Somewhere between London and Manchester, Ed Clark had an epiphany. When he boarded a train to travel between the two British cities in 2002, Toronto-Dominion Bank's then-CEO-in-waiting didn't know much about Bharat Masrani, the man making the journey with him, beyond his job title–head of TD's discount brokerage in the United Kingdom. But over the course of 330 kilometres, something about the man sparked Clark's curiosity.
"When we talked on the train, I realized, 'Okay, this guy really is special,'" Clark recalls. "I said: 'I'm going to be your HR man, and eventually I'm going to find something for you. I'm going to call, and I want you to come to Toronto when I call. And don't ask whether it's a good thing for you, whether it's a bad thing for you. Just do it and tell your family you're moving.'"
Clark wasn't lying. He rang Masrani a few weeks later, and his new protégé was soon ensconced in Toronto, tasked with running TD's electronic banking business. After Masrani had logged only half a year in that role, the CEO called again, this time from Boston. "He says: 'I want you to do another job,'" Masrani remembers with a laugh. TD was suffering the consequences of its aggressive lending to telecom companies during the tech bubble, and Clark wanted Masrani to set up a separate bank that would take the toxic debt off TD's books.
"I tried to do the 'Well, let me think about it; I'll go talk to my wife; when you're back in town let's sit down,'" Masrani recalls. Clark wasn't having it. He said, "Let me be clear: I'm not asking; I'm telling you."
Little did Masrani know that the CEO was setting him up for a career that would culminate in succession. When Clark retires at the end of October, Masrani will take over as chief executive–and he is in the enviable position of inheriting an organization he now knows intimately. Almost from the moment he was summoned to Canada, the incoming CEO has been Clark's sidekick, helping him shape TD through multibillion-dollar takeovers and gut-wrenching strategy sessions. The two men made the mutual decision to buy multiple American retail banks for a pretty penny, in order to distinguish TD from its Canadian rivals, and they determined that the bank should differentiate itself at home by doubling down on customer service and convenience. "Every one of those major changes or events that occurred, I was with Ed, side by side, and, frankly, was involved [and] invested quite heavily in all of those initiatives," Masrani says.
Despite all that, Bay Street barely knows him. Over the past eight years, Masrani has spent most of his time running the bank's U.S. retail operation from Maine and New Jersey, far from TD's iconic black skyscrapers in Toronto's downtown core. Before that, he served as chief risk officer, rarely making public appearances.
His personal style doesn't help much in the profile department, either. Even people who work closely with Masrani say it took them time to suss him out. "The vibe he gives off is a very reserved, conservative, holds-things-close-to-the-vest kind of person," says Steve Boyle, now CFO of TD's U.S. retail arm, one of the first Americans to meet Masrani when TD made its first major foray into the U.S. market.
So a quiet, little-known man has landed one of the most powerful jobs in the country, at an institution that is crucial to the Canadian economy. The Big Six lenders control 93 per cent of the country's banking deposits, and TD is one of the dominant players–it's Canada's second-largest lender, behind Royal Bank of Canada. TD is also the country's second-most profitable company, again following RBC.
TD, though, is betting that the man who blew Ed Clark away can win over Bay Street too–just give him enough time. "He surprises you," Boyle swears.
As if proving yourself isn't hard enough for any new bank CEO, Masrani, who is now 58, also has to emerge from Clark's shadow. The outgoing chief executive was arguably the most outspoken of his cohort, weighing in on policy issues whenever he could. His greatest hits include penning a Financial Times op-ed calling for tighter bank regulations in the heat of the financial crisis and imploring Ottawa to tighten mortgage lending restrictions at the height of the current real estate boom. At one point during his tenure, a consultant hired to review TD's media strategy had to tell the communications team to rein in their CEO so that he didn't bigfoot the rest of the executive team.
Masrani is not such a grandstander. When he spoke to TD's top managers last December, he made the distinction this way: "I was raised Hindu; Ed was raised hippie." But that doesn't mean Masrani won't be vocal when necessary. TD has a history of speaking up on policy issues, and the bank even funds an economic research arm devoted to public policy ideas.
