Presentation to the Senate Committee on Banking
Gordon M. Nixon
President & Chief Executive Officer
RBC Financial Group
Senate Committee on Banking, Trade and Commerce
Monday, November 25, 2002
Thank you, Mr. Chairman and Members of the Committee for
this opportunity to appear before you. Joining me here today
are two members of our Group Management Committee:
Currie, Vice-Chairman and Chief Financial Officer; and,
Bigsby, Senior Executive-Vice President, Human Resources and Public Affairs.
Let me say at the outset that RBC supports the Government
of Canada's initiative to bring greater clarity to the merger
review process. I believe we are in agreement that the existing
process is not clear. This causes confusion for members of
our industry and may result in decisions that are not in the
interest of clients, employees, shareholders or the Canadian
public. In addition, because the current rules do not provide
clarity, there is uncertainty about outcomes. Uncertainty
is a barrier to the growth and prosperity of the Canadian
financial services industry. We support all efforts to not
only determine whether mergers are in the public interest,
but also to establish guidelines and definition around this
process. This is essential to good business decision-making,
as well as sound public policy.
In particular, you have asked us for views on the major considerations
that should apply in determining the public interest implications.
As set out, the merger review process already addresses the
public interest in two ways: The Office of the Superintendent
of Financial Institutions will assess the impact of any transaction
on the safety and soundness of Canadian banks and the Competition
Bureau will review the impact on competition in Canada.
There are however some additional areas of public interest
that I will address in my remarks:
- First, I believe mergers should
be examined in terms of their long-term impact on Canada's
future prosperity and standard of living. Specifically,
we should be looking at whether the creation of larger,
more internationally competitive financial institutions
would enhance Canada's economic growth.
- Second, I think it is important
to consider how mergers would impact Canadians with respect
to access to and choice of financial services. In particular,
we need to look at the total spectrum of delivery channels
and providers, and understand how new technology and existing
competitors fit into the equation.
- Third, I believe it's important
to look at the transitional issues caused by mergers in
terms of their short and long-term implications. For example,
what impact will mergers have on the number and quality
of jobs in Canada?
- And fourth, I believe it is in
the public's interest to have a merger review process in
Canada that is consistent and competitive with other countries.
Specifically, we need a process that has clarity, transparency,
and predictability and can be completed in a reasonable
I would like to say up front that, in my opinion, consolidation
of the financial services industry would be strategically
good for our country. Increased scale is important for the
continued health and development of our industry, both in
Canada and increasingly in a North American market. Even with
mergers, Canadians will have access to an extremely competitive
financial services industry and will receive the benefits
of increased scale. Consolidation will also help the industry
build efficiency and profitability, which is good for clients,
our international standing and our reputation as stable counter-parties.
However, I cannot and will not suggest to your committee
or the Canadian public that bank mergers do not need to be
carefully managed. There are concerns relating to execution,
short-term job dislocation, head office reductions, service
disruption, and impact on our communities. However, we believe
these concerns can be managed in a way that meets the public
interest and delivers the long-term benefit of strengthening
the Canadian financial services industry.
With that background, I'd now like to return to the four
points I have identified for discussion, starting with the
long-term impact of mergers on Canada's future prosperity
and standard of living.
1. Impact on Canada's Future Prosperity
Financial services is an important industry for our country.
It contributes to the creation of long-term growth prospects
for Canada both directly, as one of Canada's world-class industries,
and indirectly as an important contributor to the success
of other Canadian firms.
Banks have over 8,300 branches and more than 16,800 ABMs
across Canada. We provide financing and credit to Canadian
individuals and businesses. We are large employers - with
over 235,000 employees in Canada and an annual payroll of
$15.8 billion. And the six largest banks paid $4.8 billion
in Canadian taxes last year.
We all know that countries need strong, viable financial
services industries to support economic growth and prosperity.
As I have stated before, I believe that a sectoral strategy
for excellence is crucial to improving Canada's productivity
and advancing the country's prosperity agenda. I also believe
that business, government and other key constituents must
work together in partnership to develop the right policies
and macro-economic climate for our key industries. We have
an opportunity to co-operatively develop financial services
policy that gives our country and our industry a competitive
advantage and facilitates increased competition.
Canada's financial services industry is among the best and
most competitive in the world. Canadian banks offer very price
competitive services when compared with our U.S. counterparts,
and do so on a convenient, nation-wide basis. According to
a recent report by Standard & Poor's, Canada has one of
the most efficient banking systems in the world, with leading-edge
infrastructure, good management controls, very competitive
lending spreads, and competitive service fees. Canada's financial
services industry is among the best in the world for many
reasons, including because government and the banks have worked
With these strengths, Canadian banks have the potential to
be globally strong and to reap the economic benefits for our
country. One might ask why, if our industry is so good, should
we be concerned with improving it and why have we not been
able to take advantage of our potential?
The reality is that, despite having a strong foundation on
which to build an internationally competitive industry, Canadian
banks lack scale and capital and are becoming less globally
relevant. What potential contribution can bank mergers make
to the international competitiveness of Canada's financial
services sector and to the international competitiveness of
other Canadian firms?
