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"Remarks at the Calgary Chamber of Commerce"

Speech at the Calgary Chamber of Commerce
November 4, 2009
Written by Ed Clark.

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It is great to be in Calgary. Lots of people won’t know but on a personal note, the Clark family has deep ties to this province. My grandfather homesteaded in Lloydminster, that’s where my father grew up and I have many cousins who still live there. So it’s always great for me to get a chance to come back to Alberta.

As indicated, I’m going to focus my remarks today on the global economy, where I think it’s headed and the implications of that for Canada.

But due to the little controversy that has arisen in the last week about a report that was published that TD Economics helped fund, I thought it would be useful if I commented on that as well.

Now, this report had the aim to clarify the economic impact of different greenhouse gas emissions targets, not only from a national perspective in terms of Canada as a whole, but also from a regional and sectoral perspective. And it did generate a lot of attention and, in some places, I think a lot of criticism—serious criticism.

Normally, I don’t actually comment on reports of TD Economics. We have a rule in the bank that I don’t see the reports before they come out. I don’t exercise any editorial comment. And, in this case, as I mentioned, TD Economics’ role was not actually to write the report but to provide the financing for it. But given that some of the comments, at least from my point of view, seemed quite different from what I think the implication of the report is, I think it’s useful for me to make some comments and perhaps set the record straight.

So let me go back over what the report was intended to accomplish and why we were persuaded to fund it in the first place.

I think you have to start with the fact that for Canada, its resource industries are unbelievably important. They give us, in my view, an enormous global competitive advantage and in everything we do in Canada we have to stop and say, “What’s going to be the implication for this industry and then are we going to sustain this competitive advantage in doing this?”

Now, as countries around the world are debating issues like the environment and the related energy issues, it’s important that Canada maintain its leadership position.

But Canada’s debate, in my view, on emission reduction has taken place a comprehensive understanding of what the economic impact might be, or who will actually be affected.

And so our objective in helping to fund the report was to try to fill this gap. So what did the report do? Well, it took a look at one possible combination of measures that Canada could deploy to achieve the government’s proposed emission target, as well as a deeper target advocated by environmentalists groups. And our funding was particularly directed towards building out the provincial models so that we could understand for the first time what the implications of some of the proposals are at the provincial level.

In my view, the findings are quite clear: there would be a very significant economic cost to achieve either target; the cost of achieving higher targets obviously go up significantly. And these costs would be borne disproportionately by Alberta and Saskatchewan.

Now, we were quite surprised at the reaction to the report because in fact, many people have drawn conclusions that are quite different from the ones that we thought they would take from this.

Much of the media has focused on the devastating economic impact in Western Canada. In many cases, the report’s findings have presented as an inevitable outcome in reducing greenhouse gas emissions; that it would be a fait accompli.

I take quite a different view. I don’t believe it’s acceptable to implement environmental policies that would place a huge burden on one or two provinces given the potential economic impact that’s been identified in this report. Indeed, I believe that the contribution of the report is that it highlights the very danger that concerns many people.

Clearly this is an issue that matters to Canada. Whether you agree or not, the worldwide movement to do something about managing emissions is gaining momentum. People around the world are worried about the global economic, environmental and social costs of doing nothing. So at a very least, it’s going to be hard for Canada to sit on top of North America and do nothing, particularly if the United States chooses to act.

But I think as Canadians we have to step back and say, “We’re a very different country.” We’re a producer of much needed primary products, which in turn produce C02. And maybe we can produce, as a country, less C02—but realistically our exports will always have a higher C02 content than most nations.

Developing our oil and gas supplies in a consistent way can make a huge difference to improving the geopolitical stability of the world through lessening U.S. dependence on Middle East oil. So, should that mean that other countries get our resources, and Canadians—and especially Albertans—bear the burden alone of reducing the resulting C02 emissions?

I don’t think so. We cannot ask the West to provide the world the resources it needs and absorb all the costs of doing so. This report brings these issues to the fore and challenges us to find better answers.

