Shaking up Scotiabank: Brian Porter's vision for a bank of the future

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The dizzying run of executive departures started early, and for more than two years, rarely seemed to let up.

Three months before Brian Porter took over as Bank of Nova Scotia's chief executive officer, in November, 2013, senior leaders around him started to make tracks. Chief risk officer Rob Pitfield was the first to say farewell, announcing plans to leave in August of that year.

Then, the exits picked up. Chief operating officer Sabi Marwah retired the following spring, followed soon by Chris Hodgson, the head of wealth management.

Executive turnover is expected under any new CEO. It is also common for company veterans to retire when a new reign begins. But the shakeup at Scotiabank was something bigger, and some of the departures weren't self-imposed. One year into Mr. Porter's tenure, the new leader was out a CRO, a COO, a wealth management head, a capital markets co-head, a marketing chief and two regional leaders – one for Mexico, the other for Latin America, both of which are key markets for Canada's third-largest, and most international, chartered bank.

It didn't end there. The biggest shock came in June, 2015, when Anatol von Hahn left. Mr. von Hahn ran Canadian banking and wealth, Scotiabank's largest unit. He was well liked by the people under him; most important, he was one of the last major holdouts from the former executive regime. Mr. von Hahn's presence had helped to dispel worries that Mr. Porter was out to purge the old guard, according to multiple sources.

In many ways, Mr. Porter's presence in the corner office marked a shift from the past. His predecessor, Rick Waugh, was known for his outgoing nature and an almost-familial approach to management. Dismissals were rare. One former employee, now an executive at a rival bank, remarked that he never saw anyone get fired during his time at Scotiabank.

By most measures, the Waugh era had been a successful one. A constant string of acquistions worth at least $11-billion had expanded the bank's global footprint and helped increase its business at home. And Scotiabank, like Canada's other banks, was in the midst of an impressive streak of record financial results. The bank's annual profit more than doubled during his tenure, to $6.7-billion.

But Mr. Porter, who had risen through Scotiabank's capital markets arm and is widely viewed as being more measured and technocratic than his predecessor, also found a bank facing significant headwinds. He believed his company had been too frugal when it came to investments in technology, and he believed parts of the management group had grown soft. In one internal company presentation, the bank's culture was described as "overly collegial." The same slides show a demand for "clearer accountability." To help overhaul the bank, Mr. Porter brought in consultants from McKinsey & Co.

Until now, Mr. Porter has publicly offered few specifics about his strategy, sparking uncertainty about his vision – especially in the wake of the departures of eight of the bank's 10 most senior leaders. But with most of the restructuring behind him, the CEO opened up in an exclusive interview with The Globe and Mail.

"Change is always difficult – particularly in an organization that hadn't had change for a period of time," he explained during a lengthy conversation.

"But I also have to sit back and say, 'Okay, so-and-so has been in this job for a period of time, and they're having trouble adapting to the pace of technological change. Maybe there is more risk inherent in having them in that position than taking them out.'"

The cuts – 1,500 jobs were targeted in 2014 and 2015, with hundreds following in 2016 – cost $523-million in restructuring charges and are largely designed to help the bank embrace a digital future, as well as save hundreds of millions of dollars in annual operating costs. Technological threats are mounting as upstarts and established Silicon Valley giants invade everything from online lending to wealth management and payments, putting new pressure on Canada's Big Six banks.

"We're in the technology business," Mr. Porter says of the paradigm shift. "Our product happens to be banking, but largely that's delivered through technology."

To adapt, he has added more technology expertise to his executive team and poured resources into everything from mobile development to analytics.

Scotiabank's rivals are in the same race. Canada's six largest banks incurred over $1-billion in pretax restructuring charges in 2015, and nearly $2-billion over the past two years. On top of the technological shifts that are forcing them to question their costly bricks-and-mortar branch strategies, they are contending with a weak domestic economy, stubbornly low interest rates and Canadian households who can't afford to borrow much more after years of access to cheap funds and large mortgages.

Amid such upheaval, some of the skepticism about Mr. Porter's moves is starting to lift. Peter Routledge, an equity analyst at National Bank Financial, says he was initially puzzled by all of the personnel changes within the bank, but he's starting to come around. "I'm more inclined to give him the benefit of the doubt," he said. "The more I dive into this whole challenge from financial technology companies, the more I become aware of just how big a threat this is."

Still, Mr. Porter's changes stand out. While most of the Big Six have taken steps to cut costs and remake their businesses for an increasingly tech-driven world, Mr. Porter's reinvention of Scotiabank has arguably been the most drastic. In less than three years, the new CEO has built an entirely new executive team and imposed a new digital mantra – all while repositioning the bank's strategy in crucial international markets, which account for a third of its revenue.

