INST Committee Meeting

STANDING COMMITTEE ON INDUSTRY, SCIENCE AND TECHNOLOGY

COMITÉ PERMANENT DE L'INDUSTRIE, DES SCIENCES ET DE LA TECHNOLOGIE

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, November 21, 2001

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I'm going to call the meeting to order.

I'm pleased to welcome everyone here this afternoon.

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Pursuant to Standing Order 108(2), the committee will be considering small and medium-sized enterprise bank lending. We welcome the representatives from first the Canadian Imperial Bank of Commerce, and second we'll be meeting with representatives from the Royal Bank of Canada. We're going to have the CIBC speak first, followed by questions, and at approximately 4:30 we'll hear from the Royal Bank of Canada.

With us today from the CIBC is Carol Gray, executive vice-president of small-business banking; Mr. Robert Paterson, senior vice-president of small-business banking; and Mr. Benjamin Tal, senior economist of risk management.

The committee last met with representatives of the banks on March 1, 2001, and at that meeting the committee received evidence from all the banks. Although the meeting was very productive, we felt that more time should be allocated for the banks to profile the current status of their programs individually, so we're hearing from two banks per meeting for the next three Wednesdays.

As chair of this committee, I wish to emphasize the importance members attach to this meeting. Small and medium-sized enterprises represent the vast majority of the businesses in our country and cover all sectors. This meeting is particularly pertinent, we believe, in view of the current economic situation in Canada.

I invite you to begin your presentation.

Ms. Carol J. Gray (Executive Vice-President, Small Business Banking, Canadian Imperial Bank of Commerce): Good afternoon, Madam Chair.

My name is Carol Gray, and I'm executive vice-president for small-business banking at CIBC. I have a very short prepared presentation that will take about eight and a half minutes, and then we'll be pleased to answer any questions and have a great dialogue.

Thank you very much for the invitation to once again appear before the committee to discuss small-business banking in Canada and what CIBC is doing to help this sector. I'm joined by Rob Paterson, senior vice-president, small-business banking; and Benjamin Tal, senior economist, risk management group.

Now, what do I mean by small business? CIBC's definition of a small-business customer is anyone who depends on their business to generate their personal livelihood, who is self-employed or employs others, and whose personal and business affairs are intertwined. Our overall strategy is to provide an integrated offer that addresses both the personal and business needs of these customers. This means we do not simply deliver a menu of products. Instead, we have created an advisory service that addresses all the individual and business requirements of clients through a single team-based point of contact.

CIBC has undertaken a number of changes during the last 18 months to allow us to deliver such an offer. Our first step was to establish a specific business segment whose entire responsibility was to serve our 350,000 small-business customers, and I'm head of that division. Many of the 2,000 professionals in my area have been reorganized into teams to improve how we meet both the business and personal financial services needs of our clients as well as to establish better account relationship continuity.

One of the most common complaints by small businesses is that as soon as they get comfortable with their account manager, we go ahead and promote them. Our clients then have to invest valuable time educating someone else about the key drivers of their business. This problem has been particularly acute in urban areas. By making a team of three people responsible for all financial needs of a group of small businesses, we are tackling this irritant head-on. Even if one member of the team moves on, there will still be at least two others who know the client and can maintain the continuity of that relationship. I believe we're the only financial institution in Canada today that has undertaken such a program.

These units are made up of skilled professionals. Almost 90% have completed the Canadian securities course, and 52% have passed the professional financial planning course. Forty-four percent of the people making up these teams are women.

Excessive paperwork and access to funding have also been major issues for small business. We have undertaken several initiatives to resolve this. First, we have dramatically simplified the approval process for overdrafts and lines of credit. In cases of loans under $100,000, the process looks similar to a credit card application, with a guaranteed 48-hour turnaround. We have also reached an agreement with Wells Fargo in which small-business customers who have applied for a loan up to $100,000 can agree to be referred to Wells Fargo in cases where they don't qualify for a loan with CIBC. Two-thirds of all small businesses have borrowing needs of less than $100,000. CIBC's customers will complete a simple application that includes a direction to refer a loan request to Wells Fargo should it not be approved by CIBC. Our objective here is to help customers get greater access to capital.

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We are also working more closely than ever with our risk management colleagues to build greater flexibility and a longer-term perspective into our credit decisions. This issue is very relevant in light of today's much more challenging business environment. While I cannot say that we will be able to reach a solution for every client who experiences financial difficulty, I can assure you that our first approach to anyone in trouble is to examine what measures we can take to help them remain in business. This is also handled very much on a case-by-case basis. That means there are no broad, bank-wide policies that dictate our approach to credit issues for the small-business segment.

