Banking On America

How TD Bank Rose to the Top and Took on the U.S.A.

Howard Green

• Publisher: HarperCollins Publishers
• Year: 2013
• Print ISBN: 9781443407779
• eBook ISBN: 9781443407786
• Topic: Business
• Subtopic: Business General
• Index: Business

Since its beginning, when its predecessor, the Bank of Toronto, was founded by a group of flour millers and grain dealers, TD Bank has evolved into one of the most proactive financial institutions on the planet. Today, it is a cross-border colossus. The bank's expansion into the United States could yet prove to be one of its most successful ventures, with the familiar TD logo and its green background lighting up buildings in Manhattan and other major American cities. The bank is also the largest shareholder of TD Ameritrade, a company that does more daily trades than any other online brokerage in the world, and the bank itself now has over 1,300 branches in the States—more than it has in Canada—even as other institutions continue to close in the face of the financial crisis.

Howard Green, Canada's best-known interviewer of business notables, brings this Canadian bank to life through the people who have built it into a money-spinning machine that now generates some $19 million a day in profit. From the times of former executive Keith Gray, who kept a revolver on his desk in the rural Ontario branches of the 1950s, to today's CEO, Ed Clark, who oversees 85,000 employees, 22 million customers and more than three-quarters of a trillion dollars in assets, this iconic Canadian company has outshone its American counterparts and is now taking over their world.

1
ED’S ON THE TUBE AGAIN
Selling TD in the U.S.

Not only is he on American TV again, for an hour after the closing bell of equity trading in New York, Ed Clark is co-hosting—yes, co-hosting—on the business channel CNBC with none other than the “Money Honey,” Maria Bartiromo. With her cat’s eyes and full lips, Bartiromo conjures up a fortyish Sophia Loren. Clark, who at the time is sixty-three, lanky and with a face that’s both boyish and pleasantly nerdy, looks slightly uncomfortable, unusual for a person so bursting with confidence. He later described the experience of being Bartiromo’s co-pilot as “terrifying” but fun.² This CEO is apparently willing to endure a bit of terror. He is regularly found flogging his bank’s story in the United States (often repeating the same lines), where TD now has more branches than in Canada.

Going on Bartiromo’s show is a way of getting in the face of Americans. It’s also a way to win the hearts and minds of Clark’s approximately 27,000 employees in the United States, close to a third of the bank’s total. As Clark puts it, his American staffers can look up at the TV and proudly say, “There’s my guy.” It’s a way of giving market and street cred to a bank that’s trying to beat the Yanks at their own game.

Clark has his rap down cold for his U.S. audience. “You put us on a corner, where there are three other banks, and when people find out we’re open longer, have better service, roll their pennies for free, and have treats for their dogs, they’ll come to TD and we’ll take market share.”³

He repeats his shtick over and over again, wherever and whenever he can. For someone who says he sometimes has trouble with words, Clark is second to none as a communicator. This is a deep-thinking, strategically precise intellectual who would seem equally at home telling people why they should buy a Veg-O-Matic on the boardwalk at Coney Island. Described as someone who plays chess in 3-D, Clark may be a Harvard PhD, but he is also a salesman, and he is pitching to America like you wouldn’t believe. So much so that TD now has just over 1,300 branches in the United States versus 1,150 in Canada—and it only started buying retail banks in the U.S. in 2005, investing some $19 billion USD to gain the critical mass it believes is necessary to be a player on American soil.

In just a handful of years during Clark’s tenure, TD has barged across the border and planted itself toe-to-toe with enormous and legendary American banks like JPMorgan Chase, Bank of America and Wells Fargo. Clark started in sleepy New England and then crept into the outskirts of Manhattan. Through some lucky timing, in late 2007, just as the financial world was going on red alert, Clark pounced on a bank with a cult-like focus on customers called Commerce Bank. TD suddenly had branches in New York City and its metropolitan area, a market that has roughly the deposit base of all of Canada. In a brazen move, to show New Yorkers it wasn’t just some hick bank, TD did what’s known in advertising as a “takeover.” It bought every inch of ad space in the iconic Grand Central Station, including the umbrellas on the hot dog stands outside, blanketing the joint in TD’s colour, which is green for money.* Its goal is to move from being the number five bank in Manhattan to number three by 2015. It’s a slight exaggeration, but one top financial sector observer has said that there are now as many TD branches in New York as there are Starbucks.

Clark’s opportunistic purchase of Commerce also gave TD a hub in New Jersey, Philadelphia and Washington, and a toehold in Florida. The 2008–09 financial crisis would challenge bankers like Ed Clark as they’d never been challenged before, but the turmoil would also present him with other pigeons he could pick off to build his flock of banks in the U.S. Looking at a map might make you think TD is the “I-95 Bank,” its branches roughly tracking the famed interstate that runs down the eastern seaboard.