With so much on the line, Bay Street is watching closely, looking for answers to the question: What exactly is Brian Porter trying to build?

THE BANK OF THE FUTURE

In June, a half-dozen senior Scotiabank executives gathered in a boardroom at the bank's "Rapid Lab" technology centre – a hived-off, open-concept enclave of white boards and sticky notes within the bank's Toronto headquarters, where engineers, designers and computer scientists are devising new ways for customers to do their banking online.

"This doesn't look like Scotiabank, but this is Scotiabank," said James O'Sullivan, group head of Canadian banking, who replaced Mr. von Hahn. "Increasingly, this is what our space looks like as we figure out how to deliver a better customer experience."

While he could very well have been talking about the physical room, he was referring to the novel business relationship that brought all of the executives together: Scotiabank was announcing a partnership with an outside firm – Kabbage Inc., a U.S.-based company with an online lending platform – as part of the bank's new approach to digital banking.

The partnership gives small-business customers in Canada and Mexico the ability to apply online for loans of up to $100,000 and get access to the funds in as little as seven minutes, marking a monumental shift in how a traditional bank engages with its customers.

It also offered an opportunity to take a direct shot at small online lenders that are sprouting up in hopes of carving out chunks of the big banks' businesses. One of them, Toronto-based Lendified, was started by two Scotiabank executives Mr. Porter had let go: Kevin Clark and Troy Wright.

Mr. Porter has promised that Scotiabank will not be disrupted by upstarts, and backed up the words with efforts to revitalize the bank's dowdy branches and lacklustre online offerings.

It's been an uphill battle.

"They are not leaders from an investment perspective, and they have not been leaders in any aspect of technology for the last 15 or 20 years," said Chris Ford, a partner at Capco, a global technology consultancy that works with a number of big banks.

Mr. Porter's mission is to change that.

"There was a saying around here: The second mouse gets the cheese," he said of Scotiabank's historic aversion to tech spending. "There's no advantage to being a first mover.

"I think that largely fit the times; I'm not saying that as a criticism. We all read stories about bank so-and-so, or investment bank ABC, who spent hundreds of millions of dollars on technology and didn't get anything for it."

But he believes that strategy won't work in this era. Scotiabank's efficiency ratio for its Canadian banking division, which delivers nearly half its total profit, helps explain why. The metric measures expenses as a percentage of total revenue, and Scotiabank, which is known for supposedly low costs, comes in at 51 per cent. Royal Bank of Canada and Toronto-Dominion Bank, meanwhile, boast ratios of 44 per cent and 42 per cent, respectively. At an investor day in 2014 shortly after he became CEO, Mr. Porter made it clear he wants to catch up.

"Being frugal is not the same as being efficient," he said, and that's become a mantra since. By skimping on costs, a bank may miss technology investments that speed things up in the long run, such as the time it takes to approve new mortgage applications – a crucial step in the middle of a housing boom.

Another of his missions: opening the doors to partners, instead of ignoring invitations to collaborate with outside expertise. "We don't think we can do it all ourselves. We like having partners," he says. And he believes that outsiders should like Scotiabank. "A lot of fintech companies don't want to be regulated like banks, for obvious reasons. They want a partner like us."

However, Scotiabank is also committed to beefing up its technology capabilities in-house. Its co-heads of information technology, Kyle McNamara and Michael Zerbs, combine deep banking experience with tech smarts. Mr. Zerbs, for one, hailed from Algorithmics Inc., a successful risk-management technology shop that was absorbed into International Business Machines Inc. Under them, 350 staff will soon decamp to the bank's off-campus Digital Factory in Toronto's east end.

To drive home the importance of these initiatives, Scotiabank sent its executives and board of directors on a tour of Silicon Valley last September. At Cisco Systems Inc., the tour group saw how a large business can drive innovation; at venture capital firm Andreessen Horowitz, they heard about how technology can disrupt established industries; and at Wells Fargo & Co.'s digital innovation lab, they saw first-hand how financial technology can help consumers.

Over all, the mission is to improve the customer experience, which is something most lenders have been slow to embrace.

"Banks were bastions of stability and security," said Paul Battista, a consultant at Ernst & Young. "There was nothing about the customer in any of the design, in any of the architecture. Some of these core systems have literally been around for decades – 30, 40 years."

The same goes for bank branches, many of which now appear to be out-of-touch with customers who are increasingly making day-to-day transactions on their phones. Changes include modernized branches with smaller footprints, and new online services that allow customers to open accounts in about five minutes and sign up for credit cards in just two minutes.

Some observers are noting the shift. In June, Forrester Research awarded Scotiabank – along with rival Canadian Imperial Bank of Commerce – the highest overall score among the five biggest banks for mobile banking functionality.