I am pleased to report that all these efforts are already bearing fruit. Our market share of small business clients who borrow has grown, and our overall borrowing client base jumped almost 10% during the 18-month period ending June 2001. In fact, our net client base, including bizSmart, increased by 12% in 2001. I'm also pleased to report that in 2001, 83% of CIBC small-business clients who applied for a loan or a line of credit were approved. But even these figures don't provide a complete picture of small-business borrowing. Our research has shown that about $1.3 billion of CIBC's personal loan borrowings are actually being used for business purposes, and that figure has risen by almost 18% in the last three years. These statistics include the small office/home office, or SOHO, market.

It is interesting to note that well under half of CIBC's small-business customer base actually sought credit during the last 12 months, and fully three-quarters say that it is very unlikely that they will apply for credit in the next six months. This is probably a reflection of the much more cautionary stance being taken by many businesses in the current economic environment.

Another way we have responded to small-business needs is through the launch last year of bizSmart, a new venture aimed at the small office and home office market. It offers a complete break from the past for small business in Canada. Our bizSmart is the first to offer no-fee banking to small business. This is combined with discounted services and information to help people manage their small business. We're pleased that bizSmart is available by phone, the Internet, and bank machines and through a physical presence in Staples and Business Depot locations. We have aggressively opened new store locations across Canada, and the customer response has been gratifying. Our bizSmart clients also report significantly higher levels of satisfaction with their financial services than typical small-business bank customers.

The small office and home office segment is the group that has probably received the least attention from the financial services sector. It is also the group that represents more than 80% of the small-business market. Some 1.6 million companies are one-person operations, and their numbers have jumped more than 50% in the last seven years. Another 600,000 companies employ up to four people in addition to the owner.

The programs I have cited here today are, I believe, good examples of how banks are developing initiatives that offer true value to the small-business sector. They are also a recognition that in the past we did not readily appreciate what a large opportunity the small business segment represents.

Benny Tal has recently completed a study that clearly shows just much of an opportunity this is. His report, “Self-Employment in Canada, Trends and Prospects”, reviewed the major issues affecting this sector. He concluded that the recent dip in self-employment after a decade of rapid growth is short-term and will soon reverse itself.

Between 1989 and 1999 the number of self-employed soared by more than 40% to 2.4 million, thanks mainly to the big jump in the number of one-person operations I mentioned earlier. However, this number slipped by almost 150,000 last year as people who have been forced into self-employment by poor business conditions were once again able to find paid employment. This will soon change, Benny says, predicting that self-employment will become even more dominant in the Canadian labour market during the next ten years.

The self-employed sector now accounts for more than 16% of all workers, an increase of 13% from 1989. That will continue to grow, spurred by a number of major trends such as the aging labour force, the increased demand for personalized service, and the growth in outsourcing.

Benny is available to answer any questions that members of the committee may have about his report and the future prospects for the small-business sector.

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Let me conclude by briefly summarizing our approach to the small-business sector. Firstly, we believe the small-business market is a vibrant one, with a rich future. Secondly, CIBC is aggressively seeking to expand its role in the business sector.

The banking environment today is radically different from the prevailing one ten years ago. There is a world of competition for the small-business customer, and not just among Canadian banks. U.S. and international financial companies, even equipment suppliers like Dell computers, are now vying to grab a share of this market.

I believe this competition is a good thing. It has sharpened us up. CIBC is now putting small business at the forefront of their activities. This doesn't mean we will always get it right. Nor does it mean that we will always be able to say yes when a small-business client requests a loan. What it does mean is that we are trying harder than ever to meet the needs of small business. Our customer satisfaction measures, which show a significant jump in the last 12 months, suggest to me that our clients are already noticing the difference.

Thank you for your time and attention. I'd be happy to take any questions.

The Chair: Thank you very much.

I'm going to start with Mr. Penson.

Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you, Madam Chair.

I want to welcome CIBC to our committee.

To get some kind of perspective, I wonder if you could answer a few questions. First, how big a portion of your business do your SME clients make up in terms of your credit lending?

Ms. Carol Gray: Of the total borrowing book?

Mr. Charlie Penson: Yes.

Ms. Carol Gray: Of our business book, we have 350,000 small-business customers, of which 40% would borrow. Of our roughly six million personal customers, 20% of the personal book actually is to small-business customers.

I don't have the number off the top of my head, but it's the vast majority.

Mr. Charlie Penson: What I'm looking for is of your total loans per year, the total credit you put out, roughly what percentage would go to the category you call small and medium-sized businesses?

Mr. Benjamin Tal (Senior Economist, Risk Management, Canadian Imperial Bank of Commerce): If you look at the total business lending—because consumer lending is a totally different story—we're talking about 23%. So 23% goes to small business, and the rest goes to big ones.

