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Presentation to the Senate Committee on Banking

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Gordon M. Nixon
President & Chief Executive Officer
RBC Financial Group
Senate Committee on Banking, Trade and Commerce
Ottawa, Ontario

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:

  • Peter Currie, Vice-Chairman and Chief Financial Officer; and,

  • Elisabetta 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 time frame.

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 together.

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 markets.

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 needs.

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 areas.

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 Canada.

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 effective process.

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 Canadian public.

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.


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