Bay Street is paying attention, too.

"There is a growing confidence that Scotia will make more strategic investments and will start to do things they have not done historically," Capco's Mr. Ford said.

A BREAK FROM THE PAST

Despite the sweeping nature of these changes, they comprise only one piece of a much bigger puzzle. When Mr. Porter took over, his first order of business was to make fixes beyond the bank's home borders.

"I knew when I got this position, the first thing we had to do was something in the international bank, given that we'd been very acquisitive," he said.

More than any other Canadian bank, Scotiabank is known for its international footprint. During the 1960s, the lender planted flags in Asia. In the 1970s, it aggressively started expanding under the leadership of CEO Cedric Ritchie, who moved the bank into 40 countries across the Caribbean, Latin America and Asia. Today, Scotiabank operates in 56 countries and employs nearly 90,000 people.

Some of the bank's foreign endeavours have caused suffering ("Argentina" is still considered a dirty word internally after its economy cratered in 2002, eventually leading to a $540-million writedown), but most have worked out well – and that gave previous management a good reason to keep expanding beyond Canada.

Mr. Waugh had been particularly acquisitive. During his tenure, he inked deals worth billions, most of which came post-financial crisis. Some of his biggest acquisitions were at home, buying a 37-per-cent stake in CI Financial Corp. from Sun Life Financial in 2008 for $2.3-billion, and later acquiring DundeeWealth in two tranches for $2.6-billion. Capping off his tenure, he bought ING Bank Canada (now known as Tangerine) for $1.9-billion in 2012.

But foreign acquisitions were also prevalent. In the five-year span from 2006 to 2011, he struck 22 international deals totalling $5.2-billion. One of the highlights: acquiring a 51-per-cent stake in Colombia's Banco Colpatria in 2011, hoping to cash in on the country's new-found political calm after years of drug-related feuds.

Following such rapid expansion, Mr. Porter felt the need to streamline the bank's global strategy. Since Scotiabank started bulking up in Latin America in the 1990s, there had been some overlap among its deals. The branch networks in some countries, for one, weren't always entirely complementary. In the Caribbean, the bank was spread across 25 islands, many of which had distinct economies and government rules, making it hard to benefit from scale. And at a high level, Scotiabank was rather stretched globally – owning everything from a stake in Thailand's Thanachart Bank to a business banking unit in Egypt.

To start, he detailed a new international focus, emphasizing the bank's presence in the Pacific Alliance countries of Peru, Colombia, Chile and Mexico. They all share the same characteristics – growing middle classes and promising economic expansion (though Colombia's is starting to falter amid the commodity crash).

Then he announced the restructuring in the fall of 2014 that slashed 1,000 international jobs and 120 branches – something many people expected. Analysts had long noted the efficiency ratios in Latin America weren't particularly appealing. More recently, the bank announced it is looking at strategic options for the Thanachart Bank stake.

What raised eyebrows was the extent of the personnel changes – both abroad and at home. The new CEO replaced two regional heads and targeted the rungs below the group executives, cutting the number of executive vice-presidents to 16 from 23. Mr. Porter held no punches, either. Robin Hibberd, who used to run Canadian retail products, is a close friend of the CEO's quasi-chief of staff, Randy Lyons. The personal connection didn't seem to matter.

More departures – some voluntary, others not – were announced in the spring of 2015, including Mr. Clark, senior vice-president for global transaction banking, and Lisa Ritchie, senior vice-president of customer insights, who went to Sun Life Financial. Then came the news about Mr. von Hahn's exit, marking a shift at the highest level of Canadian banking.

Those who hoped things would finally calm down last summer were surprised to hear the capital markets arm was targeted in the fall, with departures that included the head of investment banking. This past February, capital markets head Mike Durland retired. Of the bank's 10 highest-ranking leaders at the end of Mr. Waugh's run, only two remain: Mr. Porter, and Dieter Jentsch, who once ran international banking, and is now heading the capital markets portfolio.

Because the turnover has been so extensive, there are questions about how much expertise – both in banking and internal culture – has walked out the door.

"There's no loss of institutional memory," Mr. Porter argues, adding the average tenure of Scotiabank experience around the management table is 24 years. He pivots to say the lender is actually beefing up. One hire he's especially proud of is Ignacio (Nacho) Deschamps, who was brought on as a strategic adviser for digital banking in December, 2015. Before joining, Mr. Deschamps ran BBVA Bancomer, Mexico's largest bank, and a month after starting at Scotiabank, he took over the international portfolio. Additional hires in Latin America include Enrique Zorrilla, who now runs Mexico and used to work for Citibank's Banamex unit there.

