Bank restructuring charges soar amid branch rationalization plans

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Canada's big banks are on track to report more than $1-billion in restructuring charges this year for the biggest annual total in at least a decade, according to Sohrab Movahedi, an analyst at BMO Nesbitt Burns.

So far, the actual identified charges total $844-million, but recent cost-cutting announcements by Toronto-Dominion Bank and Bank of Nova Scotia are expected to deliver additional charges in the banks' fourth-quarter results in December.

The overall number compares with just $186-million in restructuring charges last year among the Big Six banks and $370-million in 2013, raising the question of why the banks have increased their cost-cutting dramatically this year.

"Restructuring charges are not uncommon and the industry en masse has determined 2015 to be the year to get more aggressive with its physical distribution channels by reducing the costs associated with its branch network," Mr. Movahedi said in a research note.

He pointed to a shift toward fewer and smaller branches, and branch staff that are more focused on sales than processing transactions.

At the same time, the banks are investing in technology as they try to satisfy customer preferences for online and mobile banking without getting marginalized by new tech-savvy competition.

TD leads the banks in terms of charges, with $337-million announced earlier this year and more to come. Canadian Imperial Bank of Commerce has announced about $273-million in charges when a fourth-quarter estimate is factored in. Bank of Montreal has taken $149-million in charges and National Bank of Canada announced that it would take a $85-million charge in the fourth quarter.

Scotiabank has taken no charges so far this year, while Royal Bank of Canada has been restructuring its international wealth operations but has absorbed the charges.

"Simply put, in an environment where [revenue] growth is unlikely to exceed 7 per cent a year, expense growth will have to be slower for both positive operating leverage and earnings growth," Mr. Movahedi said.

He estimates that cost-cutting efforts should slow expense growth to 6 per cent in 2016, or slightly below revenue growth. If the banks can find an additional $346-million in savings next year, profits should improve slightly, to 7 per cent over 2015 from a current estimate of 6 per cent.

However, cuts to bank branches may only go so far.

Robert Sedran, an analyst at CIBC World Markets, argued in a note that branches will remain fundamentally important to banking despite a consumer shift toward online and mobile banking. "In our view, attempts to aggressively close and otherwise de-emphasize branches carry much risk and are very short-sighted," he said.

He said a 2015 Capgemini survey of 16,000 respondents in 32 countries, including Canada, found that branches remained important when applying for a new product: More than 60 per cent of 18-to 34-year-olds and 68 per cent of other customers wanted to speak with someone, suggesting that even millennials are not inclined to turn away from branches, especially as their financial needs become more complex with age.

Mr. Sedran added that, in Sweden, where the number of branches has fallen 7 per cent over the past decade, up to 90 per cent of customers jumped to another bank when their bank closed its branch and competitors did not.

"In conclusion, while we understand the desire and wish for expense rationalization to deliver earnings growth in what has been a slowing revenue environment, hopes that a smaller branch network will deliver those savings in the near term are misplaced," he said.