Ms. Carol Gray: In terms of the number of customers, it's much greater.

Mr. Benjamin Tal: Much greater. Actually, 95% of our customers are small businesses.

Mr. Charlie Penson: Where I'm going with this is I'm interested in how many of those SMEs, those customers you have, would be involved in international business, particularly into the United States. Have you any idea?

Ms. Carol Gray: I don't have a specific statistic on the number of customers who would export to the U.S.

Mr. Benjamin Tal: We know in general that only 5% of small businesses in Canada actually export a significant amount of their business to the U.S. So I would assume that it won't be a significant factor.

In fact, the small-business segment of the economy is very sensitive to domestic factors, as opposed to what's going on in the U.S. So it's more domestic market oriented.

Mr. Charlie Penson: But some of those SMEs would supply big companies that are exporting to the United States as well.

What I'm trying to get to is how important it is that we secure the access to the U.S. market in these times we are going through in terms of security. Has your bank looked at that?

Mr. Benjamin Tal: I think we looked at it, actually, and we think it's crucial for the economy in general. We export a significant amount in Canada. And as you said, maybe small businesses don't export, but they do support large companies that do export. So free access to the U.S. I think is always essential for the economy. And if we want to compete with the U.S., or be able at least to grow at the rate the U.S. will grow in the next two or three years, we have to make sure there is accessibility to their market.

Ms. Carol Gray: Actually I do have a statistic for you. It was from the Thompson Lightstone survey, which is a syndicated bank survey that's done in the summer of every year. This was done in the May-June timeframe of this year. Twelve percent of the CIBC small-business customers are involved in exporting, which compares to an average of thirteen percent for the other seven banks.

Mr. Charlie Penson: It's still significant, isn't it?

Ms. Carol Gray: It's not insignificant, no. Absolutely not.

Mr. Charlie Penson: Yes.

I'd like to go a little bit further, and maybe Mr. Tal might be able to help us here. There was already a bit of an economic downturn coming prior to what happened in the United States in September. Has your bank increased its loan loss provisions in these last few quarters?

Mr. Benjamin Tal: Yes, we did.

Mr. Charlie Penson: Can you tell us, is it just a normal percentage with the SMEs versus the larger companies that would have made up that need for loan loss provisions?

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Ms. Carol Gray: In fact the loan loss provisions have been made more at the large corporate mid-market-sized companies, but within the small end of the business.... And the loan loss provision is actually a lagging indicator of what's really going on. It's how the portfolio performs on what we call a risk rating, which is an evaluation of the risk in the portfolio. And if we see a deterioration on that, that's usually an early indicator that loan losses will follow.

Actually, within the small-business book, which includes our agriculture division, the credit risk ratings have held solid throughout the piece, although I think Benny would suggest that small business is a lagging indicator of what's happening in the economy. So we may see some deterioration in the months to come, but to date it hasn't really been evident.

Mr. Charlie Penson: Wouldn't you expect that this would be the case, the way things are going? It doesn't look like the U.S. has bottomed out yet, and we are such an important part of that U.S. equation.

Ms. Carol Gray: Right.

Mr. Benjamin Tal: I think that's a reasonable assumption. I think that if we take the next six months things can get a little bit worse, especially when it comes to small business, because we have to remember that even when the economy starts recovering, let's say in the first quarter of next year, it won't be really the domestic economy, it will be more export or inventory, stuff that has nothing to do with small business.

So consumer demand will be the main factor that will lead to the recovery, let's say, in the second or third quarter of next year. And as I say, small businesses are very sensitive to consumer spending. So the consumer was not the force that took us into this slowdown and the consumer will not take us out of this slowdown, at least not in the early stages of this recovery. Therefore, I think that when small-business activity will start recovering will be later in the year, maybe by spring or summer next year.

Mr. Charlie Penson: The last question I have for you is what percentage of your earnings comes from your international operations, as opposed to your domestic operations?

Ms. Carol Gray: I don't have that information. I'm sorry. I can get back to you with that.

Mr. Charlie Penson: Mr. Tal, do you have any idea?

Mr. Benjamin Tal: I don't know.

The Chair: Maybe you can get back to us with that. That would be fine.

Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

I'd like to thank the witnesses for being here today and having a good discussion on small business.

One of the questions I have always had in the back of my mind, as the economy was going up and up and we had so many successful years, was how well are we preparing our small businesses for a downturn, without causing us a problem? How well are we preparing our small businesses? Could you explain to me what your teams of three may be doing to help their clients to prepare for a short downturn?

Ms. Carol Gray: Absolutely. Several factors are at play here. First of all, small businesses in general are better capitalized coming into this economic slowdown than what they were, generally, in 1995 or 1991. So they have already, because of the good years they've experienced in the last four or five years, built up a good equity base that provides a bit of a cushion through the softening of the economy. So in general terms they're in good shape, better than what necessarily was the case in the slowdown in 1995.

