From the window of his office, John E. Cleghorn, Royal Bank of Canada's chairman, casts a worried glance across Lake Ontario toward the United States.
What concern Mr. Cleghorn are a host of powerful U.S. financial institutions-including Fidelity Investments, Merrill Lynch & Co., and MBNA Corp.-that are making inroads in Canada.
"We've seen what Home Depot and Wal-Mart have done to retailing," Mr. Cleghorn said. "Anyone who doesn't see the competition coming doesn't understand what's going on."
This year's decision by Mr. Cleghorn and Matthew Barrett, chairman of Bank of Montreal, to merge their banks stemmed in part from a belief that the combined institution's size would help it compete with the big U.S. financial companies.
Provided the merger goes through, the new entity would have $295 billion of assets and 85,000 employees. It would be Canada's largest banking company and the fourth-largest in North America, after Citigroup, Chase Manhattan Corp., and BankAmerica Corp.
The deal, first broached over the punch bowl at Bank of Montreal's Christmas party in Toronto last December, has run into stiff opposition from Canadian consumers, regulators, government officials, and competitors like Bank of Nova Scotia. The reaction to a second planned merger, between Canadian Imperial Bank of Commerce and Toronto-Dominion Bank, has been similar.
But the deals have also garnered considerable support in some quarters. A report issued last month by the Fraser Institute, a Toronto think tank, stated: "Given the enormous cost savings and efficiencies to be gained by branch rationalization, the federal government should allow the proposed bank mergers."
Though an independent commission last month recommended that the mergers be allowed to proceed, provided they serve all Canadians' economic interests, they have yet to obtain the approval of Canada's House of Commons and Senate, Competition Bureau, Office of the Superintendent of Financial Institutions, and Ministry of Finance.
In fact, some analysts give the two big mergers only a fifty-fifty chance of getting approval. They also question how much threat U.S. financial institutions pose.
"Foreign banks have been able to come here since kingdom come, and none of them have a particularly good record," said Roy Palmer, a banking analyst at TD Securities Inc. in Montreal.
Mr. Palmer conceded that Royal Bank of Canada and others in the country face stiff competition from specialized U.S. financial institutions. But he suggested that domestic cost savings, rather than U.S. competition, is the real impetus for the merger plans.
Meanwhile, criticisms of his megadeal have Mr. Cleghorn fuming. He vehemently disputed arguments that the proposed combination of Royal Bank and Bank of Montreal would lead to monopoly pricing and make life harder for people and small businesses.
Bigger scale would increase efficiencies and let Royal and Bank of Montreal save more than $650 million annually in operating costs. That, he said, means they could cut prices rather than raise them.
The four big banks planning mergers, he emphasized, hold only 37% of Canadian financial-sector assets. And the role played by nonbanks is only growing, he pointed out.
Businesses such as mortgages, commercial lending, deposit-taking, mutual funds, and small-business financing are increasingly being invaded by nonbank institutions, including U.S. and other foreign financial institutions, he emphasized.
Merrill Lynch this year made a significant move in Canada by acquiring Midland Walwyn, the largest independent Canadian stock broker, he noted, and other U.S. financial institutions are poised to expand.
Even if Royal Bank still holds the second-biggest share of the $186 billion Canadian mutual fund market, at 9%, competitors like Fidelity are fast catching up, he added.
Fidelity, for example, added $2.8 billion of funds under management in Canada in the 10 months through Aug. 31, giving it a total of $9.9 billion, or 5% of the market. Royal Bank itself added $1.2 billion, bringing its total mutual fund assets to $16.8 billion.
Unlike Bank of Nova Scotia, which has sought to develop internationally, and Canadian Imperial Bank of Commerce and Toronto-Dominion, which have sought to turn themselves into investment banks, Royal Bank has stuck to more traditional activities, including retail and commercial banking and private wealth management.
Merging with Bank of Montreal would create a North American banking company stretching from Toronto to Mexico City.
It would combine Royal Bank's U.S. corporate banking activities with those of Harris Bankcorp, the $22 billion-asset, Chicago-based unit of Bank of Montreal. The latter also has a 20% stake in Bancomer, Mexico's second- biggest bank.
These holdings, Mr. Cleghorn said, would give Royal a strong platform from which to expand retail banking, wealth management, and specialized corporate finance in the United States and Mexico.
He added that, even if Royal is unlikely to embark on a megamerger with a big U.S. bank, it could easily make smaller U.S. acquisitions in asset management or other areas, such as last month's purchase of Security First Network Bank, the Atlanta Internet bank.
Royal, he added, is particularly interested in expanding its asset management operations in the United States to keep pace with a growing international diversification by Canadian pension funds.
"The share of foreign investments will rise," he predicted. "And as it does, we want to have a track record behind us."
Merging Royal Bank with Bank of Montreal would be the crowning achievement for the 57-year-old, Montreal-born banker who started out as an accountant and sugar trader, then spent eight years working for Citicorp's Canadian unit before joining Royal Bank in 1974.
Since the start of the year, Mr. Cleghorn has spent an increasing amount of time trying to persuade his countrymen that bank mergers are in the country's best interests.
But the continuing uncertainty is taking its toll. The bank's share price has fallen from a high of $59 (in U.S. dollars) on April 14 to $43 Oct. 14. Meanwhile, it has been forced to put off critical decisions, such as whether to expand further in insurance.
Clearly frustrated by the slow pace of events, Mr. Cleghorn warned that time is running out for Canada's banks.
The Canadian economy is headed for a slowdown, he said, and the gap between U.S. and Canadian banks is growing.
In 1993, he pointed out, the difference between Royal Bank's market capitalization and the average for the top 15 U.S. banks was less than $3 billion. Today it is $23 billion, giving U.S. institutions a huge competitive advantage.
"We don't intend to go the New Zealand route," he said, in reference to the almost complete takeover of New Zealand's banks by Australia's. "We believe there are benefits in having Canadian institutions, and the only way to have that is by having lots of options."