It didn’t hurt that Canadian banks did not implode during the financial crisis like their brethren in the U.S. or the U.K. Believe it or not, staid Canadian bankers are now the rock stars of the global banking club. Their banks did not engage in the loose lending and hanky-panky that destroyed banks in the U.S. and forced its government to bail out the economy and financial system. Canada’s banks, long considered big and boring, have proved that boring is what you want in a bank. They make gobs of money and in September of 2012 were named the soundest on earth by the World Economic Forum for the fifth year in a row. Since the crisis, these dullards of finance have had the world’s attention.

During the crisis, although its stock was halved and it sold new shares to the public to shore up its bunker of protective capital, TD still earned $3.8 billion during the worst year of the meltdown. This strength allowed it to take advantage of opportunities that arose because others found themselves in precarious states.

TD, it should be said, sits in an exclusive club. There are really only six Canadian banks of note:^† Royal Bank of Canada (RBC), Toronto-Dominion (TD), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC) and National Bank. They are known as the Big Six and each has hundreds of billions in assets, although National is concentrated in Quebec and is considerably smaller than the other five. Critics will jump at the chance to say that Canada’s banks enjoy an oligopoly, which is true, but they omit that the same is true in countries like Australia and France. In contrast, the U.S. has 7,300 banks, from community banks with just a few branches and mere millions in assets, to JPMorgan Chase with more than $2 trillion.^‡

Canada’s banks, with a limited market of 34 million people, have looked longingly at the gigantic yet fragmented market south of the border. Restricted from merging in Canada, they need to find other places to do deals and grow earnings to satisfy the one-half of Canadians who, directly or indirectly, through mutual funds or pension funds, own their shares and rely on their quarterly dividends. The most obvious target of the bankers’ lust has been the United States. While far from a fatal attraction, this obsession with expanding into the U.S. has not been without its difficulties.

From Maine to Florida, TD is suddenly everywhere, with a forceful presence in moneyed counties and major cities like Boston, New York, Philadelphia and Washington, and throughout Florida.

Americans could be forgiven for wondering just who these TD people are. On June 13, 2011, it was game six of the Stanley Cup final between the Vancouver Canucks and the Boston Bruins. Vancouver was ahead in the series three games to two. This could have been the Canucks’ night. But they were playing on the Bruins’ home ice, which was no longer called Boston Garden, but rather TD Garden. Every time the director cut to a shot of the Canucks’ bench, viewers got a look at repeating TD logos. When the players fought for the puck along the boards, there was the TD logo. It also stared back from under the ice. Ultimately, the Canucks lost and Boston went on to win the Stanley Cup. Although no Canadian team has won the NHL championship in nearly two decades, the winning team was playing in an arena named for a Canadian bank. Clark enjoyed imagining that other Canadian bank CEOs were watching the game, grinding their teeth every time the TD shield appeared.

In a story that’s now legendary among the brass of the bank and a favourite of Ed Clark’s, a few years ago TD held its annual general meeting in Saint John, New Brunswick. One of the top executives was out on the street when a group of American tourists from a visiting cruise ship walked past and one noticed a TD branch on Canadian soil. “Hey, guys,” the tourist said, “they’ve got TD up here too!”

It wasn’t always thus. After a merger of The Bank of Toronto and The Dominion Bank in 1955, Toronto-Dominion, or TD, as it was now called, was for decades stuck as Canada’s fifth-largest bank. It was known to be well run, with specialties in certain areas, such as its discount brokerage, and was the number one lender in the world to the cable television industry, funding entrepreneurs like Ted Rogers. But TD wasn’t climbing in the rankings versus its four main competitors in Canada.

TD had tried foreign adventures a few times. In the early 1960s, the bank opened talks with David Rockefeller, grandson of the legendary John D. Rockefeller. David was CEO of Chase Manhattan Bank and had engaged in conversations with TD’s boss at the time, Allen Lambert, about some sort of stake in each other’s enterprise. According to Lambert’s assistant, future CEO Dick Thomson, Rockefeller secretly wanted to buy TD but was thwarted by the government of Prime Minister Lester Pearson. In the early 1970s, TD bought a few bank branches in ritzy neighbourhoods in California, but the experiment didn’t work. The operation was too small to make inroads and TD finally sold the unit in California to the Japanese in 1983. Bizarrely, TD even once had branches in Lebanon. In the mid-70s, someone (the bank suspects it was an employee) fired a bazooka into the vault of one of the branches in Beirut, destroying it. Two other branches in Lebanon were also obliterated, ending that chapter in the bank’s history.

