Where is the customer these days?

In the latest batch of second-quarter reports, the words “customer” or “client” are often either missing entirely or buried in the fine print. Instead, the discussion is about shareholder value, cost cutting, restructuring and the vast array of e-banking and e-commerce initiatives the banks are pursuing. Consumers or politicians reading these reports can be forgiven for thinking the banks do not put their customers’ interests first.

Of course, these reports are aimed at shareholders but they, too, should be disturbed by the failure to focus on customers. Companies that don’t concentrate on their customers’ emerging needs can be quickly left behind.

There are, however, a couple of exceptions among the reports.

One is Canadian Imperial Bank of Commerce. Although not considered a leader in customer sensitivity, its report says it is “determined to improve customer experience.” One initiative is Bizsmart, a new e-banking and e-commerce small-business bank offering that provides free online daily banking, plus special discounts or lowest price guarantees. In the wealth-management area, it is simplifying products — for example, it is reducing the number of GICs to 13 from 42 — and broadening sales capacity.

The other is National Bank of Canada. Although its message to shareholders does not mention customers, the report contains an “economic commentary” that looks to the future and the changing client relationship.

Quoting Robert Merton, Nobel prizewinner for economics, the report says: “financial institutions that win the public’s favour in the future are those that will relieve households of the burden of managing financial risk. In other words, instead of proposing investment portfolios based on the traditional risk and return criteria, institutions will guarantee future wealth by managing the risk themselves.”

One example would be signing a contract with very simple terms and conditions, which would, in exchange for a monthly payment, guarantee that the funds would be available to pay a child’s tuition at a prestigious university. Another would be home insurance products that offer protection against falling real estate prices in addition to fire and theft coverage.

“In what is a fiercely competitive market, financial institutions will move away from developing and marketing financial products to focus instead on clients’ specific needs throughout the various stages of their lives,” says National Bank.

The absence of a customer focus shows up particularly in the banks’ electronic initiatives. All the banks have them, but they seem to be viewed viewed as ends in themselves rather than tools. CIBC is the only one to tie these moves, specifically Bizsmart, directly to enhanced customer service.

It is also disturbing that a couple of banks — CIBC as well as Bank of Nova Scotia — have created separate electronic divisions. Segregating activities is not the best way to keep your focus on your customers’ total needs.

The same criticism can be directed at the basic business models the banks are using. The models put both retail banking and commercial (small and medium-sized businesses) in one division, wealth management in another and corporate and investment banking in a third.

This means that individuals and small businesses go to one division for their basic banking needs and another for their wealth-management needs; and one division serves the basic banking needs of both groups and medium-sized businesses. Not only do these groups’ banking needs differ but they also have different risk profiles.

Another potential problem is that the banks’ focus on cost control and enhancing shareholder value could lead to short-term — and short-sighted — decisions.

There is no questioning the importance of these targets but there are long-term as well as short-term considerations, and there are different ways of growing shareholder value. You can cut costs and/or you can increase revenue. Scotiabank and TD Financial Group both favour increasing revenue while ensuring costs don’t get out of control.

TD has been spectacularly successful: witness the development of TD Securities Inc. and its discount brokerage business into powerhouse TD Waterhouse Group Inc. Now, with the acquisition of Canada Trust, it is increasing its retail franchise, although Dominion Bond Rating Service cautions the acquisition puts pressure on TD’s capital ratios.

Scotiabank, on the other hand, has a long history of having the lowest or close to the lowest productivity ratio (non-interest expenses as a percentage of revenue). Yet Scotia Capital Markets remains a strong player. Scotiabank’s Caribbean retail franchise delivers good results and the bank has also done well with its investments in Latin America and Asia. A recent DBRS report says Scotiabank’s biggest challenge is to manage the risk inherent in its Third World investments.

Note that Scotiabank’s second-quarter report also has a small mention of customers, referring to customer-focused financial package products such as Scotia Total Equity Plan, in which homeowners can combine up to five products in a single borrowing program.

The big cost-cutters are CIBC and Royal Bank of Canada. CIBC has had problems because of its exposure to market volatility and derivatives. DBRS says one of its challenges is “managing the risk involved in its significant reliance on volatile and sophisticated market-related sources.” Another challenge is successfully implementing its electronic banking strategy.

CIBC is currently freeing up capital. In the second quarter, it sold 6.8 million shares in Global Crossing Ltd. to net $176 million after tax, seven office properties bringing in $333 million pretax and an investment in the West Indies that produced a $21-million net gain. The bank took $182 million of the real estate gain in the second quarter and will take the rest over the next 10 years. The bank has also identified non-core loans, which can free up more capital.

Royal’s path has been smoother. It remains Canada’s biggest bank, owns the biggest Canadian investment dealer and has a good niche in the global private client business. The bank has a new division called Global Integrated Solutions, which consolidates specialized transaction-based services under one umbrella and “allows for a more integrated relationship with business clients.” Note that this reference to customers is on page16 of its report.

Royal is trying to expand into the U.S., which will be challenging given the lower Canadian dollar and Royal’s smaller size vs its U.S. peer group and related competitiveness, says DBRS.

Bank of Montreal‘s attempt at a virtual bank may not have been a blazing success, but Harris Bank in Chicago has been a good acquisition. BMO recently sold Harris’s corporate trust business and is in the process of selling 48 branches in Western Canada to credit unions.

BMO wants to be a North American bank, but DBRS says the bank will be challenged in expanding Harris “given its small size and likely continued consolidation of the medium-sized regional banks over the long term.”

BMO’s Mexican stake is also up in the air. Bancomer, in which the bank has a 16.5% equity interest, signed an agreement with a Spanish group to merge and has subsequently received a merger proposal from Mexico’s Grupo Financiero Banamex-Accivale. BMO is studying options.

This all suggests that developing strong positions in niche markets will remain the way to go for Canadian banks, with or without mergers. Size isn’t necessarily the main ingredient for success in today’s global financial markets. Canadian banks may be well-advised to worry less about size and focus more on customers, figuring out what they will need in the future and trying to be the first to deliver those products and services. Ultimately, that is the only way to increase shareholder value.