March 6, 1998

 To:Urban Environment and Development Committee

From:Brenda J. Librecz, Interim Lead, Economic Development

Subject:Impact on Toronto of the proposed merger of Royal Bank of Canada and the Bank of Montreal

Purpose:

At its February 4,5, and 6, 1998 meeting, City Council referred a motion to the Urban Environment and Development Committee that a report be prepared on the full implications for Toronto of the proposed merger between the Royal Bank of Canada and the Bank of Montreal.

This report will examine the possible effects, both positive and negative, such a merger could cause.

Funding Sources, Financial Implications and Impact Statement:

Funding not required.

Recommendations:

1.That Committee receive this report for information only.

2.That Committee view this report as an initial report and request further reports as information becomes available.

3.That Committee consider accepting the offer of the Bank of Montreal for a briefing session to answer any further questions or address any remaining concerns.

Council Reference/Background/History:

On January 23, 1998, the Board of Directors of Bank of Montreal and Royal Bank of Canada announced a definitive agreement, subject to regulatory and shareholder approval, to merge both banking groups into a new bank as equal partners.

The Federal Government which has jurisdiction over mergers and acquisitions of Financial institutions. The Minister has stated that he will not examine the merger of The Royal Bank and the Bank of Montreal until AThe Task Force on the Future of the Canadian Financial Services Sector@ has completed its policy report on the Canadian financial sector in September 1998.

The Industry Canada Competition Bureau is examining the proposed merger from the standpoint of competition amongst financial institutions and in due course, the Office of the Superintendent of Financial Institutions will also have to examine the merger from the standpoint of consumer protection and integrity of the financial services sector. Should the City of Toronto wish to express its views on the Royal Bank, Bank of Montreal merger, comments should be directed to The Federal Minister of Finance, The Task Force on the Future of the Canadian Financial Services Sector (prior to September 1998) and the Industry Canada Competition Bureau.

The primary justification given by the banks for this merger is a Canadian response to the sharply rising level of global competition in the financial services market, which is evolving at a rapid pace. Canada needs a home-based financial institution capable of competing with the big players from around the world.

In their initial press release, the banks claim the new bank would rank in the top ten in North America and the top 25 in the world for market capitalization, and based on fiscal 1997 year-end, would have generated 41 percent of its total income from outside Canada, while employing 90 percent of its force in Canada.

In an independent study, sponsored by Scotiabank, and prepared by The Boston Consulting group, in January, 1997, we are told AWhile Toronto has an excellent reputation abroad, including a ranking as a top city for international business, it can do more to market itself on various front. But without commitment to and confidence in itself as a financial services capital, Toronto can do little to market itself convincingly. One senior official reflected the commonly held view >Many people in Canada don=t view financial services as a strategic industry, whereas most other countries do=.

There is, therefore, considerable support for a Canadian financial institution which is capable of competing on the global market. What, however, would this mean for Toronto directly?

Effects on Toronto

1. Closing of Branches/Offices

Currently, Royal Bank of Canada has 160 branches in Toronto and Bank of Montreal has 97. It is obvious some of these combined 257 branches wold no longer be required though how many is yet to be determined. The same would hold true for the combined 963 full and partial service cash machines and updating machines.

Loss in branches could soon lead to loss in tax revenue to the City. Under the old tax system, the closure of these branches would have meant an immediate loss of business taxes to the City. However, under the new system, where the Business Occupancy Tax has been eliminated, a commercial unit will have to be vacant for a minimum of 3 months before the landlord can apply for a credit. This means that if units vacated by the banks are re-leased within 3 months, there would be no tax loss to the City. Taxes aside, the closure of branches in Toronto would translate to a loss of revenue for surrounding supporting businesses, at least initially. Long term vacancy will reflect a 30% realty tax base based on current tax rates (February 23, 1995).

We must also consider office building space which could be left vacant if employment decreases due to the merger. Both banks have corporate offices in Toronto. If staffing levels decrease, so will occupied office space, again translating into lost property tax revenue to the City.

According to Bank of Montreal chairman, Matthew Barrett, the merger would result in more branches and likely increase the two lenders= combined staffing levels. These increases would be the result of the new bank=s ability to increase its Research and Development, its technological advances and its global competitive abilities. With Toronto being at the centre of the financial service industry and home to most of the currently competing branches, it stands to lose most branches and office jobs. It is not clear at this point to determine whether the increased jobs created by the new globally competitive merged bank will compensate for the jobs lost due to reduced competition with the merged bank in the local market. Where the new branches would be placed has not been identified, though it would be a safe bet Toronto would not see many of them. Office vacancy would likely be short term as the staffing increases expected would be in the higher-paying, head office positions.

2. Employment

Royal Bank of Canada and Bank of Montreal combined employ over 80,000 people in Canada, nearly half of which are employed in Ontario. In Toronto, Bank of Montreal employs 9,119 FTEs and 966 casual employees, and Royal Bank employs 14,456 FTEs and 1,456 casuals for a combined total of 25,031 FTEs and 2,422 casual employees. The main concern for Toronto would be the elimination of jobs within Toronto, including both head office jobs and branch positions.

