Amajor success story among Canada’s financial institutions is Royal Bank of Canada’s cost control. At the other end of the scale is CIBC, with its litany of problems possibly making it Canada’s most worrisome bank. In between are the others, each with its successes and challenges.

Royal Bank, however, has set the pace with a 56.8% efficiency ratio — non-interest expenses as a percentage of total revenue — in the first half of fiscal 2006, which ended Apr. 30, beating out long-time leader Bank of Nova Scotia with its 57.4%. If sustained, Royal Bank’s increased productivity should translate into higher long-term earnings, while in the shorter run providing an offset to the earnings drag coming from its U.S. operations.

The challenge for Royal Bank in the U.S., notes a recent report from rating agency Standard & Poor’s Ratings Services, is to meld companies with different product capabilities into a cohesive whole. The bank maintains it has refined and focused its U.S. strategy. It recently sold RBC Mortgage Co.,
which had operational problems.

In an entirely different area, Royal Bank and Dexia BIL of Luxembourg are merging their institutional investor services to form one of the world’s top 10 global asset custodians.

Lower productivity is an issue for the other Canadian big banks, with efficiency ratios of 65.2% at Bank of Montreal, 69.4% at CIBC and 67.3% at TD Bank Financial Group.

CIBC is the most worrisome of the Big Five.
It has suffered a number of setbacks in recent years, including unsuccessful U.S. operations, most of which it has exited; corporate loan problems starting in 1998 that caused it to halve its portfolio; the loss of exclusivity with its Aeroplan credit card; and virtually no success in reducing costs.
Smaller problems have also cropped up, such as key institutional personnel leaving to form Genuity Capital Markets, reputational issues concerning its involvement with Enron Corp., and mutual and hedge fund trading issues in the U.S.

While most of its focus has turned toward retail banking and wealth management — its acquisition of Merrill Lynch Canada Inc.’s brokerage network in 2002 was a big boost — it’s not exclusively inward-looking. It recently signed a “business co-operation agreement” with Bank of East Asia. This will provide CIBC clients with access to Chinese corporate deposit accounts in both local and foreign currencies, as well as trade finance facilities.

BMO is well established in the U.S. Midwest with Harris Bankcorp Inc. and is trying to expand its reach through acquisitions. It bought Indiana-based Mercantile Bancorp Inc. on Dec. 30, 2004, and is looking for larger purchases. However, S&P says, there are considerable challenges. Competition is heating up in Chicagoland, Harris’s investment banking group has lagged its peers and the bank must prove its ability to generate adequate returns in its recently acquired U.S. discount brokerage operations.

BMO is no longer the smallest of the Big Five banks by assets — it passed CIBC as of Jan. 31 — but it still has the smallest revenue and is frequently cited as the likeliest takeover candidate should Canadian bank mergers ever be allowed.

TD is, as usual, the most innovative. It recently picked up 51% of New England-based Banknorth Group Inc.,
renamed TD Banknorth, which will continue to run as a separate entity, thereby avoiding integration problems. Although it’s still early, analysts are generally enthusiastic about the addition, given Banknorth’s successful and continuing acquisition strategy. S&P says that although it has yet to be proven, TD’s strategy “appears to be the most sensible for further expansion in the U.S. by Canadian banks.”

One strategic uncertainty, however, is TD’s U.S. discount brokerage operations. It was recently poised to acquire Ameritrade Financial Corp., but E*Trade Financial Corp.
has put in a sweeter offer.

At home, TD’s merger with Canada Trust in
2000 made it Canada’s biggest retail banker. In 2003, it added a further 57 branches in Ontario and Western Canada that Laurentian Bank of Canada sold off. But, as with CIBC, the tech/telecom collapse in 2000-01 led TD to reduce its corporate loan portfolio by a third.

Scotiabank would also like to get into the U.S. market but hasn’t found an appropriate acquisition. In the meantime, it is aggressively pursuing its strategy in Mexico, where it owns 97% of the seventh-largest bank. Scotiabank believes that as personal incomes rise and the country further industrializes, there are huge opportunities to supply individuals with banking, insurance and wealth-management services. Through its NAFTA wholesale banking platform, it hopes to be on the ground floor as Mexico’s capital markets expand. The only thing that worries analysts is that the owners of some of Scotiabank’s competitors in Mexico have much deeper pockets.

@page_break@Scotiabank also has a retail banking network in the Caribbean and equity stakes in a number of Latin American banks. The latter involves political risk; Scotiabank has been burned in the past, as in 2001-02, when it had to exit Argentina.

One challenge at home is wealth
management. “[ Scotiabank] continues to lag its peer group, as measured by revenue and assets under management,” notes S&P.

National Bank of Canada has some niche U.S. operations but is still mainly a Quebec bank. Besides its strong retail franchise, it’s very successful in mid-market commercial lending and has “a notable presence in the income trust market,” says S&P. Its full-service investment dealer, National Bank Financial Ltd., does investment banking for mid-cap companies across the country.
However, the bank has not been able to turnaround Altamira Investment Services Inc., which it acquired in 2002. Altamira was in net redemptions during the past RRSP season.

Laurentian continues to struggle. It tried to interest Scotiabank, CIBC or TD in taking up to a 50% equity interest. (BMO and Royal Bank already have a significant presence in the province.) Its intention was to use the proceeds to expand its retail operations in Quebec. But so far there haven’t been any takers. One reason could be the fact that it’s the only unionized bank. Another is that its market share in the province is just 5%.
National Bank and the caisses populaires dominate retail banking in Quebec.

The smaller banks are all doing well. Home Capital Group Inc. has been very successful as an alternative mortgage provider for individuals who can’t qualify at the banks. It also offers a home-equity VISA card with a limit of up to $150,000, and believes this could eventually account for half its business.

Pacific & Western Credit Corp. has done very well as a federally chartered bank, after it was forced to change from a Saskatchewan trust company a few years ago. It’s growing its business of loans and leases for public-sector projects and equipment financing. It’s now targeting investment-grade corporations for the latter and is marketing a continuous receivables-financing product that could produce strong growth. It also provides residential mortgages and construction financing in southwestern Ontario.

Edmonton-based Canadian Western Bank acquired a discount property and casualty insurer, Canadian Direct Insurance, in May 2003, which is growing at an annual rate of 20%-plus and is increasing brand awareness by including the banks’ products in its advertising. In addition, CWB is building a mortgage origination business using outside mortgage brokers. IE