"You're always going to get a bit of sour grapes; I get that," Mr. Porter says of any frustration about the turnover. But he promises there weren't any personal vendettas. "I felt very strongly about this, and others did, too, on the board, that the bank was too inward-looking," he explained. "We hadn't brought a lot of outsiders into this bank for a long period of time. I'm not sure that's a healthy thing."

Mr. Porter wouldn't say anything about his relationship with his predecessor and its effect on staffing decisions. "I don't get into Rick versus Brian. There are different managers for different times." (Mr. Waugh also declined to comment.)

But he did stress there was a strategy behind all of the changes. "We made a lot of the jobs at the SVP, EVP levels bigger jobs with richer experiences," he said, noting that those who remain now often have five direct reports instead of three. "They've got more accountability, they've got more authority."

While the new CEO has largely worn the title of axeman, board chair Tom O'Neill backs his CEO. "The HR committee and the board were fully apprised" of the departures, he said, and the decisions were "subject to our approval."

Mr. O'Neill added: "Don't think it's blind board approval with management dictating, because that's absolutely not how it happened."

TOO MUCH, TOO FAST?

Even for those embracing the changes at Scotiabank, one crucial question hangs over Mr. Porter's restructuring: Has it all been implemented too quickly?

"There's an optimal amount [of change] any organization can take," said Mr. Routledge, the National Bank analyst. "There's a speed limit."

Employees must also buy into the vision, or morale can become a major problem. On this front, Mr. Porter said he is attentive to what the masses think. "My major focus has been on communication and dealing with the anxiety. Part of my job, and the board's job, and the management team's job, is to manage the pace of change. We don't want to bite off more than we can chew."

The CEO also argues that, despite the level of change, it has been spaced out. "It sounds like a lot, but we've been at this for three years-plus," he said, adding that he started working on the plans when he was made president in 2012.

It's possible that those who gripe may not realize how much is at risk in not adapting. What worked before the smartphone, when banks controlled the dominant distribution channel – their branches – may not work for the next 10 years, a revolution with the real potential of eating into the Canadian banking segments and their sometimes-40-per-cent returns on equity.

Traditional banking norms have also changed. For the past decade, Canadian banks have benefited from a lending boom fuelled by ever-lower interest rates. That party is largely over, in part because rates can't go any lower, and also because domestic households are tapped out on debt. Banks are also grappling with heavy regulatory demands that force them to hold extra capital, restraining how much free cash can be reinvested in future growth.

"The fact the banks have reported nearly $2-billion in restructuring charges in the past two years is evidence of a much tougher revenue environment," said Rob Wessel, a former Bay Street analyst who run runs an asset manager that specializes in global financial institutions, "causing all of them to focus intensely on expense reduction, which invariably includes painful staff reductions."

Or maybe his critics are right and Mr. Porter has taken it too far. It's likely too early to judge. Bank CEOs are often in their roles for a decade, if not longer, and outsiders' opinions of them often change during the long arc of history.

Former RBC CEO Gord Nixon endured three years of heat for dithering when he took over in 2001. Fed up, he famously fired three of his top executives on the same day in 2004, and then restructured the bank by removing scores of middle managers. When he retired in 2014, he was highly praised.

Even within Scotiabank, the views on former CEOs have ebbed and flowed. During the late 1990s – when RBC tried to combine with Bank of Montreal and TD tried to tie itself up with CIBC – former Scotiabank CEO Peter Godsoe was caught flatfooted, the only leader of a Big Five bank without a deal. People started referring to him as "Dead Man Walking." Then, Ottawa slapped down the merger proposals and Mr. Godsoe went on to earn nearly every accolade you could imagine.

What will ultimately vindicate, or eviscerate, Mr. Porter are the bank's results.

"The market judges every CEO's performance with long-term share-price performance," Mr. Wessel said. "If Brian's changes support higher long-term earnings growth and [returns on equity], the market will ultimately judge them favourably."

Pacific Alliance Statistics

Operating in 56 countries and employing nearly 90,000 people around the world, Scotiabank is known for its international footprint. Brian Porter's strategy since becoming CEO has focused on the so-called Pacific Alliance: Chile, Colombia, Peru and Mexico. Here are some key stats from the region:

Chile

• GDP growth*: 2%
• Branches: 200+
• Employees: 5,500+
• Annual profit**: $216-million

Colombia

• GDP growth: 2.5%
• Branches: 175+
• Employees: 6,000+
• Profit: $178-million

Peru

• GDP growth: 4.4%
• Branches: 300+
• Employees: 11,000+
• Profit: $465-million

Mexico

• GDP growth: 2.6%
• Branches: 850+
• Employees: 13,000+
• Profit: $353-million

*Year-over-year change in the first quarter of 2016.

**Scotiabank's fiscal 2015

Source: Bloomberg, company reports