Royal Bank chairman, John Cleghorn, said that 8 - 10 percent of the new bank=s 85,000 employees would lose their jobs through attrition. Loosely applied to Toronto this means a potential initial loss of 2500 full and part time jobs through attrition. Toronto could be especially susceptible to job loss, since various head office functions of the Royal Bank and Bank of Montreal are situated in Toronto., It is possible that the elimination of one corporate office will reverberate upon the rest of the economy., Repercussions could include higher office vacancy rates (which translates into lower tax revenues) and less business for outside companies which now service the banks,

Both banks stress, however, the impact of growth in technology, Research and Development, and the global competitive market on jobs. The banks project 40 percent of their earnings coming from abroad with 90 percent of the employees being in Canada. Bank of Montreal stresses its commitment to retraining staff (60 percent retrained over 10 years) and draw attention to their training centre in Scarborough -- a major investment.

Studies of 200 U.S. bank mergers which found employment levels actually increased by 5 - 7 percent within 2 to 3 years. They also note the Nesbitt Burns workforce increased 35 percent within 2 years of their merger. The banks have committed $750 million over 5 years to continue their current retraining commitments. They also suggest the potential of their large-scale financing capability will bolster expansion in other firms. This, however, is yet to be seen.

3. Competition

There are two levels of competition which must be considered, both of which will effect Toronto directly:

1) Global

2) Local/Domestic

Globally, in the early 1970's, 2 Canadian banks were in the top-20 in the world (measured by size of assets); by the early 1980's, only 1 Canadian bank was in the top-20; today, only 1 Canadian bank remains in the top-50.

Large non-Canadian firms are competing in Canada in virtually every financial service, including personal banking, small business loans, and mortgages as well as mutual funds, credit cards and leasing. It is evident that at the Global level, Canadian banks, as they are now, cannot keep up with their counterparts from other countries. For Bank of Montreal and Royal Bank of Canada, consolidation means joining forces to become a so-called mega-bank, a union they feel will give them enough financial and technological clout to compete on Bay street, Wall Street and far beyond, putting Toronto on the international banking map. It is important to note, however, that a merger is not the only way global competition could be achieved. Strategic ventures with global partners could conceivably accomplish the same level of global competitive edge the banks are seeking. Only the banks can determine what works for them.

Locally, the merger could have a different impact on Toronto as well as the rest of Canada. It has been suggested, more than once, that job loss and branch closings are red herrings and are diverting attention away from the true concern arising from this proposed merger which is the loss of competition and therefore loss of fair and easy access to credit at competitive rates within Canada.

Unlike the United States, where there are thousands of smaller banks that cater to the needs of local communities and regions, Canada has a history of fostering a few large banks that operate nationally.

It is the competition between banks which helps keep our loan rates down and allows bankers more willingness to take lending risks. It is also competition between businesses which keeps service levels up and fees (where applicable) down. Currently, between 2 and 3 percent of banks profit s are earned through fees though Canadian banking fees remain lower that those in the U.S.

The assumption from both the banks and the government is that this problem of a lack of local competition could be solved by foreign banks. Ottawa has agreed to allow foreign banks to expand their operations in Canada. At this point, however, the proposed legislation to permit foreign banks to open branches more easily in Canada is geared toward corporate banking and does not extend to consumer retail banking.

At this point, it would appear the distinct possibility exists that the merger could cause higher lending rates, lower service rates and higher user fees in Toronto and throughout the country. This, however, would leave the three remaining banks fighting for the local business, which could possibly see local rates improve.

4. Future Mergers

The merger of Royal Bank of Canada and Bank of Montreal is likely the tip of the bank merger iceberg. It is virtually a sure bet that with the creation of a new mega bank, at least two of the three remaining banks would have to merge to survive. Merge or be consumed would be the new direction for banking in Canada.

Finance Minister, Paul Martin, has noted however, that two of the remaining banks have taken different approaches. Toronto-Dominion Bank and Bank of Nova Scotia have taken a different approach from Royal Bank and Bank of Montreal. TD is more content to be a domestic bank, stressing its retail base and its consumer-oriented businesses such as the Green Line investment service, while Scotiabank is an aggressive niche player in international markets. Whether or not these approaches would continue to keep these banks competitive and successful in the throws of the Royal and Bank of Montreal merger remains undetermined.

Comments and/or Discussion and/or Justification:

Staff at the Bank of Montreal have expressed an interest in meeting with City staff or Councillors to further discuss and address any concerns or questions they may have. The majority of the issues surrounding this merger which could result in negative ramifications would likely effect outlying rural areas more so than Toronto. In face, Toronto is likely to benefit from this merger in many ways with any negative results being temporary.

Conclusions:

It would appear that initially at least, Toronto could suffer loss of employment by approximately 2,500 full and part-time positions currently filled between the two banks. This loss would be temporary according to the banks and could actually turn into a situation where employment in Toronto increases due to the merger.

Tax revenue lost by the banks closing branches should be limited and again, temporary. As the banks close branches, landlords will be making efforts to fill the vacant spaces and hopefully tax refunds will be minimal. In the meantime, increases in total employment to support global expansion and competition will see an increased need for office space. Most of the space will be filled in Toronto as Toronto is where the major Canadian financial institutions must be based to succeed globally.

Most of the long-term losses in both revenue and employment will be seen in outlying, rural areas where the banks have reduced branch presence.

Finally, lower levels of competition may indeed cause higher lending rates and lowered service levels though to what degree is not known. Increases in foreign institutions operating in Canada may help with competition though not yet at the personal level. This is likely going to be the primary concern for Toronto and may deserve further attention as more information becomes available.

Contact Name:

Marion Brayiannis, Economic Development 396-5056.

Brenda J. LibreczVirginia M. West

Interim LeadCommissioner

Economic DevelopmentUrban Planning and Development Services

Ref.: ECO-98-03