nova Scotia on Nov. 1; Dave McKay was named this week to be the next CEO at Royal Bank of Canada, a job he will assume next August; Bharat Masrani gets the top job at Toronto-Dominion Bank in November.
It is the most significant infusion of new leadership into the country's financial sector in many years – and it comes at a time that is both prosperous and perilous for Canada's banks.
The five largest banks have had another terrific year, collectively earning $28.3-billion in the fiscal year that ended Oct. 31. Their share prices recently set all-time highs, and RBC became the first Canadian company in more than a decade to top $100-billion in stock market value. The financial crisis of 2008-09 feels like a distant memory.
But any profit boom needs fuel, and there are fears that this one is running out of gas. Inside the industry, executives say the mood is changing, and quickly.
There are many concerns. Canadian households have borrowed heavily to afford real estate, and with so much debt, have little appetite to borrow more. So domestic loan growth is slowing. Wealth management is under assault from regulators who are watching for conflicts of interest that can bring easy profits.
The banks' capital markets businesses are also being watched carefully and are being ring-fenced to protect bank balance sheets. A slowdown in deal making in some sectors, including mining, has slowed a lucrative stream of fees.
As much as the banks argue that they are guided by well-rounded management teams and their boards of directors, any CEO usually has final say on strategy. New faces raise new questions in this environment.
Domestic banking – credit cards, mortgages, personal loans, deposit-taking – remains the bread and butter of every single major bank. But technological innovation and changing consumer habits (such as the shift to mobile-phone banking) are disrupting these areas. The banks are investing heavily, developing new ways to pay for products using smartphones and upgrading back office systems to help branch employees cross-sell products like mortgages and mutual funds. Their goal is to fend off rivals that might want to carve off pieces of the financial business.
"As I look across all our businesses, the rate of change is significant, and will continue to be," Mr. McKay said in an interview.
Still, that doesn't necessarily spell the end of the banks' amazing run of growth. They have many levers to pull. Expenses are the easiest and already there have been cost cuts. Last quarter, both RBC and Bank of Montreal slashed roughly 1,000 jobs, and TD incurred a $129-million restructuring charge. Plus, there's still some growth. Loan books are expanding – just at a slower pace. Interest rates will likely rise, allowing the banks to earn more on every dollar they lend.
The banks have been here before. After their proposed mergers were killed by the federal government in 1998, they went through a swift change in leadership. By the end of 2002, four of the Big Five had put new leaders in place – each of whom implemented his own strategy, with varying degrees of success. The billion-dollar question is: Who's got the best idea for growth this time around?
Royal Bank of Canada's Dave McKay: New technology, new threats to the No. 1 bank
Royal Bank of Canada is a money-making juggernaut that has opened a clear lead over its rivals in size. With more than 1,200 branches strewn across Canada, the country's largest lender can put more products in front of more clients, selling someone a credit card one minute and a credit line the next.
RBC's executives are also tied to the titans of Canadian business, nursing relationships with families like the Munks and the Westons, allowing the bank to advise on many of the country's most lucrative capital markets deals. The bank made a record $8.3-billion in fiscal 2013.
But RBC also earned its $100-billion market valuation by being the bank that said "No" when it needed to. Outgoing CEO Gordon Nixon could have bought a bank like Wachovia or an investment dealer like Bear Stearns – and was often under pressure to – but had the wherewithal to turn those trades down. They had no fear of being considered small – at least relative to the global giants.
The mentality could pay dividends. With almost every facet of banking facing upheaval, the industry's behemoth may need to be nimble.
In personal and commercial banking, incoming CEO Dave McKay believes RBC is no longer just battling its traditional Canadian rivals: It's now taking on U.S. giants such as Apple Inc. and Google Inc., which are already looking for ways to encroach on financial services. Both companies have released apps that allow customers to pay by swiping their mobile phones at the checkout counter. RBC is spending tens of millions on technology development in the payments area.
The big struggle for RBC is that it's already so big in its key businesses that there is no clear path forward for growth. Wealth management has been a hot spot, and the bank already inked a number of deals, such as its acquisition of BlueBay Asset Management for $1.5-billion in 2010. After the big rally in equities, investment management firms are no longer as cheap as they were.
While the capital markets division is a real powerhouse, with an impressive presence in the U.S. and the U.K., RBC executives have pledged not to let this unit comprise more than 25 per cent of the bank's bottom line. Instead of searching for risky growth, RBC is trying to stick to plain vanilla investment banking and corporate lending – the latter being a major focal point in the U.S. right now.
National Bank Financial analyst Peter Routledge wonders if RBC will have to consider a strategy that is a little more radical. When it comes to acquisitions, "the conventional wisdom is [they will buy] wealth management," he said. "But my dark horse candidate would be personal and commercial banking outside Canada."
Mr. Routledge knows this sounds wild. RBC's P&C operation in the U.S. was a major thorn in its side for a decade before it finally sold it in 2011. But this time around there is key difference: Mr. McKay, unlike Mr. Nixon, is a specialist in retail banking.
"If there's anybody to build out the bank outside of Canada, he'd be the ideal CEO to do that," Mr. Routledge said.
RBC doesn't seem willing to take the bait any time soon. Slow and steady seems to be enough for now. Tim Kiladze
Bank of Nova Scotia's Brian Porter: The road to growth travels through Asia
At Bank of Nova Scotia, employees are cultivated with certain core principles. No operational surprises. Seek out diverse ways to make money. Don't bet too heavily on a single company or country. Watch the expenses.