First, they can help achieve the scale required to continue
to provide individual Canadians and businesses with internationally
competitive services. If one looks at the top 20 financial
institutions in the world by market capitalization, virtually
all of them have been active in consolidation in their domestic
Second, Canada needs internationally competitive industries
- they generate the capital and jobs to support ongoing economic
vitality. They are key to maintaining a level of investment
and innovation that keeps bright young people in Canada and
generates the overall employment creation that any country
Third, in our experience, consolidation leads to competitors
with a broader array of products and services. Economies of
scale and scope mean they are more efficient with lower unit
costs. This offers Canadians the potential for lower prices
and greater choice. For example, there were concerns about
competition when the Canadian banks entered the mortgage,
retail brokerage and mutual fund markets. Instead we saw increases
in volumes, lower prices and greater product variety. The
fact that banks cannot sell insurance through their bank networks
does, in my view, a disservice to Canadian consumers. Professor
James McIntosh, who will be addressing this Committee later,
has outlined in the past an analysis showing the benefits
for Canadians that would arise from bank mergers.
I believe that innovation is key to long-term growth for
Canada; a view I know is shared by the federal government.
Many factors are at work here, but clearly we need to have
the investment resources available to fund leading development
in technology. Mergers reduce duplicate investment, freeing
up resources to invest in additional innovation. RBC spends
just under $2 billion per year on information technology.
About 15% of that number (or $280 million) is spent on new
development. If our maintenance dollars were spread over a
bigger base, allowing spending on new investments to increase,
this would contribute to innovation in our industry and in
our country. Not only would this result in growth and productivity
for Canada, it means additional jobs in high value and professional
Consolidation would also help support the future growth of
our industry. It would give financial institutions greater
financial strength to expand outside Canada, where relative
size directly impacts investments and acquisitions and the
ability to advance international growth strategies.
We believe the industry's expansion in the United States
is good for Canadians. It will allow us to increase scale
and spread our overheads over a wider base. Our resulting
improvement in cost structure will mean more competitive pricing
in Canada. In addition, there are significant spin-off benefits
to the economy from building strong, globally competitive
companies. Financial institutions need to expand internationally
to grow and continue to provide a healthy return to the millions
of Canadians who directly or indirectly invest in our shares.
Analysts understand this, and understand the challenges we
face in seeking to grow abroad because of our relatively small
size. The traditional discount on Canadian bank stocks attributed
to slower growth rates and uncertainty over consolidation
attests to this.
2. Access & Choice in Financial Services
The next area of public interest I would like to address
is the implications for Canadians regarding access to and
choice of financial services.
Understandably, Canadians are concerned about the effect
of consolidation on competition in our industry. The Competition
Bureau review set out in the merger review process will ensure
that there is adequate competition for Canadians. As well,
there has been a lot of discussion about how any change might
impact the access that Canadians have to financial services
and the availability of credit, especially for small business.
It is our job to manage our total distribution network efficiently
so clients have reasonable access. Almost 95% of transactions
now occur outside our branch network where we have and will
continue to invest in alternative distribution channels. However,
we know that despite this incredible increase in the use of
ABMs, online and phone banking, 70% of our clients still visit
our branches at least once every three months for advice,
to handle complex transactions or to resolve issues.
Over the past years, we have expanded our mobile sales force
significantly to provide our clients with investment and lending
advice at times and locations that they find convenient.
Mobile sales forces, online and phone banking help provide
service to clients who might find coming to a branch difficult,
for example, Canadians with disabilities or those located
in remote areas. We recently announced capital investment
plans for our branch network, in part, to address access needs
and we are testing alternative ways of serving lower income
Canadians. For example, our "Cash & Save" location
in Toronto was developed in partnership with St. Christopher
House and the local community.
In summary, increased investment in alternative channels
as well as our core branch network is a continued priority.
Clearly, we must address the issue of access for Canadians,
as part of any merger initiative, through continued expansion
of new distribution and by encouraging competition through
the sale of branches. Many institutions have indicated a desire
to acquire branches as well as infrastructure in the event
of consolidation. I don't believe that anyone in the industry
would be against a constructive discussion of remedies to
deal with this issue.
Next, I'd like to address the issue of availability of credit
from two perspectives - first, small and medium-sized business.
Another key issue for Canada is that we must improve our ability
to grow our small and medium-sized enterprises, and to develop
more market and industry leaders.
It was in the interest of addressing this issue that RBC
Financial Group worked with Canadian Manufacturers and Exporters,
and the Canadian Federation of Independent Business to study
how Canada can help its small and medium-sized business enterprises
prosper and grow. That study can provide valuable input for
this Parliamentary review process. While we are not perfect,
small and medium-sized businesses are well served by the Canadian
banking industry, and we all want to continue to contribute
to the growth of this important sector. Our study shows that
loan availability and competitive pricing in Canada is strong
and that entrepreneurs are accessing a wide variety of financial
providers. While there is a shortage of higher risk debt and
venture capital, mergers will not impact this issue.