And as we look ahead, we need to debate the fundamental issues, and in particular, how we can make sure Alberta and Saskatchewan are not penalized?

Good policymaking is not about creating a set of winners and losers. It’s about building a better way forward. So let’s use this opportunity of giving us all the facts to try to do just that.

I’d now like to turn to what was going to be my original focus of my remarks. And I know the economy is on a lot of people’s minds, and hopefully I think there’s some signs that we’ve begun to turn the corner, there’s a significant debate going on about what’s going to happen next, in the next three or four years?

So I’d like to share my perspective on that. I have to tell you, it won’t include any more new information on the TD Bank. We’re in a quiet period now. We’re about to announce our earnings in a few weeks, so none of my comments will give you new information about where the bank is.

When you look back the last two years, it is unbelievable how scary and dramatic the events were in the middle of the financial crisis. And I think sitting here in Canada with the current stock market rally and the continuing boom in the housing market, I think there is a risk that Canadians underestimate the continued economic difficulties in the United States.

Let me try to give you some perspective on that.

The United States has clearly had a much more severe housing crisis than Canada. Housing prices south of the border have fallen about 30%, whereas in Canada we’ve had very mild drops in our prices. When you really begin to understand how shocking the effects of that in the United States are, look at foreclosure rates. In Canada, we will foreclose about 10,000 in a single year. Now gross that up—that would be 100,000, ten times the size for the United States.

In the United States, right now, 6,600 foreclosures are going on every single day! So far this year there have been more than 2 million foreclosures in this year and the pace is continuing at that rate. It is unbelievable, the effect that that is having in societal and human terms, as well as economic terms.

The result of these losses—plus the fall off in the stock market—is that Americans, as consumers, have lost $12 trillion of net worth since the middle of 2007. Now that’s about five years of their wealth accumulation in the period from 2002 to 2007 but it’s also important to understand that the growth that occurred between 2002 and 2007 was financed by borrowing from that $12 trillion that is now all disappeared, and the loans still owing. And so you’ve had a tremendous withdrawal of the support to the consumer sector in the United States.

So even though the United States has technically emerged from the recession, there’s still an enormous amount of pain to work through. And it is unrealistic to expect the U.S. consumer to lead the recovery without continued government stimulus.

Instead, the United States is going to need an export-led recovery if it is going to continue to post sustainable growth in the next two years.

But that leads to another more fundamental problem: that’s not how the world’s global economy has been hardwired.

You step back again, and in the last 60 years the U.S. dollar has acted, in effect, as a global currency. It functions a bit like a central bank: as the U.S. money supply expands, it finances, in a sense, expansion in the global economy. So, practically speaking, every country in the world has a vested interest in the U.S. running large deficits.

At the same time, most other countries in the world wanted to try to run surpluses. If you don’t have a reserve currency, there’s a huge risk as a country of being tagged with having financial difficulties or a deficit. You only have to look at the Asian or Latin American financial crises to see the effects if you get caught on the wrong side of that. They destabilize the local economies and the political systems.

So the whole world ended up building itself around a growth model that encourages the United States to consume more than it produces, and that’s what running a deficit is, and everybody else to produce more than they consume.

Unfortunately, that system has now run its course and it’s going to have to change.

But that change is no easy feat. We have to, in effect, turn the current world growth model on its head and that’s going to have huge economic implications, and there are going to be lots of transition issues.

For emerging countries like China, it means producing more goods for their market and less for the United States. But it also means that their government must continue with the large fiscal stimulus program and be prepared to allow their currency to float upwards.

In fact, China has done a lot of things in re-implementing very massive stimulus programs, building out infrastructure investments that will help to modernize their economy, improve their productivity and at the same time, create domestic demand.

However, China and a whole set of countries that are associated with it, has been reluctant to allow their currency to rise which, in turn, places even more pressure on the other currencies around the world for them to rise—which makes it much more difficult for countries like Canada to make its own adjustment to this new growth model. Indeed, the Chinese currency has actually devalued relative to the Canadian dollar, which in terms of cost and productivity makes no sense at all.

