After years of lingering on the sidelines of the Canadian banking market, U.S. banks may finally get the chance to become mainstream players.
That's because of a set of proposals expected to be debated in the Canadian Parliament this year that would allow foreign banks to open cross- border branches. The proposals were announced Feb. 24 by Doug Peters, Canada's secretary of state for financial institutions, who will submit them to parliament before yearend.
"The primary reason foreign banks have not done better in the Canadian market is because they are required to operate as a subsidiary rather than as a branch," remarked Fred P. Buhler, chairman and chief executive at Bank of America Canada in Toronto. "We think that this market offers opportunities for U.S. banks and certainly for Bank of America."
Seventeen years after they first entered Canada, U.S. banks have carved out an only limited presence. Citicorp, the biggest U.S. bank in Canada with 17 branches, has only $4.8 billion of assets, a mere half percent of all banking assets in Canada.
U.S. banks have pursued various strategies in Canada. For example, BankAmerica Corp has concentrated on a broad range of corporate business, such as cash management, payments, trade finance corporate lending, and foreign exchange. Republic New York Corp. has pursued private banking and middle-market banking from Montreal.
U.S. bankers are themselves the first to acknowledge that Canada has been a tough nut to crack.
"Every advanced market is tough for foreign banks, and Canada, Europe, and Japan are all advanced markets," said Mr. Buhler, who also is chairman of the committee of foreign banks advising the Canadian government on proposed reforms.
But U.S. banking executives argue that the playing field will be evened if Canada eliminates a requirement that foreign banks must operate through expensive subsidiaries with only limited capital.
"We can participate much more effectively in this market by using our parent company's capital than by using our own, rather limited capital," Mr. Buhler said. "That means we can take a more active role originating, underwriting, and syndicating in the Canadian market."
Canadian bankers sound a similar note.
"Foreign banks will be able to participate in the Canadian commercial loan market more effectively than they have in the past," said David Robertson, executive vice president and general manager for Royal Bank of Canada in New York.
"That, in turn, will allow the better development of a loan syndication market in Canada and possibly the development of a secondary loan trading market."
Some U.S. institutions, however, aren't bothering to wait for a change in regulations.
This month a joint venture of Mellon Bank Corp. and Canadian Imperial Bank of Commerce has agreed to acquire the pension and institutional trust as well as custody businesses of Canada Trust Co. for $113 million. The deal will give Mellon and its Canadian partners $252 billion in total assets under administration, making the joint venture the second-largest custody business in Canada.
And earlier this year, San Francisco-based Wells Fargo & Co. has applied to Canadian regulators for approval to open a cross-border telephone-based lending service from California for Canadian small businesses. Officials at Wells Fargo could not be reached for comment on the move.
Canada's Big Six banks, which hold nearly 75% of total banking assets, remain unperturbed by the proposals.
"Because margins in Canada are substantially less than in the United States, you have to be extremely cost-efficient and you have to have a fair volume to cover your costs," observed Robert W. Chisholm, vice chairman at Bank of Nova Scotia.
"Spreads in Canada lower and technology here is better," remarked Hugh Brown, a banking analyst with Nesbitt Burns, the Toronto brokerage company that is owned by Bank of Montreal.
'This isn't Argentina, and foreign banks don't bring anything to the party."
Canadian bankers have good reason to be confident. Earnings last year reached record highs, problem assets slumped to record lows, and over the last 12 months, their collective stock prices have shot up 68%, compared with an overall 21% rise in the Canadian stock market.
What appeals to them most, they said, are the ample opportunities they see in a range of financial activities, the most popular of which appears to be asset management.
"Wealth management, including money management, brokerage, custody, mutual funds, and discount brokerage, are all areas we think have potential for rapid growth, faster than in many other areas of financial services," said Nabanita Merchant, vice president for investor relations at Royal Bank of Canada.
Still another reason for their confidence: Canada's economy is booming.
"The Canadian economy is now one of the strongest among industrialized nations," remarked John E. Cleghorn, chairman and chief executive of Royal Bank of Canada, at a recent meeting with bank analysts in New York.
Low inflation, decreasing debt levels, growing exports and a pickup in domestic demand, he predicted, will boost growth in gross domestic product in Canada to 3% or more this year and next, from 1.5% in 1996.
Just about everyone else seems to agree . "We've got a country with a cost-effective industrial base, a competitive currency, a government that's got its fiscal house in order, and low interest rates, " said Hugh Brown
That, he predicted, means "above average, noninflationary growth for the next four to five years."
The remarkable turnaround in Canada's formerly slow-moving economy can be attributed to two factors.
First, emphasized Aron Gampel, vice president and deputy chief economist at Bank of Nova Scotia in Toronto, is the large-scale industrial restructuring and shift in production toward export markets.
Second, falling interest rates combined with tough measures at the federal and provincial levels to cut costs and reduce government borrowing have slammed the brakes on rising debt burdens.
Still, Canada's economic success has not been entirely painless. Unemployment, at 9.5%, remains high. Taxes also remain high. Any rise in U.S. interest rates could dampen the economic pickup.
And the lingering question over Quebec separatism continues to inject a large measure of uncertainty into Canadian politics and economic forecasts.
"The one fly in the ointment is ongoing uncertainty about Province of Quebec," Mr. Brown said.