Scotiabank often takes 20 per cent stakes in assets it acquires abroad, cautiously assessing whether it wants to go all in. But though they pride themselves on being prudent, Canadian banks are still doing whatever they can to achieve better profit growthFred Lum/The Globe and Mail
This won't be easy for Canadians to swallow. But after all these years of stellar profits, our treasured banks can't keep growing at such an incredible clip.
Facing a challenging market, would it really be that bad if our lenders looked more like boring, dependable utilities that pay stable dividends than growth stocks that chase bigger bottom lines at any and all costs?
I've asked variations of this question to countless people in the banking world over the past two years – a time frame in which Big Six chief executives have largely stressed that the domestic business outlook has deteriorated. Canadian personal lending growth rates have tumbled, for one, forcing banks to look elsewhere for future profit expansion.
Almost every time, the idea is met with snickers. The verbal responses are rather polite – we are Canadian, after all – but the eyes staring back at me often scream, "Are you nuts?"
Canada's six biggest banks comprise 20 per cent of the S&P/TSX Composite Index, which means weaker profit growth would certainly hurt the whole market. And can you imagine the uproar if our large lenders lowered investor expectations for hiking their quarterly dividends? If there's one thing bank CEOs learn early in their tenure, it's never to mess with their banks' payouts. Retirees are very vocal.
Yet everyone acknowledges Canadian banking is fully saturated, so domestic growth is much harder to generate.
In this brave new world, some banks are resorting to cost cutting to eke out better bottom lines. The trouble, though, is that they are under siege from Silicon Valley start-ups, so they need to spend heavily to upgrade their technology. That means the slashes have to come from elsewhere, like jobs. Not the best news for the Canadian economy as we grapple with slumping energy prices.
Big lenders are also looking abroad. Since the financial crisis, they've inked deals beyond Canada's borders worth more than $15-billion, the latest being Royal Bank of Canada's $5.4-billion (U.S.) acquisition of City National. They aren't done yet, either, hoping to buy more – particularly in wealth management. Canadian Imperial Bank of Commerce is currently the most vocal about making acquisitions.
These expansion plans come as many global banks are scaling back after stretching themselves into far too many corners of world. HSBC Plc and Citigroup are now two of the most prominent sellers of some far flung operations.
Canadian banks like to pride themselves on being prudent – Scotiabank, for instance, often takes 20 per cent stakes in assets it acquires abroad, cautiously assessing whether it wants to go all in. And Canada's banking watchdog, the Office of the Superintendent of Financial Institutions, constantly monitors the lenders closely.
But they're still doing whatever they can to achieve better profit growth. At what point do we get real? Canadian banking is a mature business under threat of disruption in everything from wealth management to payments. Better to under-promise and over-deliver than to keep expectations so high.
This isn't meant to be some sort of communist manifesto. I have a personal trading account, an RRSP and a pension. Even though I can't own bank shares directly, because of my job, I know their performance still massively affects whether I'll ever be able to retire.
Consider it, then, more of a caution flag, reminding boards of directors that these organizations shouldn't chase growth for the sake of it. It's too easy for fiscal prudence to rank behind earnings per share growth in the rubric used to determine management compensation.
Executives themselves haven't been completely irresponsible. Instead of blindly overpaying for assets in these hot markets, they've panned many acquisition opportunities as far too expensive – mostly in wealth management. And before RBC acquired City National, the bank hired external consultants to review the deal, making sure it didn't pay a hefty price for no good reason.
Even if growth is becoming more elusive, there's no need to be reckless in the future. Retail banking profits, which drives the lion's share of the lenders' bottom lines, are often viewed as a multiple of gross domestic product. Canada's economy is supposed to suffer this year, but it's still expected to clock in around two per cent. Canadians will still borrow and spend.
Bank executives should also listen to their own advice. As one chief executive said to me last summer, five per cent lending growth is a far cry from the double digit expansion we saw a few years back, but it's a rate most CEOs would be have been ecstatic to see not so long ago.
Tim Kiladze