So, having said all this, the bottom line is that we should not expect the kind of recovery that historically you would see coming out of this economic downturn.

This shift in global growth models is going to have important implications for Canada.

The tepid growth rate of our largest trading partner means that industries that are oriented to the United States will be facing both currency pressures and weaker demand, and this will, in turn, put pressure on them to significantly improve their productivity.

So, if there’s a general message for Canada, it’s this: a rising currency is actually a good thing, but it is only a good thing as long as your productivity can grow along with it. But that’s where the bad news is. We all know that Canada has had a hard productivity challenge. We don’t do well in this area. And so we are going to have to put even greater focus on addressing this fundamental challenge for an economy.

And the shift in the world economies to more domestic growth in Asia can, on the other side, be positive for certain regions in Canada. Energy demand is going to be in demand. These areas that are commodity-deficient are becoming the new centres of growth, and that certainly bodes well for Alberta.

So I remain quite optimistic about Canada as long as you are realistic about the kind of adjustments that you’re going to have to make.

I think some of the things that we can be proud of that we have here is that we actually do have, today, a pretty competitive tax system. I know all of us complain about the tax system and how complicated it is and how it doesn’t work until you step outside Canada and see what’s out there. By lowering our corporate tax rates and, for the most part, having no capital tax, our country today is well positioned to attract new investments and jobs and what’s more, the introduction of the Harmonized Sales Tax in British Columbia and Ontario is a major, major step that’s going to reduce business costs, lower consumer prices and enhance the competitive position of those two provinces.

Another very topical thing is health care and the health care system, which both provide us a competitive advantage. We are truly blessed to live in a country where everyone has coverage.

But Canada is not immune to the general health care dilemma that all countries are now facing. Our population is aging at the same time as more medical treatments are becoming available.

Health care now accounts for about 45% on average of provincial government spending and it continues to grow more rapidly than any other category. Eventually, in this country, we are going to have to have the courage to have a real debate about how Canada can both preserve the fundamental principle of universality, at the same time, figuring out how we’re going to restrain these types of annual cost increases.

A third advantage, and this will sound self-serving I know, has been, in the last few years, definitely our banking system. It had actually got Canada through the economic downturn in much better shape than it would have had if it had a different banking system.

Now let me talk a little bit about that. There are two significant benefits that I think has come away from the Canadian banking system. The first is that the federal government, and this is unique around the world, did not have to use a dollar of government money to bailout a bank. And the implication of that is that the Canadian government, its fiscal capacity stayed in place, in order, and it was in position to help the average Canadian get through this tough time.

And second, because Canadian banks were able to stay strong, we were able to continue to lend to customers and businesses throughout the crisis. Indeed, when you travel around the world, one of the great untold stories of Canada is that during this worldwide recession, Canada had a housing boom. So when it mattered, the Canadian banks were there for Canadians.

Now, I know many people would say, “Yes, but the cost of credit has increased in relative terms because, in fact, the disturbance in the market and the re-pricing of credit that’s gone around everywhere. I think it is also important to look at it in absolute terms because their costs have actually gone down.

Today our prime in Canada is 2.25%. That is the lowest prime rate since records began in the early 1930’s in Canada.

So I think Canadian banks can be said to have helped manage Canada through this economic crisis in a relatively unscathed way.

I’d like to now provide a few comments about TD, what we’re doing and how we have we performed as well during this crisis.

Now, one of the things that we made right from the start is we could see that many banks were retrenching or retreating. Well, we took a very opposite position and we said, “Let’s take advantage of this crisis and actually try to grow in the middle of a downturn.”

To give you a sense of the numbers: our consumer lending volumes in the last 12 months, so year over year, have grown 17%. Our business volumes are up 7%. These are remarkable numbers.

In the United States, our loan book has grown by 14% in that same timeframe, and if you read the U.S. newspapers, in general, U.S. banks are dropping their lending by 10 to 20%.

