Tuesday, December 28, 2010

Bank Profits needed here at home!

By Ian Austin, New York Times, December 28, 2010
Now several of the (Canadian)banks are taking advantage of their solid balance sheets as well as the current revamping and consolidation of the American banking system to again look south for expansion. Last week, the Toronto-Dominion Bank agreed to pay $6.3 billion for Chrysler Financial. And earlier this month the Bank of Montreal bought Marshall & Ilsley, a bank based in Milwaukee, for $4.1 billion.

Given the uneven success of previous forays south of the border, however, few investors expect much good to come of either deal.
“We don’t think it’s a great idea for Canadian banks to be expanding into the American market,” said J. Bradley Smith, the head of research at Stonecap Securities in Toronto. “From a cultural perspective, we’re very similar. But from a management perspective, the American market is not an easy threshold to cross.”
Still, Canadian banks have few other options for expansion.
“The banks simply have no choice,” said Louis Gagnon, an associate professor of finance at Queen’s University in Kingston, Ontario. “They have to go beyond our borders to grow and the only market that makes sense is the United States.”
In their home market, Canada’s top five banks — the Royal Bank of Canada, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce and the Bank of Montreal — offer a complete range of banking, from retail to investment banking through a nationwide chain of branches. Changes in regulation have also allowed them to expand, on a limited basis, into insurance while most brokerage houses became bank subsidiaries.
That market dominance, and some regulatory restrictions, mean that competition from foreign-owned banks in Canada is limited. At the same time, the managers of Canadian banks are immune from takeover pressures because of federal laws that prohibit any person or company from owning more than 20 percent of a chartered bank.
While that has made for a orderly financial system for Canada that is very profitable for bank investors, the banks now find themselves accumulating substantial capital without effective ways to use it to increase their businesses within Canada.
To the professor of finance at Queen's, one is prompted to ask: "Are there not other countries whose banking systems, while solid and growing, could not use a little Canadian expertise as well as a little Canadian banking investment?"
And also, are there not other ways for Canadian chartered banks to diversify their product offerings, and the role as stimulators of innovation in the Canadian marketplace?
We have a school and health care system that are both begging for substantial underwriting, and while the banks would not be able to invest directly in education as private investors, nor in the provision of health care, they could certainly stimulate scholarship, innovation, foresight, insight and ingenuity in the Canadian education marketplace, for their own long-term benefits. 
We have a derth of funded and cutting-edge research in Canada, excepting the occasional Roman candle like Blackberry, and the private sector is not investing in research at a level that befits, especially, the profits of the chartered banks. Of course, there is the argument that Canadian banks are more like religious institutions in that the are protected from private ownership, and therefore also from private whims.
However, with that protection also comes a social responsibility role.
Naturally, their shareholders need to be protected and that means a substantial return on their investment.Surely, the latest figures demonstrate that that goal has been, and will continue to be, more than adequately met.
It might seem both strange, and even ironic, for someone who did not pass Economics 20 and who has had a love/hate relationship with the banks, for me to be offering advice to these corporate monsters, whose services I both need,  and whose provision of those services I frequently find more than a little distasteful.
It is the arrogance, and the lack of accountability, and the refusal to take some pages from the books of the micro-lender banks in the third world in order to better grow the lives of individuals who could otherwise not afford to make their own way as entrepreneurs, and the subtle shifts in modus operandi with which the banks exercise their privileged position in the Canadian society that really offend this writer.
These corporate elite citizens are built in the form of Greek temples, especially in the older buildings across the country; they assume an air of sophistication and detachment befitting a member of the aristocracy in Great Britain, whose model they are presumably following; they compete like warriors for the business that has already found its way into their competitors files, vaults and accounts; they offer a mere 1-2% on interest-bearing accounts, and charge a whopping (by comparison) interest rate of 5% on home mortgages, and 8-9% on car and "toy" loans, thereby generating such mountains of profit, that they are now looking for "new frontier" to enhance their profiteering opportunity.
Could they not make an ever-so-brief nod, or bow to the Canadian account holders whose needs and whose business have generated such profits? Could they not change their business model, by widening it to include some imaginative, and slightly more risky proposals, so that the lid of risk-aversion that so elegantly serves as the archetype of Canadian financial services is lifted ever so slightly?  Perhaps the banks' profits might look a little smaller, while the number of new ideas, and new ventures and new proposals and through all of these individual iniatives, the cultural expectations of the next two or three generations might be raised because the door of opportunity might have opened just a crack wider.
There is a successful business man in New England, who does not operate a bank, but rather a large retail consumer business in the provision of natural soaps, tooth paste, deodorants and the like. His name is Tom Chappell, and his products are marketed under the brand name of Tom's of Maine. While his employees have the task of both donating 5% of their work-time to needy causes in the community, they also have the task of distributing 5% of the company's profits to other needy causes. Tom, himself, visits local high schools where he asks the faculty and principal to give him the name of those students most "off course" who have no idea what they want to do with their lives, and who are doing very badly in their academic grades.
He then invites these students to breakfast, once monthly, where he discerns their individual passion, and through a formal business plan, and a little financing, turns their passions into the student's own business enterprise. By meeting with them monthly, he is able to monitor and guide these aspiring entrepreneurs into their own success, and, in the process, reverse the downward trend of their grades, enhancing the likelihood of these same former "losers" attending and succeeding at post secondary education.
Why could the banks,with just a little of their profits, entertain and build their own model for such an education/life-skills/transformative experiment?
On another front, in Canada there are some 91 Kiwanis Music Festivals, many of them struggling for financial underwriting. Into these festivals, every year, thousands of young musicians enrol, after spending hours in rehearsal, and in other public performances and then perform for professional adjudication. Many of these young performers are later the recipients of Juno Awards, and go on to fill chairs in local symphonies, and chamber ensembles across the country and around the world. While every Canadian is proud to learn of the Giller prize for writing, donated by the Bank of Nova Scotia, through which the work of Canadian writers is not only juried, but also recognized ( it is certainly hyped as a writers' competition!) there are younger, and less established artists everywhere needing a little incentive. Sponsorships of writing contests, Kiwanis (and other service club sponsored Music Festivals) and local schools for the arts would do much to raise the level of both expectation among the young and among the parents of those same children, while at the same time putting those profits to platinum use.
And the benefits, both in direct revenue, and in public appreciation and in enhaned investment would grow for the next century, to the banks, to the individual artists, and the country generally.
Just a thought.


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