RBC Leading Banks Seeking Small-Business Loans

RBC Leading Banks Seeking Small-Business Loans
Royal Bank of Canada, Toronto-Dominion Bank and Canada’s other big banks are boosting efforts to win a slice of the C$18.4 billion ($18.4 billion) market for small-business loans as consumer lending slows. Photographer: Brent Lewin/Bloomberg

Royal Bank of Canada, Toronto-Dominion Bank and Canada’s other big banks are boosting efforts to win a slice of the C$18.4 billion ($18.4 billion) market for small-business loans as consumer lending slows.

The lenders, ranked the world’s soundest for the past five years by the World Economic Forum, have hired business advisers and small-business specialists across the country over the past few years, as competition for loans to companies up to C$250,000 intensified.

“We find it as an attractive area to grow in Canada, which is a relatively slow-growth market for us,” Bank of Nova Scotia Chief Executive Officer Richard Waugh said in an interview on Oct. 23. “It remains a priority, because we see growth.”

Consumer borrowing has slowed amid record household debt levels and repeated warnings from Bank of Canada Governor Mark Carney about the dangers of too much borrowing. Personal lending, a category that includes credit cards and residential lines of credit, rose 8.9 percent in September over the same month the year before, down from a monthly average of almost 12 percent in 2010, according to Statistics Canada.

Canada will see an “unprecedented boom in new business” over the next decade, Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce said in a September report. He predicted a net creation of 150,000 new businesses in the next decade.

Business Bankers

The 10-member S&P/TSX Banks Index rose 0.3 percent today and has climbed 8.1 percent this year, led by Canadian Western Bank of Edmonton, Alberta. That compares to a 28 percent increase on the KBW Bank Index, which include U.S. lenders such as Bank of America and Citigroup Inc.

Toronto-Dominion, the country’s second-largest bank by assets, said in March it would focus on corporate lending, and has added 500 Canadian business bankers in the past five years for a total of 1,420. Bank of Montreal, the fourth-largest bank, has hired 180 small-business bankers since March 2011, Paul Cunliffe, a bank spokesman said.

Royal Bank, the country’s largest lender, has increased its “relationship management team” for business clients by about 3 percent this year for a total of 580 people, said Peter Conrod, the bank’s vice president of client and business strategy. The Toronto-based lender also conducts seminars and sessions for business owners, he said.

Lending Rising

Outstanding loans issued by Canada’s seven largest lenders to small businesses -- generally credit offered up to C$250,000 -- totaled C$18.4 billion as of June, Conrod said, citing data from the Canadian Bankers Association.

Scotiabank has increased its small-business adviser group by more than 10 percent over the last few years, Andrew Chornenky, a spokesman said.

CIBC has added 40 “dedicated small business roles” this year, said Kevin Dove, CIBC spokesman.

The increased emphasis banks are placing on commercial clients is already being reflected in financial results. Sumit Malhotra, an analyst at Macquarie Capital Markets in Toronto, said domestic commercial and small-business loans for the country’s six biggest banks climbed 10 percent in the fiscal third quarter, a faster rate than the 6.1 percent increase in domestic consumer lending.

“Business borrowers - whether small-and-middle market commercial or larger corporate clients - are on aggregate carrying a much lower level of debt than Canadian consumers,” said Malhotra. “So while business lending is a smaller portion of the book for most banks, it’s also an area that should have more capacity for growth in the interim when compared to the highly leveraged position of the consumer.”

Household Debt

Household debt rose to a record 166 percent of disposable income in the second quarter, Statistics Canada said. Toronto-Dominion Bank CEO Edmund Clark has said he expects domestic consumer-banking profit growth to slow.

“The Canadian consumer cannot constantly leverage themselves up, and so we had a pretty classic leverage-driven expansion in Canada that aids the banks,” Clark told investors at a Scotiabank Global Banking and Markets conference in September. “You’re going to see slower growth.”

Small-business clients are less satisfied with major financial institutions than consumer clients even as they visit a bank branch three times as often, said a study last month by J.D. Power & Associates.

The J.D. Power report, which surveyed 1,200 small-business owners in Canada between July and August, found that the average customer satisfaction score for a bank was 728 out of 1,000 compared with an average score of 753 for individual clients.

Less Satisfied

“They’re less satisfied than their retail counterparts,” said Jim Miller, senior director of banking at J.D. Power. “Based on the value of those relationship and the amount that they’re interacting with the bank, we would expect that their satisfaction should be equal or higher than we see with retail.”

Small-business clients will visit a bank branch an average of 33 times per year, Miller said, which means “banks have an opportunity because they should know these customers.” Companies with fewer than 50 employees are doing less business with banks including CIBC, National Bank of Canada and Royal Bank, said a 2010 study conducted by the Canadian Federation of Independent Business.

The federation study showed that CIBC lost 48 percent market share between 1989 and 2009 in the so-called small and medium enterprise market, with National Bank and Royal Bank also declining. Credit unions, on the other hand, increased that business by 96 percent.

CIBC has set up general managers and financial advisers just for small business, said David Williamson, CIBC group head of retail and business banking. “We’re performing and picking up market share,” he said in an interview with Bloomberg in Toronto today.

Angels and Dragons

Institutions including FirstOntario Credit Union of Hamilton, Ontario, say that they have a higher level of satisfaction with small-business clients.

“Banks aren’t even close to the levels of satisfaction” of credit unions, FirstOntario Chief Operating Officer Dave Schurman said in an interview at Bloomberg’s Toronto office.

Optimism among small and medium-sized business in Canada rose in September for the first time since March, according to the Canadian Federation of Independent Business.

Many startup companies are turning to so-called angel investors for their financing needs, said Jim Treliving, co-owner of Boston Pizza International Inc. and star of Canadian Broadcasting Corp.’s television programs ’Dragon’s Den’ and ’The Big Decision’.

“There’s a lot of entrepreneurs across Canada that are sitting there saying, ‘I’ll try the banks first and if that doesn’t work, I’ll go to these angel investors,’” Treliving said in a telephone interview. “There are people advertising saying, ‘I’m an investor.’ Five, seven years ago you never saw that.”

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