We became, during this period, the first truly North American bank, with more than 1,000 retail locations on both sides of the border. So now, our U.S. operations are the 13th largest bank in the United States, and employ 23,000 people. Together, with TD Ameritrade, we have 10 million U.S. customers, the same size as our customer base in Canada.

So by any measure we’ve actually emerged as one of the top 10 financial institutions in North America. And during this crisis, we remain one of only three triple-A rated banks on the New York Stock Exchange, reflecting, I believe, our conservative risk culture.

I think from our point of view, we have tried to build a TD bank in the old way: customer by customer, relationship by relationship.

If I just take sight of what we’ve done in Alberta here. This is obviously a huge focus for us. If you take a look at the energy sector, we’ve underwritten more than $8 billion of financing for new oil sands projects over the past 8 years and had over 25 mergers and acquisitions advisory assignments.

We have a very strong presence in this province. We’re very proud and we earned it and I think we will continue to earn it, building it one relationship at a time.

So where are we going next? Where is the TD Bank going next?

Well again, if you go back to our fundamental strategy, we are a growth-oriented company. We’re a North American company. While we have a focus on retail bank, the retail bank, that’s our lead brand, we offer a broad spectrum of commercial and corporate and wealth management products. And the key to our model is that we have a relentless desire to own the customer service and convenience space.

In Canada, we continue to build out our branch network. Between 2004 and 2008, TD Canada Trust opened one-third of all new banking branches in Canada—137 all told. We’ve opened 20 new branches in 2009, nine of them in Alberta. In fact, TD Bank has more bank locations in Calgary than any other bank.

We complement that by having those branches open longer, 55% longer hours than our competitors. And that has resulted in a huge shift in market share. We’ve taken market share in small business, commercial, personal banking over the last five years, significantly outgrowing our competition in both revenue and profits and market share.

But I think the thing that we’re most proud of is our service. We are the undisputed leader in customer service. We have won J.D. Power for four years in a row, and the Synovate award for five years in a row.

Now how do we do that? A key part of that is to listen to our customers. Each week we call 7,600 customers who have somehow come into the bank, touched an ATM, been into a call centre, and we asked them for feedback of how we are doing, and then we tie that feedback to the compensation of the employees of the TD Bank, starting with me.

One of the things that we’ve learned in the last few years, though, is what’s on people’s minds shifts as you go through different parts of the economy. And clearly, today many of our customers are worried about their financial future.

And so we’ve stepped back and said, “You know, we’re going to have to make some more changes to our model because if we are going to remain the undisputed leader in customer service, we’re going to have to actually redefine what that means in tough economic times. In fact, we think of it as that we have to say, “Can we get better at handling customers with issues, not just customers with opportunities.”

So we’re in the process of learning that and that shift is happening as we speak today. We launched a program called TD Helps, a program that tries to take our customers and give them practical solutions to get through tougher times.

But it also means that we had to expand our capacity inside the bank to debt counselling. And we had to empower those debt counsellors and give them the authority to defer mortgage payments, to consolidate your debts for lower monthly payments, to find out ways we could make the debt more manageable for customers, and make sure that we could preserve them as customers by helping them get control of their finances, so they could take their lives back.

So far we’ve been able to help 17,000 customers and I have to tell you I believe that this is good business sense. But I think for the organization, it means much more than that. For us, it means that our customers have been done right. We have looked after them. And customers who, through no fault of their own, have come across serious financial adversity, we’ve stood by them when they needed us most.

And it’s incredible within the organization how proud people are to see the bank use its strength in this way.

As the same time, we’re trying to grow even more aggressively in the United States. As it happens, I would say, we didn’t pick the best timing to grow in the United States when we bought Commerce Bank. That was in the end of 2007. And we’ve obviously had tough economic conditions, but we have not altered our strategy. I believe great companies are made by sticking to what you believe.

Currently, we operate in five of the top metropolitan areas in the United States: New York, Miami, Philadelphia, Washington, and Boston. The combined population of where we operate is the same as Canada.