Large business is another issue. Large corporations recognize
that more internationally competitive banks would be better
positioned to meet some of their needs; however, they also
express concern that consolidation among the large banks in
Canada could restrict access to credit. This would be a valid
concern, if the market for credit were limited to the "big
five" Canadian banks. But, in reality, it is not, nor
should it be. Large corporations have access to capital markets
and to foreign banks as sources of financing for their growth
initiatives and these markets are very competitive. Although
increased efficiency and larger capital bases would enhance
the ability of a merged Canadian bank to lend to large corporations,
consolidation may impact credit limits. Developing broader
capital markets and increasing foreign competition are viable
and necessary solutions to this issue regardless of mergers.
3. Transitional Issues
The third area of public interest I'd like to address concerns
transitional issues such as employment.
As I have pointed out, the financial services industry is
a large employer in Canada, and the potential for job loss
due to consolidation is, of course, a concern. In the event
of a merger, the absolute number of jobs would decline initially,
as duplicate processes are brought together. However, it is
our assessment that the industry would be able to re-deploy
many of the employees whose positions become redundant through
natural attrition. For example, at RBC we need to replace
2,000 jobs a year in Toronto alone.
In addition, the greater investment capacity of a merged
entity offers the potential to create higher value jobs in
the areas of research and technology development, which will
have a positive impact on Canada's productivity. As banks
grow internationally, we will continue to create jobs in Canada.
For example, as a result of our expansion in the U.S., we
have created information technology and call centre jobs in
We have seen a definite trend to upgrade jobs over the past
ten years and I have no doubt consolidation would strengthen
it. Conversely, I believe that maintaining the status quo
could have serious negative implications for employment in
our industry. If implemented in a manner consistent with the
public interest, consolidation in financial services has the
potential to build strong, viable, competitive businesses
with the ability to make the strategic investments necessary
for Canada's future growth and productivity, while at the
same time ensuring that Canadians continue to have access
to competitive financial services. The key is to ensure an
4. Clear & Timely Merger Review Process
Which leads me to my last point, the merger review process.
The process as currently laid out requires merging banks
to prepare and provide a vast amount of information. Application
must be made to the Office of the Superintendent of Financial
Institutions, the Competition Bureau and the Minister of Finance.
In addition, the merging banks must prepare a Public Interest
Impact Assessment, which will be a basis for public review
of the proposed merger by this Committee and the House of
Commons Finance Committee. Reports from OSFI and the Competition
Bureau to the Minister will also be made public, and considered
by the parliamentary committees before they report to the
Minister. Following all of this, the Minister will make a
decision as to whether any public interest, prudential and
competition concerns are capable of being addressed. If so,
then remedies may be negotiated and ultimately enforced. This
bank merger review process is more complex, difficult and
time consuming than what many of our foreign competitors face
in their home markets. There is clearly a need to ensure that
the best interests of Canadians are addressed; however, I
am concerned about this process for a variety of reasons.
The process, and in particular, the public interest aspect
of it , has the potential to render the process unworkable
as a practical matter, despite its broader merits.
Of course, we cannot expect the outcome of the process to
be pre-determined. However, as the CEO of a large financial
institution, I, together with the Board of Directors, have
a responsibility to our employees, clients and shareholders
to make a considered assessment of the likelihood of successfully
completing a transaction before we allow the institution to
undertake all the workload associated with a proposed merger.
Without clear guidelines, which set out the criteria for the
Public Interest Impact Assessment, including how the cost
and benefits are to be weighted to arrive at an overall result,
banks proposing to merger will be uncertain as to the likelihood
of success. If the merger review process is unduly protracted,
the result could easily impair the institutions involved and
have negative implications for the overall industry and the
Therefore, our request of you is for greater specificity
around the overall process and applicable criteria. We ask
for clearer guidelines of what is expected. In particular,
we ask for public interest criteria that do not include the
issues that will be addressed by OSFI and the Competition
Bureau. We need criteria which are sufficiently well defined
so that we can make informed business decisions and give us
a framework to structure transactions.
This process must be clear, transparent, consistently applied
and completed in a timeframe comparable with most public market
transactions. We need a process that fosters predictability
so we can make informed business decisions. In addition, we
believe that any discussion of remedies should precede the
public interest elements of the process, because remedies
are integral to addressing public interest concerns.
We ask the committee to recommend rules that enable individual
banks to make judgements and decisions. This is what we hope
results from this consultative process. From a prudential
standpoint, we do not believe that an open-ended process in
which there is no ability for the industry to predict the
outcome is in the public interest.
The government has acknowledged that mergers are a legitimate
business strategy for banks. However, the merger review process
has the effect of discouraging banks from pursuing this strategy.
This discrepancy between policy and process needs to be addressed.
This is what we hope results from this consultation.
In conclusion, I would like to reiterate our support for
your efforts to improve clarity around the issue of financial
services consolidation in Canada and allow us to make the
strategic choices necessary to ensure the ongoing viability
of our industry for the benefit of all Canadians. Thank you
for the opportunity to meet with you today. We would be pleased
to answer your questions.