But having said that, the objective of these three-person business advisory teams is to, first of all, get to know their customers. And because the three individuals have the mandate to be responsible for ensuring that the needs of their customers are met on both the business and personal side, and to know their customers, it's through that knowledge of their customers, their businesses, and the industries they're in that they're able to provide the kind of business and investment advice that will make their businesses successful.

There are specific programs, training and so forth, they go through so that they have the skills and knowledge to do this. But most importantly, it's having an intact team of three whose job it is to get to know those customers. I think that with information on the customers about any distress signs that come early to them, then we work with them, work out solutions that can help them through any difficult times they may have.

If you look at the portfolio of our small-business customers, it can really be segregated into two, into the very small and then into those whose borrowings are say in the $250,000 to $1 million range. And the customers in the $250,000 to $1 million range are often long-term customers. The average tenure of those customers is eight years, so we already have a history of these companies. We know what their management ability is like. We know what their track record is like. Therefore that knowledge and history of them is important, because it enables us to work with them should they experience any difficulty.

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Mr. Walt Lastewka: Let me ask you about small businesses that have gone out of business, are bankrupt, or whatever. What are you finding are the reasons they're going out of business?

Ms. Carol Gray: There are several reasons. It's often by their own decision. If you look at the demographics of the Canadian population, in certain respects we're an aging population, so in many of these businesses the owners are looking to cash out. So they're not necessarily going out of business, but the business is changing hands and as a consequence perhaps morphing into something else.

Succession planning is a big issue that small-business owners are facing today. Finding ways to help those business owners get the shareholder liquidity out of their company so that they can pass it on to either another generation within the family or to perhaps the employees is an important issue we see every day.

So that's one example. When you say they're going out of business, a major category of companies are not really going out of business, but they're transforming.

Mr. Walt Lastewka: Of those ones that do go bankrupt and do go out of business, what were the main reasons that caused them to go out of business?

Ms. Carol Gray: I don't have statistics, but anecdotally, I can tell you it's a combination of not having a sound business plan, not getting the customers they wanted.

If you look at the surveys, and again I'm citing the Thompson Lightstone survey, the most predominant issue that small businesses say they face is getting new customers. Financing is actually quite down the order of concerns. It's not so much an access to capital that is forcing them out of business, but it's more a case of not having the right business plan, not having the right technology, not being able to find the right kind of skilled labour, which is another big issue that small businesses face. And it's those things, more than the lack of financing, that have probably pushed businesses into bankruptcy.

Mr. Benjamin Tal: In fact, one out of five companies that went under is saying that access to financing is their reason for declaring bankruptcy.

If you take all the dot-com companies that went under over the past year or two, it was clearly not a factor of financing. It was simply that the market was not there any more. It was simply that their motive was wrong, so that's the reason why they went under. And a lack of management and vision was probably the main reason.

Mr. Walt Lastewka: When you talked about Wells Fargo and your agreement with Wells Fargo, I take it that it is seamless. You look at it as the CIBC bank, and if the risk factor goes beyond your mandate as CIBC, you then forward it to Wells Fargo. Is that correct?

Ms. Carol Gray: Yes...the application process. At the time when the customer applies he's given the option right at that time. When he fills out the application he's given the right to acknowledge that in the event that we are not able to accept his loan, then the application is immediately forwarded to Wells Fargo. So in that sense, you're right, it is seamless. And at that point, if it is forwarded to Wells Fargo, Wells Fargo follows up directly with the client.

Mr. Walt Lastewka: What percentage of applications that come to your bank are forwarded to Wells Fargo?

Ms. Carol Gray: A very small minority. We are able to finance most of the requests, perhaps to the chagrin of Wells Fargo. I would say, including bizSmart, less than 5%.

The Chair: Thank you very much, Mr. Lastewka.

[Translation]

Mr. Bergeron, please.

Mr. Stéphane Bergeron (Verchères—Les-Patriotes, BQ): Thank you, Madam Chair.

First, thank you for being here today and, please, excuse me for being late. Unfortunately, I couldn't hear your presentation, but I had a quick look at your statement. I'll certainly have the opportunity to read it at leisure later on.

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I'd like to quickly pick up on one of the answers you just gave to my colleague, Mr. Lastewka. You said that the most predominant issue for small and medium-sized businesses is not having access to capital, but getting new customers.

First, if I may, let me qualify that. You know as well as I do that our large Canadian companies make a spectacular contribution to the economy in terms of the number of people they employ, but that in Canada, particularly in Quebec, the economic system rests largely on small and medium-sized businesses which create one, two, three, four or fifty jobs. They are the ones which drive the economy, in Canada and in Quebec.