We continue to open stores, just as we do here in Canada. Thirty-two new retail locations in the United States in 2009 and there too, we have 50% longer hours and there too, we try to deliver legendary service. And we won the JD Power award for four years running, the first company ever to win that award in the middle of a merger.

Now again, our model is the same. A very boring, conservative relationship model. So we avoided the subprime lending; we didn’t lend to people that we didn’t know so we lent out of our branches. We focused on customers we knew, and that’s how we did our lending. And because of that, we were able to outperform dramatically our U.S. competitors in terms of loan losses.

TD also owns 45% of TD Ameritrade, and TD Ameritrade is the #1 online brokerage firm in the world, and is in the process every year of relentlessly taking market share, both from full-service brokers and other online competitors.

Of course, I think any of you who run a business know at the end of the day you can have the best strategy in the world but it means nothing if you don’t have a talented team to execute it, and that’s why our core advantage comes down to people, to making our place a great place to work. We are absolutely focused on how we make a workplace that attracts people who are passionate and believe in our dream. And I’m very proud of the employees that we have here today.

So, let me return to my first question: what comes next for the Canadian economy?

I think there are some positive signs that a recovery is underway. But we shouldn’t kid ourselves. We are not going to return to the kind of economic pace that we experienced before the market meltdown.

Big structural shifts are taking place in the global economy and they require a rebalancing act.

I want to be clear. I think the U.S. economy is going to come out of this in a position of strength. When you operate down there, it’s just an economy that’s unbelievably powerful. They have people that are unbelievably resilient and energetic and so they will find a way but we have to be realistic. What this in fact means: that they will have difficulty. Ultimately, the United States is going to have to consume less and produce more. And countries like China are going to have to consume more, and produce less. And transitions like this are never easy.

Parts of Canada—including Alberta—are going to have to see enormous potential in this new economic order. There are challenges, but at the end of the day, frankly, there aren’t many places in the world as well positioned as this province.

For TD Bank’s part, we remain very proud to stand by our customers and clients during this period of transition and growth, and we will work with you to see if we can build a better future.

Thank you very much.

Question & Answer with Ed at the Calgary Chamber of Commerce

Male: All right, Mr. Clark. Thanks for your remarks. I was particularly interested in your discussion and comments, and I think it would be appreciated in this room that the structure of our economy actually matters in terms of our approaches to climate and carbon challenges.

And then, some sobering numbers from the U.S., both in terms of housing and consumers. So I’ll start by picking up there, at something in your speech. You talked about the importance of the export sector leading the U.S. recovery and yet roughly 70% of the U.S. economy—maybe this is one of the challenges—is consumer-driven, and therein the dichotomy or the difficulty. So is it realistic to think the U.S. can return to its former self anytime soon or is the message really that the U.S. economy and the nature of North American exports need to change in the future?

EC: I think my basic message is unless the governments, in a sense, socialize the debt of the individual consumer, and brings in a program like “Cash for Clunkers” for example, then in fact, eventually the U.S. government is going to have to start to withdraw. But it’s not obvious that the U.S. consumer, which accounts for 70% of the GNP, can pick that up. And that’s why I think you’ve got to look to another sector which is the export sector.

To give you the flip side, in China, the consumer accounts for 30% of the GNP so you really do see the mirror images of these two economies and so, the U.S. economy has to go through a phase of starting to save and producing more than it consumes. And China has to go through a phase where it says, “We can’t simply drive our whole economy by selling flat screens to Americans.” It’s just not going to work anymore.

But there’s a lot of economic transition that creates all sorts of issues, and I go back to the climate change. You know, you start changing the fundamental rules of the economy, you better watch the transition. It’s not an easy thing; economies don’t shift that fast. So I think that does mean that we as Canadians are sitting on top of this—Canadians export 70% of their GNP to the United States. Australia has 70% going into Asia. They have a very different situation than we have, and so again, I think we have to start thinking of how we, in fact, shift our production more to take advantage of what’s clearly going to be. Today, for the first time, emerging economies in the world, GNP equals developed countries in the world and that is going to just keep shifting relentlessly here for the next 20 years.