Because the Canadian financial system is so concentrated, Masrani stresses that these institutions have big roles to play when it comes to issues such as economic policy and mortgage rates. Clark wasn't scared to speak up, and "I think that role will continue with me," he says.
Coming after Clark also has its advantages–especially when he's resolutely in your corner. Because the outgoing chief has run three different financial institutions–Financial Trustco, Canada Trust and TD Bank–Clark has learned which hurdles are the hardest for CEOs to clear. One of the toughest: embracing the fear that comes with knowing the buck stops with you. "You've got to get over the, 'Okay, there's nobody else who's going to make this [decision]', or, 'If something goes wrong, there's only one person that people are going to look to,'" he says. CEOs also need to learn how to run sprawling organizations and influence people they will never meet. "I consciously tried to map out a career for Bharat [so] that he learned that second part. And he got that training in the U.S.," Clark says.
One thing investors need not stress over is Masrani's banking expertise. The man has touched nearly every aspect of TD's far-flung operation.
After earning an MBA from York University in 1979, Bharat–pronounced like "parrot"–joined TD at a small commercial banking centre in Mississauga. When a rival bank tried to lure him away, TD held on to him by promoting him to a head-office role and handing him some large accounts. That job laid the groundwork for Masrani's becoming a corporate loan officer for telcos–one of TD's most important client groups. By 1993, Masrani had taken over all Canadian corporate banking at TD.
Then, out of the blue in 1995, he was tapped to move to India to set up the bank's first office there. Masrani struggled with the request. He remembers thinking, "Why would I do that?… I have the best job in the bank, it pays well–every major deal that's happening, I'm in the middle of it," he says. But it quickly became clear he wasn't being asked to go–he was, again, being told to go. So he went.
Though he is of Indian descent, Masrani had never lived in the country. He was born in Uganda but his family fled when dictator Idi Amin expelled the country's South Asians, who dominated the merchant class. Like many Indians, who were given 90 days to leave, Masrani and his family went to the U.K., where he was enrolled in boarding school.
Masrani was in Mumbai for only 18 months before he, his wife, Shabnam, and their two kids decamped to the U.K. There, he oversaw wholesale banking and ultimately ran the country's retail discount brokerage. Finally feeling settled, he then had the fateful train ride with Clark.
After his initial head-office roles, Masrani took over as chief risk officer in 2003, just as Clark started putting his stamp on TD, turning it into a safer, retail-first business. "I was in the process of trying to shape the bank to what my risk appetite was," Clark says, and that meant he and Masrani would meet almost every night. Together they made the prescient decision prior to the 2008 financial crisis to dump the bank's exposure to high-risk assets such as mortgage-backed securities.
"We struggled with the business model," says Masrani. "It was very hard to get out of, in the sense that it was successful–it was making a lot of money for the bank, it was loved by the Street, by investors." But very few people–even few TD employees–understood the complex products. And since management was trying to build a powerful retail lender, a side cart of complex securities just didn't make sense.
Looking back, the departing CEO pounds his chest. "Ninety per cent of the world missed what he and I found, to put it bluntly," Clark says. Masrani, meanwhile, is a little more modest about dodging the bullet.
That's in his nature. "What I liked about him was an element of humbleness," says Chris Dyrda, who oversees much of TD's commercial lending business in Ontario, and who brought Masrani to head office more than two decades ago. "He had a very easy demeanour to him. He related, best I could tell, to almost anybody, whether it was someone rich or poor, junior or senior. And as I've watched him over the last 20-some-odd years, I think that's the one piece of Bharat that hasn't changed much at all."
The trait has served him well more than once. When he created the non-core bank for telco loans, he did so knowing that success would result in shutting down the new venture and putting himself out of a job. He did it anyway.