When you talk to small and medium-sized business owners and to people who want to start such businesses, one of the comments they make is indeed that they have problems getting credit. In spite of all the good intentions of our financial institutions, it seems to me that there are still a few problems in this area.

Let me go back to your answer, when you said that the main issue was to get new customers. We know that now that we face an economic slowdown, we have to boost consumer spending. In this regard, I believe that the Bank of Canada and the United States central bank have showed us the way by sharply reducing their guide rates, which led to a sizeable reduction of interest rates on mortgages and personal loans.

We can only be delighted at those news. I think it's indeed going to boost consumer spending. However, still on the subject of consumer spending, we can only regret that this downward trend has not affected credit card rates.

Let me ask you the question quite frankly. Are financial institutions, particularly the CIBC, going to follow this downward trend, including in terms of credit card rates?

[English]

Ms. Carol Gray: Yes, I'll respond to that.

Credit cards are one way to finance a small business. The menu or family of credit cards is designed to meet different client needs. Many customers have a credit card because, quite frankly, they want to collect the airline points. Other customers will have a different credit card because they want the dividend payment. And others will use low-interest credit cards because they want to revolve the balance.

There are credit cards at differing levels of interest. I think it's important for every customer to determine what their needs are, what they are looking to get out of the credit card, because often it isn't financing. Most customers who do have a credit card also have a line of credit. They can easily use the credit card for the convenience of making purchases so they don't have to carry sufficient cash and then pay off their balances on a monthly basis on their credit card and revolve it on a lower interest-offering line of credit.

So there are lots of options for customers to avoid higher rates of interest on the credit cards. The credit cards that do charge higher rates of interest are designed, typically, not to revolve and they are a reflection of the amount of forgery that's inherent in that product.

[Translation]

Mr. Stéphane Bergeron: I do understand that, and thank you for your answer. I believe you are quite right. Consumers have a variety of options when it comes to credit cards, however, it's still surprising that, given the downward trend initiated by the central banks, there are still credit cards carrying interest rates in the 18 % range.

My question is quite simple. Do you anticipate eventually following that downward trend and reducing the interest rates applying to that category of credit cards or are you going to maintain those relatively high rates which, under the circumstances, appear to be rather prohibitive?

[English]

Ms. Carol Gray: Again, I would suggest that each customer look at the credit card that's going to satisfy their needs, because there are lots of options. They don't need to avail themselves of a credit card that has a high interest rate.

The cards that carry a high interest rate often, as I mentioned, carry other benefits to the customer. And those other benefits, whether discounts on other purchases or airline points or whatever it is, are the benefits the customers are looking for. They're not looking to use the credit card as a financing vehicle. Therefore, for those customers the interest rate is actually quite irrelevant.

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The Chair: Mr. Bagnell, please.

Mr. Larry Bagnell (Yukon, Lib.): Thank you for coming. Actually, I'm a good customer.

I come from a northern riding. I know that when I worked for Industry Canada a decade ago, at least, there were numerous complaints about the difficulty of access to financing for small businesses in rural and northern areas, especially if they weren't in the capital city. All the banks universally used to refer them...access to capital. Do you have any stats or other indications to show that's improved over the last decade?

Ms. Carol Gray: I do have some statistics that would show that our market share has grown in some of those more rural communities, by province, for example, in Saskatchewan, Manitoba, and northeastern Ontario. So by virtue of the fact that we are growing market share from borrowing customers, I have to conclude that we're giving them greater access to financing.

Mr. Larry Bagnell: If you do have anything later on, not now, specific to the Yukon, that would be useful for me, because I know in the city of Whitehorse it was easy to get loans, but outside the city limits it was fairly difficult.

My second question is for mon collègue, Stéphane Bergeron. Since September 11, have you been particularly accommodating to some short cashflow that certain industries may have had a problem with, for obvious reasons? The one I'm thinking of is the travel agent industry. People may have come to you needing a little delay in payments or whatever.

Ms. Carol Gray: We have not issued a policy statement that would put a blanket-wide approach to a particular industry. We think this actually isn't the right approach to take, because when you take these blanket-wide policy approaches, then in many ways you're injecting a bias into the system.

So we have approached it by looking at companies within industries that are obviously affected and speaking to the customers directly, working with them on a case-by-case basis to find the right solution relevant to their needs. Not all customers borrow, so it is important that we do it on a case-by-case basis. We feel that gives us the greatest flexibility and we can respond to their unique needs, rather than trying to blanket the system with a one-size-fits-all solution.

Mr. Larry Bagnell: I think the initiatives the banks have taken over the last few years have been great to help improve service to small business.