As the century ended and a new one started, the transformation began. TD bought Canada Trust, a company that set the standard for customer service, showing up the stodgy and crusty banks with its underdog gimmicks. Along with that purchase, TD got Ed Clark, an unbanker-like CEO if there ever was one. After establishing himself as boss and refocusing the bank on retail, rather than fancy financial products and corporate lending, Clark embarked on a fearless U.S. buying spree.

When Clark took over from Charlie Baillie at the end of 2002, TD’s assets stood at $278 billion. By the end of the third quarter of 2012, they were $806 billion, second only to Canada’s largest bank and company, Royal Bank, and placing TD as the sixth-largest bank in North America (by assets, deposits and market value) and the only bank traded on the New York Stock Exchange with a triple-A credit rating from Moody’s. Although Royal Bank has a higher market value, TD continues to gather assets at a faster clip. As of the end of the third quarter of 2012, RBC had just $18 billion more assets than TD ($824 billion versus TD’s $806 billion). As for profitability, TD earned upwards of a billion dollars more than Royal in 2011 and now has more branches than RBC.

Ed Clark is an outlier because he wasn’t always a banker. There was a time when those who ended up at the top of financial institutions like TD were lifers who’d started as tellers. Some still are, but Clark didn’t take that route. He was a scholar who ended up with a notorious and controversial history in government before being tossed aside and landing in the financial industry.

In the 1970s, Ed Clark graduated from Harvard with a PhD in economics and eschewed the family tradition of heading into academia. Even though he was offered professorships at both Harvard and Stanford upon graduation, he blew them off, likely to the chagrin of his father, who was a leading academic, having founded the sociology department at the University of Toronto. Instead, William Edmund Clark went to work as a civil servant in Ottawa, the furthest thing from being a banker.

Arriving in 1947, Clark was born into the second year of the baby boomer era. He was sixteen when the Beatles appeared on Ed Sullivan—a child of the change-the-world-for-the-better-generation. Like many brainy kids at that time, he wanted to work for the government of Pierre Trudeau, which had an activist bent. Clark is one of the rare few to have been honoured as both Civil Servant of the Year and CEO of the Year. During his time in the Department of Energy, Clark wrote what came to be called the National Energy Program (NEP).

In the aftermath of the global oil shocks of the 1970s, the thrust of the NEP was threefold: to tax the sector more heavily so Ottawa could get what it considered a fair share of revenues, to achieve a greater degree of Canadian ownership of the industry and to protect the consumer from the impact of high oil prices. Westerners were appalled because they considered oil and gas their resource, not Ottawa’s. Clark was dubbed “Red Ed” by the oil patch. It didn’t help that he had written his doctoral thesis about the socialist regime in Tanzania.⁴

So how did this guy become CEO of the best-run bank in Canada, the country with the best-run banks in the world, and also one of the most powerful bankers in the United States of America? Ed Clark recounts a scene from an annual banking event in 2010, a CEO-fest he attended with the likes of Jamie Dimon of JPMorgan and John Stumpf of Wells Fargo. Amidst the wreckage of U.S. banking, these two were relative standouts. Clark burbles with delight as he describes running into Dimon and Stumpf: “They bow down and say, ‘The triple-A bank is here.’ Four years ago, it would have been ‘What do you do? Who are you?’”

Clark says that most Canadian businesses have two approaches to breaking into the U.S. market: either they don’t have the guts to do it or they go down there and blow their brains out trying. TD, so far, doesn’t fall into either camp. It’s made the leap and isn’t losing money having done so.

Given the shipwrecks of Canadian businesses that have tried to sail into the American market, how did a Canadian bank manage to pull it off? In June 2011, Royal Bank was the most recent casualty in the long list of Canadian companies that have tried their luck in the U.S. After spending billions over a ten-year period, RBC finally cried uncle and sold its retail banking business in the U.S. to PNC Financial Services Group Inc. of Pittsburgh for $3.62 billion USD. It was a loss for Royal, but at least the division wouldn’t be a ball and chain anymore and it wouldn’t have to answer recurring and irritating questions from analysts, investors and the media. What is it about the United States? Even a company like Tim Hortons that has made its fortune on donuts and coffee can’t seem to make its simple formula work down south.

A cartoon that appeared in the New Yorker a few years back sums up the subtle differences between Canadians and Americans. It shows a man and woman out at dinner, leaning in over their meals. One says to the other, “You seem familiar, yet somehow strange—are you by any chance Canadian?”⁵ While we share great similarities, there are also significant differences, and TD must cater to each one depending in which country it’s operating.

It has been one of the great misapprehensions—that Canadians are just like Americans and vice versa. While we are allies and exuberant trading partners and friends, we are not the same. We may look alike, share tastes in movies, music and sports, drive similar cars and spend our winter holidays in the same places. Arguably Americans are more enthusiastic, more entrepreneurial, more gregarious and more socially conservative than Canadians, who are perceived as more standoffish, less flashy, more cautious and deferential to authority. You won’t find a drive-thru daiquiri bar in Ontario as you will in Louisiana. Some might say that Canadians are changing to become more like Americans as the country has become more confident, more patriotic, more willing to compete on the world stage economically and culturally.

Still, there are many cleavages in our national personalities. As a result, a Canadian firm looking to attract U.S. consumers requires an in-depth understanding of the psychology of Americans. Slapping your shingle on a few locations and thinking that the market, which is ten times larger than Canada’s, will suddenly flock to your door is delusional. Canadian Tire (twice), Mark’s Work Wearhouse, Danier Leather, Future Shop, Jean Coutu, Shoppers Drug Mart, Tim Hortons and RBC have all learned this lesson the hard way.

What did these companies miss? Larry Stevenson, who was CEO of the Canadian bookstore chain Chapters and then held the same position at the U.S automotive repair chain Pep Boys, says that it’s very different for U.S. companies coming to compete in Canada than the other way around. For U.S. companies, adding Canada is like adding California. While a big addition, it’s not akin to betting the company. As well, when a major U.S. chain moves into Canada, Canadians are already aware of the brand. Every Canadian knew Walmart before it arrived. Everyone knew Home Depot. The next big incursion will be by clothing retailer Target, familiar to many cross-border shoppers. Canadian customers and retailers here have been anticipating the chain’s arrival for five years.⁶ In contrast, when a Canadian retailer or a Canadian bank heads south, there is no instant brand awareness. As well, U.S. retailers are huge and used to lots of competition. Canadian companies are not used to as much pushback, and many have tried to enter the American market with just a few stores—not enough to fend off rivals.

Keith Howlett, a highly regarded retail and consumer products analyst who works with Desjardins Securities, says it’s hard to find a profitable franchise chain in the United States with fewer than 500 stores. Howlett gets wound up about cross-border retail. He says that the home improvement chain Lowe’s, which entered the Canadian market in 2007, had racked up cumulative losses of $300 million by mid-2011, yet during the company’s quarterly conference calls none of the analysts who covered the stock even asked about it. “They can absorb this. They can sustain that type of loss over four years without everyone shouting and screaming, ‘You have to stop this!’ Lowe’s is [losing] $300 million and no one asks them anything. Whereas Mark’s [Work Wearhouse] with two or three [U.S.] stores is getting pummelled.”

On the issue of competition, Howlett says U.S. retailers are used to doing molecular research when they enter a new market like Canada, whereas Canadian retailers traditionally have not done the same level of analysis when entering the U.S. At the same time, he is critical of Canadian investors who hammer the nation’s companies for their overseas ventures. “Canadian investors are really nervous Nellies” on foreign investments, he says. “It’s just reflexive; if they hear about a company going to the U.S., they remember all the errors.”

Lululemon Athletica has been a recent success story. The yoga-wear retailer caught the wave of popularity around yoga, taking something that had all the sizzle of a self-righteous health food store and turning it into a fashion statement. “They really understand their business and they have a really distinctive consumer proposition. Lululemon, it’s such a beautifully branded message,” says Howlett.

The fact remains that there have been a lot of U.S. misadventures. Experienced observers put Canadians’ success ratio at about one in ten. In the case of...

Table of contents

• Cover
• Title Page
• Dedication
• Contents
• Introduction
• 1. Ed’s on the Tube Again
• 2. Poor Boy Dropout
• 3. The Bomb Threat
• 4. Building a Business Inside (or Outside) the Bank
• 5. Hunting Larry Waterhouse
• 6. Unlikely Bank Boss
• 7. Buying Canada Trust, Getting Ed Clark
• 8. Obsessed with the U.S. of A
• 9. TD’s Budding U.S. Empire
• 10. Avoiding Subprime
• 11. The $8.5 Billion Wounded Duck
• 12. They’re Not Branches, They’re Stores!
• 13. The Most Trades in the World
• 14. TD University
• 15. Ed’s Personal Shoppers
• 16. And Car Loans Too
• 17. The Era of Ed
• Epilogue: Keith Gray’s Moment
• Bibliography
• Acknowledgements
• About the Author
• Timeline
• Copyright
• About the Publisher
• Endnotes