Male: Great. No, I quite agree. I think another factor there that is critical is the fact that some of the growing economies and emerging economies in the world are also the most populated with the greatest growth in middle class and the greatest growth in opportunity, so all of that speaks very well.

On the productivity side, which is another theme in your speech, for a long time we’ve seen numbers that suggest Canada and North America fall behind averages on the productivity side. Are there central factors there or specific challenges and specific things that both the private and public sectors might do to overcome our productivity issues?

EC: Well this has been on the Canadian agenda now for a while. In a sense, we’re about at least the 20% gap in productivity per worker relative to the United States. We used to be at the top of the OECD in the growth of our productivity; we’re now at the bottom. So we grow at about a percentage of productivity growth; about a percentage less quickly than American productivity. Not a good place to have your currency rising relative to theirs.

I think, in fact, governments have tried to do some things. I think—I would cite the Harmonized Sales Tax as a pretty—I think it’s probably hard on the West to fully appreciate that but for Ontario that’s a very radical political move that, you know, most governments would not have the courage to do but it’s clearly a pro-productivity move. I think the move to try to break down inter-provincial barriers has been good. I think the move to try to have a simple corporate tax rate—25%—is great between federal and provincial across has been terrific.

So I want to acknowledge that I think governments have done a number of things. As I said, what’s left on the agenda: I think you have to start with education. I think we’re still falling behind the world and when you go outside this country and look at the literacy and math skills of their graduates versus ours, I think there’s a risk to us. I know Alberta has a tremendous dropout rate for high schools. It just is not going to work in the modern economy if we sit there and are going to be the uneducated. The Chinese are going to say, and we’re going to be the educated, and we know who’s going to earn more money in the end of the day. And so we do—I think there’s a fear I think in our Canadian universities. We still haven’t made the shift of people getting into the sciences as much as the social sciences and there’s still a kind of search for degrees versus search for quality. So I think we’ve made some progress on the education front but I think we have a long way to go to catch up.

I think we have a new emerging issue that’s getting a lot of public attention and that’s immigration. You know, it used to be in Canada that the immigrants actually performed better than people born in Canada and their incomes actually widened over time. Now I think it’s pretty clear that the success rate of immigrants is dramatically less than people born in Canada. And so I think you have to step back and say, “What is it about our selection process and what about our immigration process, integration process, that we have highly educated people who immigrated to here not having their talents fully utilized? And what is it we’re going to have to do to tackle that problem?”

The third, though, is I do think we have a leadership issue in the private sector. I think it’s too easy for the private sector to say, “This is all a politician’s fault and why haven’t they solved this problem?” You know, 80% of Canada’s small businesses don’t export at all. We keep on saying we’re a trade nation but fundamentally we have 50 companies that do all our exporting and we do not have a class of small business there that go out and take market share. And if you look at other countries in the world like Italy, it is their small businesses that in fact are out there opening up opportunities. And we have all taken the easy route and say, “Well why don’t we just cross the border. That’s the easiest one.” And I think we have to, as I said earlier, think about well how are we going to say, “There’s a new world here”. Twenty years from now this world is going to look completely different. There’s a global, economic, political shift going on here and is the business sector leading that or are they hanging back saying, “What are the easy options?” So I think we should be a little self-critical as business people of whether we’re driving hard enough.

You know, I’d say for my own industry, you know, we took a position and lots of people say this is wrong, you know, go into the United States. And I sit there and I say, “We do run better banks in Canada than American banks but why don’t we actually prove it by getting on the streets of New York and slugging it out with them rather than just sitting here in Canada and making the easy money just doing what we do always?”

It’s not fun. It’s hard work. You get lots of criticism but we are building a great North American company. We’re creating jobs and taxes in Canada, and that’s what I think business has to do.

Male: Great. Well Mr. Clark, I’m thinking I’d love to have another hour of your time but I’m afraid we are out of time. So please join me in thanking Mr. Clark for the Q&A.


Executive Headshot :  Ed Clark
Ed Clark
Group President and Chief Executive Officer
TD Bank Group

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