The message was symbolic of how the bank thought about itself at the time. CIBC wanted to expand around the world and conquer new markets, taking risks and growing rapidly as it went. It saw itself as a player in the world’s financial capitals, and invested heavily in its businesses in the U.S., Asia and elsewhere.
These days, CIBC has shed virtually all of its imperial swagger. Under Mr. McCaughey, the bank has largely retreated to Canada, where it relied heavily on the domestic banking market, which is stable and predictable, but where growth is increasingly hard to find.
Seated in one of his spartan strategy rooms decked out with giant whiteboards, Mr. McCaughey rests his elbows on the table and lays out his vision. It is a strategy for operating a bank that runs against everything the industry has become accustomed to over the past few decades. Unbridled growth is not quite a dirty word to him, but it’s close.
“We don’t want to be the fastest-growing bank,” he says. In fact, he believes the industry is entering a new era of slower growth, caution, and smaller deals.
“If anyone thinks we’re going back to the ‘good old days,’ ” they are mistaken, he says. “We may never go back to that. It may be the world has permanently changed, and that financial services are no longer a growth industry. I believe it’s a mature industry.”
For investors, this is not necessarily welcome news. Canadians have padded their portfolios over the past 20 years with unrelenting growth in bank stocks and their dividends, which were fuelled by seemingly constant expansion into new businesses such as brokerages and insurance, new markets around the world, and an unprecedented rise in mortgage borrowing among customers at home.
But now, faced with lower interest rates, higher capital demands, highly indebted Canadian consumers, and depleted acquisition opportunities, the sector is looking less like a land of opportunity. The average bank now runs more like a utility, Mr. McCaughey argues, and the most important strategy is avoiding risk. Safe is the new daring; boring is the new benchmark for success.
“We will accept lower growth levels in order to maintain our lower risk posture,” Mr. McCaughey says, choosing his words carefully.
“The world has become a very leveraged place. It was seven years ago, and it’s even more leveraged today as a result of consumer debt,” he says. “Part of the reason why we had a good economy [in Canada] is the consumer continued to spend. Part of the reason the consumer continued to spend is because debt levels fuelled their spending.”
Statistics Canada data show the average ratio of debt-to-disposable income has risen to 152 per cent this year, up from 150.6 per cent at the end of 2011. Concerns over this magnitude of leverage has resonated in Ottawa, culminating in this week’s announcement by Finance Minister Jim Flaherty that mortgage rules were being tightened again, including scaling back the maximum allowable length of a government-backed mortgage to 25 years, down from 30 years, in a bid to cool the borrowing market.
Indeed, when Mr. McCaughey took the CEO job seven years ago, he inherited a vast business built on various forms of consumer debt. In the early 2000s, sensing a fertile new breeding ground for profit, CIBC moved aggressively under Mr. Hunkin into structured credit, which was fuelling borrowing in the U.S. housing market. But when the mortgage crisis hit, CIBC got caught with billions of dollars worth of exposure to securities backed by U.S. subprime mortgages, resulting in more than $10-billion worth of writedowns.
It was a massive setback for Mr. McCaughey. To help excavate CIBC from the hole it had dug, he clawed back investment banking to focus on the more reliable business of Canadian retail banking. Then he engineered a $3-billion equity sale to shore up badly needed capital. It was an unpopular move among shareholders, since it diluted the stock considerably, but turned out to be well-timed. Within months, the North American banking sector would be in the throes of a crisis, and capital was king.
“I think it was one of the better decisions in the credit crisis,” says Peter Routledge, an analyst at National Bank Financial. “CIBC exists in its current form – independent, profitable – because of that decision.”