As you know, there's been constant criticism about access to capital. Do you have anything on the downside, on the evaluation side, that shows that small business is happier on surveys, or they have better access to capital? If the problem is perceived, are they happier now, because you fixed the perception? Or if the problem was real, are they happier now because they're getting more access to capital?

Ms. Carol Gray: I have some statistics. I don't want to overwhelm you by throwing out numbers, so I'll just give you a few as an example. We did a a syndicated bank study, specifically on the SOHO market—which is the small office, home office—and the greatest number of growths in small businesses is in that segment.

Customers who responded to that survey said that the biggest challenges facing them, and this is in order, were finding clients, dealing with the government bureaucracy regulations, and quite a way down there, only 5% said bank financing was an issue.

We also participate in a syndicated study called the Thompson Lightstone, which shows levels of customer satisfaction. Across all the banks, year over year, the results have improved, particularly in areas such as satisfaction with their main contact at their bank, increases in what we refer to as “customer loyalty”, so their propensity to stay with the same financial institution.

I know for CIBC, customer loyalty for our customers year over year increased by 8%, so we think that's fairly significant.

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The Chair: Thank you very much, Mr. Bagnell.

Mr. Ianno.

Mr. Tony Ianno (Trinity—Spadina, Lib.): Let's deal with the numbers Mr. Bagnell was asking about.

As of December 31, 1995, when we first had the report, the amount of money given to small businesses was $8.53 billion. As of June 30, 2001, the amount of money given to small businesses was $8.19 billion. That's six years and more businesses and the numbers are relatively the same. That's about 8%, or whatever the number is. For the large business loans it's relatively the same, $27.5 billion in 1995 and on June 30 it was $26.6 billion. So it went from 23.6% to 23.5%.

When I spoke to your president, he indicated that he believed that unlike the past, small business is very important and they want to improve and increase it. Taking into account some of the difficulties businesses may face with the slowdown, what strategy might you put in place, one, to relieve or reduce the stress they may face...? The loan-loss ratio for small business, as you said, is probably better than for large business, so it's not a question of viability or a risk factor. How will you try to mitigate that problem at least until the economy changes?

The second part to that question is what are you going to do to increase that to $10 billion or whatever an appropriate number is for small business?

Ms. Carol Gray: I'll start off and then Benny would like to contribute as well.

First of all, it's true that particularly in the period from 1996 to 1999 we were losing market share and we were not paying attention to the opportunities that the small-business sector represented. In 1999 we made a strategic choice to create a business unit focused on small business, with a clear mandate to be responsible for not only increasing the share but ensuring that we're satisfying the needs of small business and giving that sector the attention it deserves.

Since 1999 we have put together a number of strategies. I think the two that probably had the greatest impact on the marketplace are the introduction of bizSmart, which, as I mentioned, is Canada's only no-fee banking service for small business—

Mr. Tony Ianno: Has that made a difference in the numbers?

Ms. Carol Gray: It has.

Mr. Benjamin Tal: Let me give you some numbers. As Carol mentioned, we will be the first to admit that we were sleeping a little bit between 1995 and 1999. If you look at the 1995 and 1999 figures, you'll see that our authorizations went down by 5.6%, our outstanding loans went down by 4.6%, and our number of customers went down by 1.2%. We lost market share. Since 1999, as Carol mentioned, we changed our view about small business.

Mr. Tony Ianno: Will that be the same strategy you'll be using from now on?

Mr. Benjamin Tal: Yes, we will continue with this strategy.

Our authorizations went up by 2.2%, and our number of customers went up by 10.5%.

The number of very small customers, those involving micro-loans of less than $25,000, went up over the past 18 months by 19%. That is more than 1% a month. This is significant growth, and we are actually gaining market share in a very significant way.

Mr. Tony Ianno: Excellent.

So why is it that as of March 31, 1999, $8.14 billion had been given out to small businesses and as of June 30, 2001, it was $1.95 billion?

Mr. Benjamin Tal: In terms of outstanding?

Mr. Tony Ianno: Of course. We don't deal with authorization here.

If that's three years of numbers and that's success, with the 0.003% increase, or whatever it is, and that is what we have to expect for the next three or four years, you'll never meet your goals, because you'll be roughly at the same point. So what kind of strategy might you change, taking into account what you consider success? I don't consider that success, and I don't think anyone else would, but rather being stagnant.

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Ms. Carol Gray: I think you have to look at the numbers and get underneath the difference between outstandings, authorizations, and the number of borrowing customers.

Mr. Tony Ianno: We've gone through that many times.

Ms. Carol Gray: What those three categories of numbers say is that more customers are now able to borrow. Whether they avail themselves of the borrowing is up to them. But the credit facilities are there.

