Thursday, September 8, 2005

A New Framework for Canada/US Relations

In the banking industry specifically, we have a very strong industry with well-run companies that are not slow-growth-they are, in fact, fast growth companies.

And, at TD, we see great opportunities for more organic growth in Canada despite operating in a mature marketplace.

So we are not expanding outside Canada because we don't like what we have in Canada. On the contrary, it is our very success in Canada that has led us to look for opportunities outside. Each year, TD generates more capital than we can realistically invest in growth opportunities in Canada. While we have made some small and successful acquisitions, prospects are limited.

And while we do not see Canadian bank mergers happening anytime soon, that's not what's driving our U.S. strategy.

Basically when you have excess capital, you have two distinct choices. You can become, in effect, an income trust that gives the capital back to your shareholders in the form of dividends and share buybacks. This is a very certain way to increase your share price and return value to your shareholders in the short-run. But, in our view, it limits your options for future business growth and over time your shareholders suffer because the market values companies on the present value of future earnings. Companies that can grow earnings are worth more.

If we can find opportunities for our excess capital that deliver a good rate of return to our shareholders over the medium term and create optionality --opening up markets and opportunities we couldn't exploit if we stayed only in Canada --then reinvesting capital is the superior strategy. We have chosen the second path.

But if your choice is to redeploy capital then you must be sure that you can re-invest properly. When Canadian companies consider going abroad, it often makes people worry. While some Canadian companies have been successful in the US marketplace, others have not.

So in executing on our US strategies, we decided three things were important:

• we needed sufficient scale and size to be sustainable in the markets in which we choose to compete;
• we wanted to ensure that there were future opportunities to grow through acquisition
• we had to have the right US based management team with the right capabilities and a shared culture

It was the need to have sufficient scale and size and the desire to be able to finance future growth that led to the unique structures of our two deals. In both, we have taken an ownership stake rather than owning 100% of either. Both of these businesses are well-positioned for future growth and both operate in markets that are ripe for consolidation. In effect, we preferred less of a more sustainable entity because we view financial services as a scale game.

We also picked our spots where we could be scale players -- Northeastern United States for TD Banknorth and on-line brokerage for TD Ameritrade.

Both operate in businesses that we know well -- they are our core businesses in our Canadian marketplace.

That gives us great comfort that we know what we are doing and that we will add value to these enterprises. However, we have not been unrealistic about our ability to run these businesses in the very different US marketplace. That is what leads us to the third, and likely most important, criteria-we had to have the right US based management team.
In both of these transactions, the single most important factor was to find a proven, strong management team. We wanted a team with excellent operating skills and a track record of successful consolidation. One that shared our culture and strategic vision and could be given a mandate to run the company. Both Bill Ryan and his team from TD Banknorth and Joe Moglia and his team from Ameritrade are exactly what we were looking for.

You may be surprised that I emphasize culture-but culture is the key.
At TD, we have leadership values and they matter to us.
It is possible to run a company with strict controls and tight centralized decision-making. But to be successful we prefer strong management teams with real authority who are bound together by a shared paradigm and values.

Canada / US Relations
In many ways, as I said earlier, what TD is doing in the US is an example of the evolution that's taking place in the way Canadians are thinking about the United States. Given the increasing importance of the US to Canadian business, as Canadian business leaders, we need to understand that to Americans, all international relations- including Canada/US - are now being seen through a new framework.

The transformation in the US since September 11 has been profound. The security of all Americans has been tested and Americans are feeling vulnerable. The impact on Canada/US relations is not surprising-Americans are concerned about their safety --and when they look at things like the Canadian and US border they look at it through the framework of safety and security first.

The same transformation has simply not occurred in Canada. The twin towers were not on our soil. And although all Canadians mourned the tragedy of September 11, we cannot feel the same loss nor the same fear for our safety as Americans do. In thinking about Canada/US issues, we must keep front and centre the emotional transformation that has occurred in the US.

This may seem completely obvious to those of you who are Canadians living in the US and who live and breathe Canada/US relations every day. But frankly I think there is some work to be done to help all Canadians better understand the fundamental change that has happened in the United States-- and the impact it has had on Canada/US relations.

It is also clear that the US is feeling economically vulnerable.
They are faced with a large current account deficit, a weakening dollar, a rising challenge from outsourcing and a new economic giant in China.
Canadian economic relations are not front and centre -- and to the extent they are, they see Canada as enjoying the benefits of a large trade surplus with the US which last year reached $100 billion.

On the other hand, there has also been a fundamental change in the framework through which Canadians view the United States. While the US was always important to Canada, the Free Trade Agreement and NAFTA profoundly altered the psychology of Canada's relationship to the US. Canadians accepted a degree of economic integration. Trade took off.
Exports to the US now account for one quarter of our Gross Domestic Product. As Canadian companies shifted their focus, they increasingly saw the US, as well, as a place to invest.

Indeed in the early 1980s, prior to the Free Trade Agreement, Canadian direct investment in the U.S. was half what Americans directly invested in Canada. By the late 1990s Canadian direct investment in the U.S. had increased so that it was almost equal to U.S. investment in Canada.

Consider this in the context of the much larger US marketplace -- by investing almost equal amounts, Canada is investing 15% of its GDP in the US while the US is investing less than 2% of its GDP in Canada. If I looked at our commercial customer base in Canada, virtually all of those companies would now have a significant US strategy, certainly as exporters, but in many cases also as investors.

