October 22 , 2015

Fintech poses ‘long-term and dangerous’ threat to golden goose of Canadian banks, analysts warn

Toronto, ON--Canada’s banks may be pitching their big push into technology as a growth platform, but in reality it is just a way — and a costly one at that — to try to preserve their “golden goose” of dominance in personal and commercial banking, according to a new report from analysts at National Bank Financial, says Peter J. Thompson of the National Post.

“We think the Big Six Canadian banks have all embarked not on offensive, growth-oriented strategies – as recent rhetoric from all suggest … but rather, they have gone on the defensive,” bank analyst Peter Routledge and two associates wrote in the report.

“We now see all Canadian P&C banking fintech or digital initiatives as necessary responses to a long-term and dangerous competitive threat.”

The defensive strategies to protect revenue and earnings in their profitable personal and commercial banking franchises — along with the imperative to invest in technology — could “overwhelm the earnings growth imperative” of the big banks, the National Bank analysts wrote in a report distributed Sunday evening.

The report predicts the big, dominant banks will prevail in their showdown with fintech rivals. But they suggest it will be a long and expensive battle that won’t allow the banks to weather cyclical and economic challenges to earnings growth — as they have in the past — by cutting costs.

Canadian banks have been reviewing their operations and looking to cut costs for months amid concerns about an economic slowdown and curtailed borrowing by over-leveraged consumers.

A report from Reuters on Monday said several hundred employees could be cut by TD in a series of cuts that began last week. Canada’s second-largest bank has about 85,000 employees in its retail, wholesale and investment banking operations in Canada and the U.S.

A TD spokesperson told the Financial Post an organizational review that began in the first quarter focusing primarily on the United States has now shifted to Canada and should be complete by the end of the year.

“Its focus is primarily on clearly defining our executive and corporate management structure,” the spokesperson said in an emailed statement. “As a result of the review, some roles are changing and some are being impacted.”

Earlier this month, National Bank of Canada announced cuts that will affect a few hundred employees of the Montreal-based bank.

Investor conferences held by Toronto-Dominion Bank and Canadian Imperial Bank of Commerce this month convinced Routledge and the other National Bank Financial analysts not to take the bank “messaging” about tech and digital innovation at “face value,” according to their report this week — though their conclusions are not confined to those two banks.

TD and CIBC showcased strategies for their business, and highlighted the strengths of the personal and commercial lines which have been a key driver behind all the Canadian banks’ profit growth over the past several years.

Of particular note to the National Bank analysts were comments executives at TD and CIBC made about partnerships forged with outside “fintech” companies that are innovating in traditional business lines such as payments.

“Why, we asked ourselves, is the boring but profitable Canadian oligopoly inviting third parties into their most valuable, profitable business line?” the analysts wrote. “Simply put, we think they are worried … worried that innovators will nip away at, and ultimately fleece, their Golden Geese.”

The report noted the personal and commercial franchises of the Canadian banks have been largely insulated from competition in the past, due to their individual and combined market share and regulations that have made it difficult for foreign players to enter via acquisition.

The most imminent threat from the fintech firms is to the payments operations of the Canadian banks’ domestic personal and commercial banking franchises, the report suggests.

Those nipping at the heels of Canada’s dominant banks may not be of the magnitude of a Microsoft, which, the report points out, benefitted greatly from being invited to the table with IBM, but the National Bank analysts say they “do think the Canadian Big Six banks face a material threat to their most profitable business line.”

The report concluded that the big banks will be forced to confront and combat the fintech firms over the long term.

“In other words,” the analysts wrote, “this threat is clear, present, intensifying and has staying power – one or two simple alliances will not neutralize it.”