Canada’s rich banks need to simplify: study

Canadian banks have spent the last several years pushing into new geographies and business lines, but a new report suggests the ‘big five’ may want to rein things, or at least streamline the business.

Ernst & Young says in its 2015 Global Banking Outlook that banks with global growth aspirations need to reinvent themselves by simplifying their business, or run the risk of being squeezed by an evolving marketplace that no longer rewards sprawling lenders selling products you need a PhD to decipher.

In other words, in a world of increasing regulation, changing investor sentiment and evolving customer behaviour, the old ‘bigger is better’ model is starting to look outdated, particularly with economic growth not exactly setting records.

“Banks that focus and simplify their products will do better than those that try to do everything for everyone,” says E&Y Canadian Financial Services Leader Andre de Haan, summing up the results of the study.

Pick and pay

E&Y says there’s little correlation between a bank’s market share and the breadth of it’s product offering, meaning banks can do more with less.

As well, increasingly well-informed bank consumers are shying away from the old model of banks packaging a bunch of products together. E&Y says the way forward is to allow customers to pick and choose products that work for them.

Ultimately, E&Y says, the kind of complex organizations that are born of rapid takeovers have too many working parts, which need to be pared and streamlined in order to be profitable.

Now, Canada’s banks aren’t exactly the big kids on the global banking block, but they have been growing like mad since the financial crisis, which hit many of the world’s banks hard but left the Canadian biggies in relatively good shape.

So Scotiabank now has its fingers all through Latin America and parts of Asia, TD has more U.S. branches than Canadian ones, and RBC’s investment bank is bigger on Wall Street than it is on Bay Street. Even BMO and CIBC are players in the U.S.

And it’s not like they’re struggling. The big five pulled in a collective $32 billion in profit last year, though the big brains in the Toronto towers are likely more worried about falling oil prices right now than cluttered product lines.

A nod to the future

But E&Y says change is needed, not only to respond to the pressures of today, but to be ready for what’s coming down the pipe.

According to the study, banks operating on a global scale reported average return-on-equity of 7.5 per cent in 2013, while big banks with a less diverse business and geographic footprint notched ROE of 10.7 per cent.

Of course, the big Canadian lenders had ROE of 15.5 per cent, but De Haan says the thesis still applies.

“Canadian banks are going to feel the same pressure,” he says. Regulation is not going anywhere, customers are going to demand more, it’s going to be harder to find staff who can respond to the needs of customers who demand more.”

E&Y says the banks need to focus on profit, rather than revenue, and shed business lines or products that are feeding the top line rather than the bottom.

Expansion is still fine, but focused expansion, rather than just aggressive growth in a region. And don’t be afraid to partner with other banks or non-banks to leverage new technologies and generate fees.

And if you’re wondering ‘why do I care what a bunch of banks earn?’, remember that anyone with a pension (which is hopefully most of us) probably has money parked in the Canadian financials. So, their poison is your poison.

So, should Canada’s banks start selling off their foreign assets and retreat to simple mortgage and asset-management institutions? De Haan says that’s taking it too far.

“In order to do (it) effectively and cheaply, you still need scale, so I wouldn’t’ say shrinking is the way to go,” he says.