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Bharat Masrani is betting on branches at a time when many others are questioning their value. He explains why an aggressive U.S. expansion strategy sill makes sense for Canadian-owned TD Bank.
June 1 -
As it expands its U.S. branches, Toronto-Dominion is hoping to sell more products to existing customers and to emulate its cross-selling success in its home country of Canada.
April 27 -
Toronto-Dominion will promote U.S. head Bharat Masrani to CEO once Ed Clark retires in late 2014. Organic growth and selective M&A — especially in the U.S. — will remain priorities during the lengthy transition period, the executives of the Canadian company said.
April 3
Think of Ed Clark as the anti-Mr. Burns.
The Simpsons' cartoon personification of corporate greed is a heartless boss with no sense of social responsibility, an antiquated approach to business and a trapdoor installed in the floor of his office the better to dismiss terrified underlings.
Clark, on the other hand, retired as chief executive of Toronto-Dominion Bank in November with the reputation of a gentle giant.
His coworkers say it was typical for Clark, 67, to enter board meetings balancing a grandchild on one hip over the course of his 12-year reign at TD the better to communicate his support for a work-life balance for the Canadian bank's 85,000 employees. A philanthropist dedicated to helping the homeless, he has repeatedly argued that he gets paid
And he's proven that CEOs need not be tyrants to transform their companies, propelling TD from a nonentity in the United States to the country's
"I will not put up with people who yell," Clark said during a visit to American Banker's New York office in November. "It's power abuse. It doesn't make a comfortable place for a lot of people."
What's more, a culture of anger puts the entire bank at risk, according to Clark.
"Who wants to bring the boss bad news if you're going to get yelled at?" he said. Leaders with a kill-the-messenger mentality "send a message all the way down the organization, and that's 'hide problems.'"
Clark's strict no-yell policy is typical of his morally uncompromising mindset. He says it is important for bank chiefs to act ethically even when it will hurt the bottom line as he believed would be the case when he pulled TD out of the
After becoming TD's CEO in 2002, Clark concluded that the business was too complex for most people to understand and too dangerous to continue. "People need to see that you've walked away from the company being able to make money because [an opportunity] wasn't the right thing to do," Clark said.
In this case, however, doing the right thing worked out in the long run. Although Clark initially took some flak for dropping the lucrative product, his decision wound up helping to shelter the bank from the worst of the financial crisis just three years later.
And while Clark is cautious when it comes to risk, he was by no means averse to it. He took a major leap by leading TD's charge into U.S. territory early in his tenure as CEO. Clark says he developed the bank's cross-border strategy the same way he made all his decisions: very carefully.
"It was hard to believe we could continue to outperform in Canada by the degree we were forever," Clark said of the thinking that informed TD's expansion into the U.S. "And Canada would not continuously outperform the U.S. We went to the board and said, 'We can take this money we're making and buy back shares and we'll look very good in four or five years, but we won't have built a growth path for 20 years.'"
"My chairman [John Thompson] said, 'Ed, we do not pay you this kind of money to just clip coupons and buy back stock,'" Clark recalled. "'You have to build this company so it can grow 20 or 30 years from now.'"
And so TD, one of the five largest banks in Canada, dipped into stateside waters in 2005 with the purchase of a 51% stake in Banknorth a $29 billion-asset New England lender headquartered in Portland, Maine.
"We were really afraid that when we crossed the border we would not have the risk-culture capability to survive in the U.S.," Clark said. "We thought, 'Whoa, we're going to the Wild West here, we have to find people who look like us.'"
TD wanted to merge with a bank that operated "as a Canadian would [run it] if they had lived in the U.S. for 30 years," Clark said. Banknorth's conservative lending practices made it a comfortable fit. What sealed the deal was his impression of Banknorth Chief Executive William Ryan, who impressed Clark as "a man of principle."
The other acquisition that set the tone for TD's U.S. operation was its 2008 purchase of Commerce Bank, a regional lender in Cherry Hill, N.J., known for its extended weekday and weekend branch hours. Commerce appealed to TD because it would allow the bank to marry its conservative risk culture with a customer-focused approach, according to Clark.
"Most banks sit around and say, 'Why don't we do this product and make a lot of money,' and they hope to convince the customer that's what they want, instead of going out and asking the customer, 'What would you like?'" Clark says. "Commerce got that."
TD's buying streak continued for a total of 11 acquisitions, including the purchases of
Analysts generally agree that taking the plunge into the U.S. has worked out for the $814 billion-asset TD. Between 2005 and 2014, its average deposits (excluding the TD Ameritrade brokerage arm) shot up from $22 billion to $124 billon, at a compound annual growth rate of 10% over the last four years. Today TD is the country's 8th-largest bank holding company by deposits and 10th-largest by branches, according to the Federal Deposit Insurance Corp.
"Given that Canadian banks can't really buy each other up" because there are only a handful of large institutions in the country, "going into the U.S. and a similar growth market in terms of the overall economy has been a good move for TD," said Dan Werner, an analyst at Morningstar. "They've made acquisitions similar to what they did and wanted to be in Canada, which is the premier retail type of bank."
To be sure, while TD's stateside growth is striking, its returns in the U.S. have tended to hover below industry average. TD's U.S. bank posted a 0.54% return on assets in the third quarter, Clark's last full quarter as CEO, according to data from the FDIC. By comparison, all U.S. banks above the $15 billion-asset threshold had an average 1.02% ROA during the same period, according to data from the Federal Reserve Bank of St. Louis. TD's 4.13% return on equity in the third quarter also trailed the average 9.02% ROE for its competitors above the $15 billion mark.
