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.