Because free trade has reframed the way we view Canada/US relations we assume that it carries the same importance for Americans. But as we know, Americans' preoccupation is not trade with Canada-it's with Asia.

Americans do not always understand the shift in our paradigm -the importance to Canadians of the border and trade with the US since the adoption of free trade. Nor do they always understand how devastating it is for us in Canada to be in trade disputes with the US that cannot be resolved -- despite clear agreements and procedures to do so.

Clearly, there is some work to be done in building a more effective relationship with the United States. This is not just the role of our governments and of our very accomplished representatives like Pamela and Frank McKenna. And we can't just foist it upon business leaders like many of you who are resident here. I know that you are instrumental in building great Canada/US relations. To many Americans you are the face of Canada. But those of us who have our home base in Canada and do business in the US need to step up too.

But how to do that?
I'm sure that the real benefit of this session of Pamela's today will be what we hear from you rather than from me. But let me at least kick it off. First, in my view, Canadians can do a better job of promoting what we have done to support the US. We need to talk about the troops we sent and still have in Afghanistan. This is a very significant Canadian military commitment. We need to talk about what we did to help out after September 11th.

We housed thousands of air travelers whose flights were blocked. We sent firefighters and police and rescue workers to New York to help with the aftermath. We need to talk about the supplies and rescue teams we have already sent to Louisiana and other affected areas in the south to help with the relief mission. And the fact that we have increased our oil and oil product exports to the help ease US shortages.

Why talk about these things? To make sure that Americans understand that we do support them where we can.

Regardless of how you think of Canada's choice not to go to war against Iraq, it was obviously a very important decision for both Canadians and Americans. To some Americans the Canadian position was hurtful. They felt we should support the US even if we disagreed with them. But we can't let that decision completely eclipse all the other ways that we support the United States. Nor can we stop looking for ways to continue to support the United States as they work to improve their security. Because Canadians too understand how important security issues are -- even if we didn't experience the full emotional impact of September 11.

The second area we can help is in recognizing the symbolic importance of things like defence expenditure to the US. The truth is that we have not done our fair share.
The Canadian government has made some great progress in the last few years in trying to catch up our defence spending which had fallen to an unacceptable level.
We have a way to go and we should recognize that as good partners we have an obligation to do so.

We would all agree that terrorism will not be fought only with traditional armed forces. Homeland security and intelligence are at least as important. These are areas where we can also expect Americans to call on us for help. And they are also areas where everyone -- British, Americans, Canadians - recognizes that they pose enormously difficult problems of how far to go without conflicting with fundamental human rights. But the fact that it raises difficult issues doesn't mean we should oppose security measures or appear to resist sensible improvements to what we currently do. No one wants Canada to be a haven for terrorists. We need to be more vocal in supporting security measures in Canada.

Nowhere is this more important than border issues. I hear all the time from our commercial clients about how critically important it is that there be a free flow of goods over the US border. If that traffic grinds to a halt so does their company. Our chief economist calculates we are losing $8 billion in Ontario alone because the border doesn't work. To keep the border crossing flowing smoothly-a business issue to us-our government leaders are dealing with a host of American security and defence issues. Obviously for government to move ahead they need the support of the Canadian people to address these issues. The business community can help to get the message out.

To me, the biggest risk I run in my remarks today is leaving you with the impression that I am arguing let's be Americanized. Or let's give in to whatever Americans want. Nothing could be further from the truth. As a Canadian, I am proud of the things that make us clearly Canadian. I am proud of the stand our government has taken to permit gays to be married in Canada. I am proud of Canada's social safety net and commitment to universal health coverage. There are distinct differences in Canada and we should preserve them. Nor do we need to give in where our economic interests differ.

But I also think that we must work very hard to ensure that the things that make us different from Americans-as important as those differences may be-do not distract us from the things we have in common. As in all great relationships-whether its brothers, spouses, best friends-we are not going to agree on everything. But that doesn't mean that we can't deal with our differences respectfully, find solutions that work and still have a strong supportive relationship. Key to that is always recognizing where the other side is coming from and the symbolic importance of certain issues.

When Canadian business leaders are in the US, they need to show that they "get it"-that the United States has been transformed by September 11-- and that the real economic issues for Americans are coming out of China and the rest of Asia and not Canada.

American leaders have some work to do as well-the recent events on softwood lumber show this is a two-way street. There are many Americans who, like us, are appalled by the position being taken on softwood lumber. They recognize that where a government sacrifices the broader interest for those of a special interest group, the larger community is hurt. These Americans need to be heard. The softwood lumber dispute is symbolic for Canadians. Many Canadians are evaluating whether NAFTA works or not based on how the softwood lumber issue is resolved.

So what am I really saying here? Clearly the United States matters to us. Many Canadian companies like TD are working to become North American players headquartered in Canada. And given the importance of the US to our business strategy, we need to work in conjunction with the Canadian government and with our great representatives like Pamela to make Canada/US relations work.

But we won't get far on any of the issues that are important to us if we ignore the paradigm shifts we have both experienced and that are at the heart of our relationship. Our role as business leaders is to understand them ourselves and help others on both sides of the border to understand them and the impact that they have. With each side better understanding the issues and concerns, we will reach better long-term solutions.

Thank you