If you look at the outstandings in all of Canada, you'll see that they are down for all of small business. Our outstandings are down less than the market in total, which means we have increased market share. The amount that customers are authorized to borrow is up. Most importantly, the number of customers who have authorized credit facilities, as Ben mentioned, is up significantly, much greater than the market in general.

Mr. Tony Ianno: So if you count authorizations as being very important and if I as the bank authorize $50,000 for you as a small business but you don't use it so I double it to $100,000, that's a great accomplishment even if you still don't use it. Is that correct?

Ms. Carol Gray: If you apply for a loan but decide not to use it, that's your decision. But you have access to the credit when you do this.

Mr. Benjamin Tal: I think the assumption here is that it's a supply factor. Small businesses ask for credit, and banks do not provide the credit. What we're saying—

Mr. Tony Ianno: No, you supply recommendations to Wells Fargo. Is that correct?

The Chair: This will be your last question, Mr. Ianno.

Mr. Benjamin Tal: That is less than 5%. Most of it is actually approved.

But what's happening here is that it's really not a supply factor. Authorizations are rising much faster than outstandings. It is a demand factor. Small businesses are now demanding less than they demanded before. Why? It's for a few reasons. First, we're talking about significant growth in smaller companies. As I mentioned, there was about a 19% increase in very small companies. By definition a company with one or two employees will require much less financing than a company with ten employees.

Mr. Tony Ianno: Unfortunately, I won't be able to ask any more questions.

So I would assume that when we speak to President Hunkin again, we're basically going to say that for the next three to four years we should see the same amount for small business because in effect your strategy is working.

Ms. Carol Gray: Our strategy is working. We are growing market share in all categories.

Mr. Tony Ianno: So you're beating out the other banks but you're not giving more money to small businesses.

Ms. Carol Gray: Credit is available for them to use if they want it.

Mr. Robert Paterson (Senior Vice-President, Small Business Banking, Canadian Imperial Bank of Commerce): We are also changing how we lend. We have start-up lending in the bizSmart model. A business that has been around for up to four months can now apply to get unsecured lending up to $50,000. We provide the traditional lending of up to $100,000 unsecured at one year. So not only is it the authorized limits, but we're also opening up the market and getting closer to the start-up market, which is important when paid employment starts to decrease.

The Chair: Thank you. I have to move on, Mr. Ianno.

Mr. Tony Ianno: I just want to say, Madam Chair, that I'm very disappointed with the CIBC—

The Chair: Mr. Ianno, I'm going to have to move on.

Mr. Tony Ianno: Thank you.

The Chair: Thank you.

Mr. Lastewka, did you have another question?

Mr. Walt Lastewka: Yes.

What happened to the opposition?

The Chair: They're there. They just don't have any more questions for this witness.

Mr. Walt Lastewka: My question has to do with the fact that you have so many authorizations and businesses are using only a portion of them. You can get different opinions out of that. My question is, are the smaller businesses getting the loans they've been requesting? The data you're giving us could be misinterpreted. I'm not saying this applies to your bank, but we hear from time to time, they want to give us money after we're successful, but not when we're going through the dirt. I'm trying to separate the two. What information can you give us on requests for funds while the business is in the start-up mode versus eight years, seven years, six years down the road? Let's get down to the one, two, or three years. What kind of data do you have on that?

Mr. Robert Paterson: We created the bizSmart model about a year ago. That was specifically built for the small office marketplace you're talking about. We knew it was important to be able to give them the early day financing money to help get those ideas seeded in the Canadian economy.

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So after a business has been around for four months, which I think we had all agreed is a short period of time, they can apply for lending up to $50,000. Those lending decisions can be made within a Staples store, one of 60 locations that we have open across Canada, over the Internet, or through telephone banking. The decisions can be made within five to ten seconds off a basic, simple application.

Once the business has reached up to one year, we provide financing up to $100,000. All this is done on a no-fee basis. So they can open their account in their business name with no fees. They can get their lending solution with no fees. Average savings, we speculate, are around $2,000 per business, which can be put into other equipment they might need for the business that they're starting up.

It's simple and easy for them to get hold of, and the lending rates are reasonable, as low as prime plus one and a half percent—again, non-secured, not having to put up their home or other assets. We've found that this has been a good catalyst within the SOHO marketplace to help get those ideas started within the economy.

Mr. Walt Lastewka: Of the 350,000 small businesses, how many are new businesses within the last 12 months?

Ms. Carol Gray: This doesn't answer your question directly, Mr. Lastewka, but the statistics I have are that 53% of companies that are one-person operators—and so they're at the small end of the market—have been in business more than five years. So 47% have been in business less than five years. I don't have it broken down into less than 12 months.

