By Tom Bradley

The banks don’t seem to be feeling the effects of a sluggish Canadian economy yet (profits are still robust), although they’re clearly worried about a lack of growth in the years to come. Virtually all of them have announced, or signaled that they will announce, cost cutting measures and increased technology spending. Staff reductions and on-line banking initiatives are important pieces of their 2016 business plans.

TD Bank was the latest to step up. Last week at the bank’s analyst day, Chief Executive Officer, Bharat Masrani, said, “Running our business more efficiently enables us to take some costs permanently out of the TD.”

I’ve contended for years that when it comes to profits, the banks have a big safety cushion - they have an enormous opportunity to cut costs. There’s branches and branches of low hanging fruit if you will (pun intended). If you think about it, no large organization that has experienced the kind of success that the Big 5 have could be expected to escape bureaucratic bloat.

So, when revenue growth slows to a crawl, or turns negative, and loan losses increase, it’s conceivable that the banks will be able to grow their earnings and maintain their high-teens return on equity (ROE).

I guess one could logically ask the question: Are these efficiencies that Mr. Masrani speaks of going to benefit the bank’s customers in the form of better service and lower fees, or is it strictly being directed to the shareholders in the form of higher profits? If our beloved banking oligopoly stays true to form, I would guess that the Canadian public will derive little benefit from the banks’ scale and newfound efficiency.

Note: TD Bank is held in our Income and Equity Funds and is the largest stock holding in the firm.

Additional note: I find it interesting that TD’s latest cost savings are going to come from the Canadian retail bank. As I’ve pointed out in this blog previously, TD has a ROE of 45% in this business (most recent quarterly earnings). With these new initiatives, it is conceivable that TD can get the ROE on its Canadian retail bank up to 50% before the next recession hits. Wow!