Masrani's 2006 move to oversee TD's expansion into the U.S. retail banking market was another ego-test moment. The job took him to Portland, Maine, home of Banknorth, a northeast lender with 389 branches and assets worth $29-billion (U.S.), in which TD had acquired a 51 per cent stake. Masrani was told he wouldn't report to head office, despite the brief he'd been given and his having previously been on TD's executive team. Clark says most executives would have put up a fuss, asking for big things in return. With Masrani, he says, there was no question of "Okay, what's the deal here? What are my guarantees?"
On the day he sits for an interview in the boardroom beside the CEO's office that will soon be his, Masrani looks more like a middle manager than a chief executive–his glasses are metal-framed and he opts for a dress shirt with no cufflinks under his dark grey suit. Masrani likes cricket but also follows North American sports, if only because he wants to have talking points with other people in the office. And he's often too busy with work to devote extra time to anything other than family (his children now live in London and Los Angeles). "People ask him what he does outside of work, and he basically talks about his family," says Dyrda.
The bank Masrani will take over is in tip-top shape. When Clark became CEO, TD had just posted its first-ever full-year loss, a devastating blow to former CEO Charlie Baillie on his way out; now it makes $2-billion in profit a quarter and the bank's market value is more than $100-billion. This didn't happen by chance: The success stems from a deliberate strategy that dates back to Ottawa's decision to slap down bank mergers in the late '90s.
While some lenders needed time to figure out what kinds of bank they wanted to be at that crossroads–and some are still wrestling with that existential question–TD sprung into action, scooping up Canada Trust, a retail-oriented bank that was being run by Clark. As it turned out, the takeover didn't just offer earnings growth; it helped to create a culture.
"Charlie Baillie gets a lot of credit here" for the Canada Trust deal, says TD chairman Brian Levitt. "Most times when companies make acquisitions, the first thing they do is dispose of a lot of value that they acquire by disposing of the management." But Baillie recognized that "on the retail side [Canada Trust] had a superior business model, and so he was going to adopt that."
This retail banking ethos now defines everything TD does. "I get kidded all the time, 'You look like some retail salesman,'" Clark explains. "And I say, 'But you have to understand, that's a compliment in our world.'"
Likewise in its U.S. venture, TD wasn't afraid to adopt cultural strengths or to keep key executives whom it inherited from its two blockbuster acquisitions in the U.S. After spending about $18-billion to buy Banknorth and Commerce Bank in the span of three years, TD could have easily imposed its own values on the institutions. But it embraced the new banks and co-opted some key ideas–particularly from Commerce, the New Jersey-based lender with $49-billion (U.S.) in assets that it acquired in 2008. Commerce, headquartered just outside of Philadelphia, was all about fostering a branch environment that made clients feel like they were on the set of Leave It to Beaver, offering umbrellas if it rained and dog treats.
The struggle now is to make the acquisitions work. For all the billions TD has shelled out stateside, the key performance metric of return on equity shows a chasm between Canadian and American operations. The U.S. retail arm returned just 9 per cent last quarter, its Canadian equivalent 43.4 per cent.
TD swears it is starting to get out of the woods. "We're no longer in a mode where we say, 'Don't look at the numbers, think about the future,'" Levitt, the chairman, says. But there's obviously still a long way to go, and the slow-to-recover U.S. market has created intense competition from rival lenders for loans and other products, leading to lower margins.
The tightness of the market led to speculation that TD might buy yet another American bank to add even more scale. It is only in the last eight months that TD has all but ruled that out, barring the appearance of a dream deal. The bank's leadership has good reason not to have been more vocal on this score. Public declarations "come back to haunt you," Boyle says. "Bharat and I joke about this: I gave an interview at a conference [in 2007] and said, 'You know, we really aren't going to do any big deals.'" It was a genuine answer, but two months later TD bought Commerce, an opportunity that came about solely because Commerce's managers got into regulatory trouble.