Mr. Walt Lastewka: I would be interested in knowing your growth in one year and two years. I don't know if that's information you want to share or not.

Ms. Carol Gray: If we have it available, I will share it. I don't have it with me.

Mr. Walt Lastewka: As well, you talked about a program that you've introduced in the last 18 months. Has that been effective? Of the 350,000 small businesses, how many new businesses have been involved?

Ms. Carol Gray: How many businesses that have started...?

Mr. Walt Lastewka: How many new businesses?

Ms. Carol Gray: How many businesses that are new to us, or newly created?

Mr. Walt Lastewka: Of the 350,000, how many are newly created?

Ms. Carol Gray: I don't have that statistic off the top, but I can look into it for you.

The Chair: Okay.

Mr. Lastewka.

Mr. Walt Lastewka: May I ask one more question?

The Chair: Sure.

Mr. Walt Lastewka: On the business planning requirement, when I did a search of all the banks there was everything from 11 to 65 pages. When I asked the different sections of the banks, the small businesses, how many pages they really fill out, it's half.

What are you doing to make it simpler on the business planning project for new businesses?

Ms. Carol Gray: Are you talking about customers preparing a business plan or preparing a credit application?

Mr. Walt Lastewka: I mean, preparing their business plan for a credit application.

Ms. Carol Gray: For loans under $100,000, we don't need a business plan. All we need is the answer to a very simple credit application that is basically half a page. It looks very much like a credit card application. A few key questions are all we ask. We do not need a business plan. We don't need financial statements.

Mr. Walt Lastewka: So, up to $100,000 is strictly on credit rating?

Ms. Carol Gray: It's not only on credit rating.

As for the bizSmart model, I could let Rob talk about that.

Mr. Robert Paterson: Sure.

For the lending under $100,000, it is based off the information you have in your head. You can walk in and make the application. It does have traditional credit-scoring practices, but we have introduced, in the last year and a bit, some more human factors, for lack of a better description: highest level of education; have you run that type of business before; have you had a family member that has run that type of business before?

We're using more personal indicators, as well, to help us make a decision on lending under $100,000, again, trying to get down to that, being able to make a decision in five to ten seconds, which is what we do in the bizSmart model, so that we can save the time of the entrepreneur and not have to have them come back again, or again.

The Chair: This is your last question, Mr. Lastewka.

Mr. Walt Lastewka: I want to go back to my earlier question concerning assistance during a downturn.

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You talked about your team of three and helping small business adjust when there's a downturn. So that leads me to believe that I shouldn't hear from clients saying they didn't hear from the bank and all of a sudden their loan is pulled. Is that correct?

Ms. Carol Gray: That is correct. You should not hear that.

Mr. Walt Lastewka: Thank you.

The Chair: Thanks very much, Mr. Lastewka.

I want to pick up on a couple of points. Mr. Bergeron raised an interesting one—and I've received some correspondence with regard to this effect—that as the prime rate has fallen, the Bank of Canada rate has fallen, credit card interest rates haven't fallen.

Ms. Carol Gray: Right.

The Chair: This committee also has a responsibility for consumers in Canada, and I'm wondering how you justify that as a bank.

Ms. Carol Gray: Again, the higher interest rate cards—

The Chair: No, I'm just talking about a regular Visa card. None of them have fallen. Do you have a credit card where your interest rate has fallen?

Ms. Carol Gray: Yes, the bizSmart.

The Chair: It has fallen?

Mr. Robert Paterson: BizSmart is indexed on prime.

The Chair: It's indexed on prime.

Mr. Robert Paterson: It could be as low as prime plus one and a half, which is what we lend at.

Ms. Carol Gray: The small-business Aerogold card for CIBC is also indexed off prime, and it can be as low as prime plus one.

The Chair: That's for small business, but for the regular consumer, have any of the interest rates changed for consumer credit cards?

Ms. Carol Gray: I'm not as familiar with the consumer....

The Chair: One of the proposals that has been bandied about is that there should be a Bank of Canada credit card, because the banks aren't fulfilling that role. As interest rates have dropped, credit card rates have held. I have an Aerogold card, a CIBC Visa card, and that rate hasn't changed at all.

Mr. Tony Ianno: Is there another one, other than the one you stated?

The Chair: No, I'm saying I just know about mine, and mine hasn't changed. I have only one.

Ms. Carol Gray: I have a gold card too, and mine hasn't changed either.

The Chair: I'm just saying....

Ms. Carol Gray: I understand. On the consumer side, I'm sorry, I'm really at a loss to give you information, because it's not my area of specialization. We can come back to you with that.

The Chair: But I'm surprised at that, because your definition of “small business” is anyone who's intertwined. Their personal and business affairs are intertwined, so they're obviously going to have a business credit card and a personal credit card. