Financial Challenges

Chapter 16
How Canada’s Banks Stack Up in Terms of Cash1

In June 2002, the Bank of Nova Scotia listed its shares on the New York Stock Exchange, one of the last of Canada’s Big Six banks to do so. Over the past few years, Canada’s largest banks have become very eager acquirers of US-based financial services and assets as they look for opportunities for increased growth and diversification. Indeed, the banking industry in Canada is fairly competitive and hence Canada’s Big Six banks have been pressured by increased global market competition to diversify south. The United States’ far-larger population and relatively fragmented banking industry is very appealing as an area of potential growth.

In 1998, CIBC bought Oppenheimer & Co. for $525 million for an entry into mutual funds and full services brokerage. More recently, the Royal Bank of Canada picked up Barclays Bank’s $2.9 billion of private banking assets in the United States and Latin America. For these, and purchases made by other Canadian banks, cash has been the primary currency.

The table below shows the relative size of Canada’s six major banks as of June 2002 and in particular the size of cash holdings both in dollar value and as a percentage of total assets. It would appear that the Bank of Montreal, the Bank of Nova Scotia, and the National Bank of Canada were all maintaining relatively large cash balances as of that time, perhaps in anticipation of potential purchases of US and other international banking assets.

As we saw in the discussion of dividend policy (Chapter 14), one theory (i.e., the passive residual policy) suggests that if a firm has more funds than it needs for investments in its business, it should either pay out these funds as cash dividends to shareholders or use the funds to buy back its common shares from time to time. Rather than return these funds to its shareholders, Canada’s banks have been using their cash hoards for investment in US companies. In addition to buying entire companies, they have also been purchasing specific lines of business in the US financial services industry, buying their way into new markets and diversifying away risks associated with their domestic market. Whether these investments will be beneficial to the banks’ shareholders over the long term remains to be seen.

Based on A. Weinberg, “A Maple Leaf for Finance,” June 10, 2002, www.Forbes.com

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