It is an ethos that is particularly apt for the current environment. After a runup in bank stocks, investors are waiting for a financial institution to make a big mistake. Scotiabank executives swear any blunder won't be theirs. New CEO Brian Porter, who has been in the job for about six weeks, plans to stay the course and deliver methodical growth.
That principle is becoming harder to stand by. In a competitive environment and a decent economy, it is easy to loosen risk constraints in order to reap some rewards. Banks can do this by simply lending to less desirable borrowers.
"We've seen this one before, where people really stretch looking for business," Mr. Porter said. "You have to maintain your discipline. It's a long game."
It is arguably easier for Scotianak to do this than some of its Canadian peers, because it has a growth story outside of the country that it can lean on. Scotiabank has been scooping up assets in South America, building on its existing network in Mexico and the Caribbean. Now there are plans to expand in Asia.
This mix ensures Scotiabank's eggs aren't all in one geographic basket. "Diversification is a big, big plus," Mr. Porter said. And it's something employees have a history with. "If you go back and look at the bank even thirty years ago, we had a footprint in the Caribbean and a small footprint in Latin America," he added. "Those seeds were planted decades ago."
This expansion has helped the bank stick to core products, such as mortgages and corporate loans – only it can sell them in South American countries such as Colombia and Peru where the economic growth rates are in the middle single digits.
Expect Scotiabank to rely on these operations even more in the coming years. Investors can also count on management building out its existing operations abroad.
Mr. Porter has hinted that the bank intends to offer the same range of services it provides to Canadian clients – wealth management, capital markets advice – to clients in other countries.
Such a strategy isn't risk-free. While the products themselves may be rather safe, political risk is always a question. Argentina is a bad word internally after the bank lost $540-million there in 2002, ultimately abandoning the country altogether.
After such extensive growth since the financial crisis – Scotiabank also bought ING Bank of Canada at home for $1.9-billion – Mr. Porter knows that it's time to trim expenses. "We've got to run our business more efficiently," he said in an interview last month.
Employees often quip that Scotiabank can be rather cheap, and Mr. Porter doesn't dispute that – although he phrases it a little differently. "Efficiency is a part of our DNA," he said.
Toronto-Dominion Bank's Bharat Masrani: To buy again in the U.S. or stand pat?
The leadership change at Toronto-Dominion Bank signals a renewed focus on core strengths such as retail banking and a bigger push into the U.S. market.
But incoming CEO Bharat Masrani and top management will be challenged to repeat the bank's recent growth rate in the current climate.
As retail and commercial loan growth slows in Canada, the country's second-largest lender by market capitalization is facing headwinds.
"Globally, we're in a slower growth period right now," said Colleen Johnston, TD's chief financial officer. The financial sector continues to feel the effects of the financial crisis, from low interest rates to increased regulation, and that's putting pressure on the bank's medium-term outlook. "Everyone is being held to a higher standard," she said.
It's a major shift from the bank TD CEO Ed Clark took control of in 2002. Mr. Clark inherited a troubled loan portfolio, struggling discount brokerage business and a lagging stock. But through acquisitions during his tenure, the bank grew both geographically and by assets – from $278-billion in 2002 to $863-billion in 2013.
Mr. Masrani has been travelling across Canada to meet with employees and customers. "Everywhere I go, I see evidence of the tremendous expansion in our Canadian franchise over the last decade," he said on a conference call this week. From bank branches to work culture "the key message remains one of continuity."
Mr. Masrani, who officially takes over on Nov. 1, 2014, started with the bank 26 years ago as a trainee in commercial lending. He has since held an array of positions, landing the role of TD Bank's U.S. CEO since 2008. That experience in the U.S. will be critical to the growth of the bank in the decade to come.
The bank has built tremendous scale through acquisitions and organic growth along the Eastern seaboard – from Maine to Florida. TD's acquisition of New Jersey-based Commerce Bancorp Inc. for $8.5-billion in 2008 boosted the bank's retail platform and security portfolio in the U.S., making TD a top-10 bank in the country. But the business wasn't a big lender, and TD's challenge now is to gradually replace those lower-yielding securities with more profitable loans, all while increasing deposits.
TD executives could reasonably decide to take another big bite in the U.S. Although Mr. Clark has dismissed plans to drop billions to buy RBS Citizens Financial Group Inc., the speculation hasn't quite abated. The Rhode Island-headquartered bank has nearly 1,400 branches across 12 states and could dramatically increase the bank's scale.
Either way, more acquisitions could lay ahead. Mr. Masrani has previously expressed some interest in health care assets and asset-based financing, where borrowers put up assets such as inventory or equipment as collateral. This year, TD acquired Target Corp.'s U.S. credit card portfolio.
The bank's personal and commercial banking U.S. wealth management platform is a newer business, but it could contribute more significantly in the long term, according to analysts.
Growth plans in the U.S. will be tested by prolonged low interest rates and regulatory uncertainty.
Fortunately, there's still room to grow in Canada, where the bank recently purchased half of CIBC's Aeroplan rewards card portfolio. The Aeroplan acquisition will "save" TD's personal and commercial Canadian business next year, Peter Routledge, an analyst with National Bank Financial, wrote in a note to clients. "Absent this transaction, we estimate TD would struggle to generate positive earnings growth in this segment," he said.
The bank's retail focus on long hours of business and branch accessibility has increased in the last decade. Ms. Johnston said this emphasis on convenience will continue to be a focus for the bank, as it builds out its digital and mobile banking platforms. "It's very important we can deliver the same seamless experience across all those channels," she said. "That's our calling card for TD, and we've invested a lot of money and energy in making sure we can deliver that experience." Jacqueline Nelson