Bank Mergers Beneficial but Feds Opposed

WHEN JACK DZIERWA, a relative newcomer to Bay Street, wrote about bank mergers in a research report last July, he broached a subject still too sticky for some to want to discuss. When he suggested mergers in this country made a lot of sense, he was championing a view widely - but quietly - held in business circles. And when he said a marriage between the Bank of Montreal and the Bank of Nova Scotia would be an "ideal fit," he was downright, although unwittingly, prescient. What he didn't foresee was a move by his own head office that would have a direct - and harsh - effect on him. Within days of the news that actual talks to merge those two banks had halted due to Jean Chrétien's displeasure, Dzierwa's senior executives at Salomon Smith Barney in New York decided coverage of the Canadian banking sector was "no longer worth doing" and pulled the plug on Dzierwa's research - and his job.

Unbeknownst to Dzierwa, and just about every other Canadian, discussions about BMO and Scotiabank joining forces got underway in earnest in late summer. The deal, as the analyst had pointed out, would have a lot going for it. Scotiabank has extensive holdings in the Caribbean and Latin America, where the Bank of Montreal is virtually absent. BMO's coveted stronghold in Chicago, Harris Bancorp Inc., would fill a serious gap in Scotiabank's international portfolio, and would give the new entity a chance to tap further into the Hispanic market in the U.S., a focus of Harris Bank since 1999. Amalgamating these institutions, the two smallest of Canada's Big Five, also didn't have the common stumbling block of who would be king: Scotia CEO Peter Godsoe is set to retire next spring, clearing the path for BMO's Tony Comper to take control. And by creating the country's biggest bank, leapfrogging the Royal Bank of Canada, Comper would have eliminated a widely-held perception that BMO has been aimless and without direction ever since 1998, the last time it attempted, and failed, to enter a financial marriage.

This time around, the bankers were determined not to make the same mistakes. Their advisers were among the best: Comper hired Peter Donolo, formerly of the Prime Minister's Office and more recently Air Canada, and Godsoe took advice from Scotia board member Senator Michael Kirby, who had penned an important report on mergers in 1998. They also established a pipeline to John Manley's office, in an effort to get a read through the finance minister of Ottawa's openness to a deal. That move made sense: in 1998, then finance minister Paul Martin was ambushed by the announcement one cold January morning that the Royal and BMO were planning nuptials - leaving him red-faced as he tried to answer questions on developments he'd learned about from the media. Still, this time, something again went terribly wrong, and instead of the finance minister putting the kibosh on the deal, it came directly from the Prime Minister's Office. Godsoe has been left with succession plans in shreds - and three vice chairs who, passed over for the big job, are probably scouting for work elsewhere. Comper is back to square one on the strategy front - still lacking direction. What went wrong? It couldn't be possible the banks made the same mistake twice, could it?

Matthew Barrett, Comper's colourful predecessor and the man at BMO's helm in 1998, blasted the politicians for killing the deal. "Canada is an interesting new emerging model of democracy," Barrett said, with sarcasm dripping. The decision, he asserted, "is purely political and not about concentration. They are marginalizing some very fine banks that are dropping like stones in the rankings." Now chief of Barclays Bank PLC, Britain's third largest bank, Barrett has lost none of his Irish directness. "Canadian banks are landlocked in an indigenous market with a poison pill in their stock," he said after giving a lecture in London. "The obvious answer is to permit more consolidation. I think it's a disgrace."

Others lay blame at the bankers' own feet. Their biggest mistake was to not get the Liberal parliamentary caucus onside, says David MacNaughton, a communications specialist who advised BMO and Royal in 1998. Instead, they focused on Manley and Chrétien, with the belief that their blessings would be all that was needed to clinch the deal. Wrong, MacNaughton says. In the eyes of caucus, courting favour with the PM and the finance minister could well backfire, he says, like "telling your daughter you don't like her boyfriend." Over the past four years, Scotiabank had spent a lot of time talking quietly with caucus members, sources say, and had detected more neutrality and less hostility on the mergers issue. "Neutrality is not good enough," says MacNaughton. "You have to address the concerns of caucus and the general public if you ever want a deal like this to go through. There's no particular advantage for a member of caucus to stand up and say bank mergers are a good idea."

The argument should not be contentious. Canada's banks ought to be among the country's best-regarded corporate citizens. With top of the line benefits and training programs, they are consistently ranked among Canada's best employers - and with 235,000 employees, they are among the largest. As philanthropists, the big banks leave everyone behind - as kids on bank-sponsored pee-wee teams across Canada know - with charitable donations in 2001 amounting to $90 million in Canada (and $32 million more in other parts of the world). Regardless, the banks have not succeeded in translating their presence into popular goodwill. The business argument - that consolidation is happening in other sectors in Canada and in financial services around the world, leaving the Canadian institutions behind - tends to leave the populace cold.

But Salomon Smith Barney's decision to drop coverage of the sector underscores the international view that Canadian financial institutions are becoming insignificant. While it would be hugely profitable to a pair of banks and their shareholders to merge, establishing a solid industry in Canada is also good for Canadians. That's the tough sell: Canadians love to hate their banks, so the resentment grows at the prospect of ever-larger institutions. On top of that, the five largest banks are all Bay Street-based, and if there's one thing Canadians love to hate more than their banks, it's Toronto.

Even in terms of competition inside Canada, where people are embracing e-banking, mergers make sense. Canadians are the world's biggest per-capita users of automatic bank machines and debit cards. The proportion who use the Internet to do almost all their banking has doubled in the last two years, to 16 per cent. One in three does at least some banking on-line, and more than half expect to do so in the next two or three years. Only a third say their primary way of doing banking is in person at a branch - which is what MPs and Chrétien normally say they are defending. With more bank access points - branches, ATMs, debit-card terminals - per capita in Canada than any other country, Canada has a glut of banking facilities - particularly as bank customers increasingly use electronic means to pay bills and transfer funds. A merger between the Bank of Montreal and Scotiabank would have meant some branches would be shut down, and some jobs would be lost. Chances are they'll be closed anyhow - and the same people will be out of work.

It's whispered that BMO and Scotiabank are still talking and could - eventually - make it all the way to the altar. Truth is, whether it's this pair or another, a merger is painful. Not merging, though, is going to be worse.

See also BANKING.

Maclean's November 18, 2002