Considering that the U.S. is the key to future growth, it helps that the new CEO knows the market intimately. Florida, where TD operates following its 2010 acquisition of South Financial Group, is different from New York, and both are different from Canada. He has learned what it means to really be a retail banker. "Bharat would be the last guy you could think of to run a retail bank in the U.S.," Clark jokes, looking back on the decision to send Masrani to Maine in 2006. It was the one area of TD Masrani had never worked in.
But even the incoming chief is willing to admit that the U.S. operation is a grind. "Without a doubt, the environment you have in the U.S. is a lot different than one would have anticipated seven, eight years ago," he says. "Our view is that in the long haul, it's a terrific market."
Until the U.S. roars back to life–fingers crossed–TD can rely on a stellar domestic franchise. Its Canadian retail arm alone makes more than what Bank of Montreal, the country's fourth-largest bank, makes in total, and the division is only becoming more formidable.
Until recently, TD had some gaps in its business model at home. It had a less-than-stellar commercial lending arm and an almost non-existent credit-card business, thanks to a divestiture required by the federal Competition Bureau at the time of the Canada Trust purchase. But because the bank did so well during the financial crisis, it was able to step up and lend to small businesses in the worst of times, helping to grow that division. And over the past few years, TD has acquired both MBNA's Canadian credit-card portfolio and half of the Aeroplan accounts from Canadian Imperial Bank of Commerce, vaulting it to first, by one measure, in the credit-card business.
With a full roster and impressive earnings, TD may now seem bulletproof. But, like all banks, it has flaws. In fiscal 2013, TD's earnings per share climbed just 0.4 per cent, largely owing to a big loss in its insurance unit. The financial system is also susceptible to cycles, and the current bull run is bound to turn bearish–eventually. Canada's banks had their shirts handed to them in the late '80s and early '90s, and TD has made major missteps before, such as the telco loan debacle that helped send Baillie packing.
The bank also has formidable challengers, and it faces extra uncertainty because it's hard to tell what the new crop of CEOs now taking the reins at Canada's banks will do. RBC and TD, the country's two largest companies, are now neck and neck. "I don't know that the organic growth is going to be that dissimilar, because they're both going to do well in Canada," CIBC World Markets analyst Rob Sedran says. "The question as to which one is going to be bigger in 10 years is going to come [from] what they do with the excess capital that they're going to be generating." Do they plow it back into their businesses to create organic growth? Do they go out and buy? If so, where do they strike deals?
TD swears it will stick to the plain-vanilla approach and emphasize customer service. "That's the only position where we can compete," Masrani says. "We can't compete on price; we can't compete on product. Whatever product we come up with, chances are within a nanosecond somebody's going to copy." With the new CEO, there is no 100-day plan. Because he worked so closely with Clark, "I feel like an equal partner of what this bank is today and hence, I don't feel compelled to change."
Masrani is the first person of colour to run a Canadian bank. It may seem like a major part of his story, and of TD's evolution, but the new chief executive doesn't see it that way. Good luck trying to get him to talk about it. "Do I think about this from a personal perspective? The answer is no," he says, adding that he is asked about the issue all the time. "But, hey, if this inspires a minority of any sort, then hey, Godspeed."
In less than 18 months, new faces have taken most of Canada's top financial jobs June, 2013
Stephen Poloz: governor of the Bank of Canada November, 2013
Brian Porter: CEO, Bank of Nova Scotia January, 2014
Evan Siddall: CEO Canada Mortgage and Housing Corp. March, 2014
Joe Oliver: federal Finance Minister June, 2014
Jeremy Rudin: superintendent, Office of the Superintendent of Financial Institutions August, 2014
Dave McKay: CEO Royal Bank of Canada September, 2014
Victor Dodig: CEO, Canadian Imperial Bank of Commerce November, 2014
Bharat Masrani: CEO, Toronto-Dominion Bank Canadian retail (includes wealth management)
WHERE TD MAKES ITS MONEY
Reported net income, first nine months of fiscal 2014
Canadian retail: $3.9-billion
U.S. retail: $1.4-billion
TD AMERITRADE (U.S. brokerage): $222-million
Wholesale banking: $653-million