Ed Clark wastes no time. A few seconds into our lunchtime conversation, he opens with a zinger.
The 64-year-old chief executive officer of Toronto-Dominion Bank has just been asked about the inconsistencies coming from the lips of the country's top bankers. Over and over, they have warned investors that business is slowing, that it's getting tougher to eke out profits in the financial sector. And then every three months, Canada's six biggest banks burst forth with a profit bonanza. A few weeks ago, they revealed combined earnings of $8-billion in the fiscal third quarter. Times have never been better.
"It's not you," Mr. Clark gamely admits. "It's us that's the liars – for saying it was going to slow down."
In conversational terms, Mr. Clark has just skipped the appetizer and gone straight to the main course, hitting at the heart of the issue facing Canada's banks right now. The numbers look great. But some less-pleasant truths lie in the details. There is indeed a rough patch coming, Mr. Clark says – a significant one in fact – that is a direct result of the ugly economic picture beyond Bay Street, which has spawned super-low interest rates that limit banks' ability to squeeze profits from loans and investment portfolios.
Such is the reality four years after the earthquake that changed the banking industry forever – the collapse of Lehman Brothers and subsequent credit crisis that toppled financial giants around the world. The post-Lehman world is one of persistent threats of recession, loan defaults and economic turmoil in North America and Europe. All in all, not a great environment for banking. The hangover has created a world of sluggish long-term growth – The Big Stall. Not negative growth, "or zero growth," Mr. Clark notes, but a lot less robust than before.
Mr. Clark doesn't remember what he was doing that morning four years ago today, on Monday, Sept. 15, 2008, when Lehman collapsed. But he recalls that autumn, and the way that all hell broke loose, vividly. "I can certainly remember getting up every single morning and the first thing I do is race down, turn on my computer and figure out what blew up overnight. And you went through not one day of that, you went week after week after week, it seemed, of just rolling crisis," Mr. Clark says.
The enduring lessons are that the global banking system needs to be managed better. Liquidity – the daily flow of money from one financial institution to the next to keep the system working – could not be taken for granted. "I think the biggest learning was [that] liquidity matters, and trying to figure out how to finance the banking system so it's more stable is critical."
Even the big Canadian banks – those supposedly careful, boring, responsible institutions that didn't gorge on mortgage-backed securities the way European and U.S. banks did – couldn't avoid the fallout. "So you had a textbook example of avoiding tail risk, and yet what you couldn't avoid is the collateral damage of other banks … So the big surprise [of the whole crisis] is this could be scary – even if you got it right."
Since then, the sector has gone through a rewriting of regulations to make banks less prone to failure. Repairing the public perception of bankers, Mr. Clark says, will take longer.
He is a booster of banks, in particular his own, which is no surprise. He wears a green tie to our meeting, a sort of an unofficial uniform at TD. Every male executive there seems to own one – you wonder if the Harry Rosen store on Bay Street has trouble keeping them in stock. But even with Mr. Clark's pride and optimism for Canadian banks, he figures the lasting legacy of the financial crisis is the damage that banks have done to their image. And that's something all bankers now must wear.
"We still have a long journey to go for people to restore trust in the banking system," he says. "I didn't think the banking industry as a whole acknowledged the roles that they played in the financial crisis, and they didn't act like, 'Hey, we were central to this.'"
Four years after Lehman, the banking crisis is now a fiscal crisis, putting pressure on governments which are now burdened with debt, including some in Europe which propped up their own imperilled banks during the darkest days of the 2008 and 2009 crisis. That safety cushion, Mr. Clark says, is now gone.
"That's the frightening part is that we've burned through governments as an instrument behind [the banks] … I think your last line of defence is your central banks, and that's where you're down to. So that makes you more nervous about it in some sense than you were before."
And yet Mr. Clark remains upbeat on certain fronts. The U.S., where TD opened its 1,300th branch in August and has more locations than in Canada, will be resilient even in the face of economic turmoil, he predicts. If it can resolve its political deadlock, Washington has the ability to fix its fiscal mess. "Its problems are trivial compared to Europe. If you put five economists in a room and say you each have half an hour to come up with a solution for the United States, all five could say, 'I don't need half an hour,'" he says. "Europe is much more complicated."
The prospect of a default in one or more euro zone countries has hung over the financial world for more than a year now. A prolonged recession in Europe could send ripples around the globe, potentially halting an economic recovery in the U.S. and grinding down China's growth rate, which would then turn into a reckoning for Canada's resource-rich economy.
"You don't have to spend too much time in the entrails of the European collapse to know what it does to Canada," Mr. Clark says. "Anything that hurts Canada, will hurt TD and hurt the other Canadian banks."
And that is where the true slowdown looms for Canadian banking. Not in the recent third-quarter numbers, but in the ones yet to come. Prolonged low interest rates have created a low-growth environment.
It's a problem of perspective, Mr. Clark says. In the past, you could compare a bank's quarter to the year before and be comfortable that profits were growing. Now, the most important measure is from one quarter to the next. "I think this quarter, everyone dodged a bullet," he says. "But … you can see the effects starting to bite on everyone."