"If there's a hair in the ointment, I think that's probably it," Werner said. TD's strategy of gaining a toehold in the Northeast and then growing organically has put a drag on returns, he said, while regulatory costs and the low-interest-rate environment have been a challenge for all retail banks.
Clark agreed that those factors have posed a challenge for TD.
"In one sense you can say, everything that could go wrong went wrong" when it came to the timing of TD's entrance into the U.S., Clark said.
"We modeled a recession; we did not model the greatest financial crisis since the Great Depression," he said. "We didn't do subprime lending every egregious thing banks did, we did not do. But at same time we faced the same regulatory assault as banks that did all that."
"Still, we're not far off from where we thought our original ROEs would be," Clark said. "We hadn't anticipated how badly placed a lot of the American banks were going to be and how much market share was available for the taking." The bank managed to survive the downturn without sustaining a single quarterly loss.
"But certainly if we had known all the disasters [in advance], I'm not sure anyone would have been brave enough to go into the U.S., because you wouldn't have had confidence that you could have adapted to it," Clark said.
Now that TD has established itself in the U.S., its new CEO Bharat Masrani
Clark added that while TD may not be on the hunt for mergers, it will remain on the lookout for potential partnerships.
"Because we have more deposits than we have assets, we're still looking to find assets that we can buy, or businesses," Clark said.
TD's target deals would be ones in which their partners "have the ability to originate, and we have the ability to manage credit card portfolios," he said. "That sort of deal is highly appealing because you can keep filling in your balance sheet with higher-ROE assets."
Meanwhile, Clark is already at work on the next chapter of his own career. He's accepted a temporary stint offering Canada's interior government advice about whether to sell or hold a number of state-owned companies.
The project marks a return to Clark's public-sector roots. After completing a doctorate in economics at Harvard University in 1974, Clark spent a decade working for the Canadian government before making the switch to finance with a job at Merrill Lynch. He eventually joined Canada Trust in 1991 and rose through the ranks to become head of the bank in 1994, overseeing its acquisition by TD six years later.
Clark's longer-term game plan remains flexible, but he says his philanthropic efforts will occupy much of his attention. His interest lies "not just in writing the checks," he said, but in exploring "how you can use philanthropy in the social area to deal with some of big problems in modern society."
With a view toward that goal, Clark and his wife, Fran, donated almost $3 million to help launch
"It tends to be that shelters are homophobic and not safe places for LGBTQ youth," Clark explained.
While Clark has long been a staunch advocate for gay rights, he says he wasn't always aware of the extent of the prejudices faced by this community. Back in 1994, Clark introduced same-sex benefits at Canada Trust. After the bank was acquired by TD in 2000, he asked how many people at the combined company were claiming the benefits.
"We had about 55,000 employees at the time, and they said 50," Clark said. "So it struck me the math means we're running a homophobic organization. People were afraid to tell us they have a same-sex partner, and they were willing to give up benefits because they feared what would happen to them."
It was then that Clark realized TD had "a deep culture problem," he said. "I stood up in a meeting and said, 'This is going to be my No.1 personal priority.'"
That announcement paved the way for TD's current
"This is about trying to make an atmosphere where people are comfortable being themselves," Clark said of his efforts to shape an accepting environment at TD. "We have made enormous progress but we can do better."
"People shouldn't have to adapt to me," Clark said. "I should be adapting to them, trying to understand them and walk in their shoes."
According to Clark's TD colleagues, he has a knack for making people feel at home. At TD's employee-recognition events, Clark would get onstage and "dance or sing in a funny way in order to make people feel comfortable and let them know he's a real guy," said Teri Currie, TD's group head of direct channels, marketing, corporate shared services and people strategies.
And when a group of first-grade students sent Clark a thank you note for donating books as part of a nationwide TD program, Clark responded with his trademark warmth.
"We're supposed to do some big meeting, and he's like, 'Norie, I'll go in my office and everybody can stand around the desk'" to pose for a photo. That way, he said, the students "'can see what we look like, too!'"
In his final speech as TD's CEO, Clark quipped that he has been "
"To build great people, you have to take chances on them, have their back and recognize that they may stumble, but that shouldn't be career-ending," he said. "Your job is to help them through."
As might be expected of a man whose colleagues nicknamed him "the professor," Clark took his mentoring duties seriously at TD right down to teaching impromptu lessons in finance.
"My background's in law and more of an arts background, and Ed's a serious math and economics guy," Campbell said. Clark made a point of teaching her about the ins and outs of banking when she worked as his special assistant.
Once, Campbell recalled, "he said to me, 'Do you know what negative convexity is? I'm going to teach you.' He did, too."
Among the biggest lessons of Clark's career, in his own estimation, is that bankers can grow their companies while refusing to fall prey to what he calls the "greed culture."
"Your job is not to get up and say, 'How can I personally be richer tomorrow than I was yesterday?'" he said.
"As a leader, I've got a duty to my shareholders to deliver decent returns, but also to society to do the right thing, and to employees to create a culture where they can say, 'I love working here; this is a great place to work,'" Clark continued. "You can't have one stakeholder dominate all the others. You get paid to come to that balance."
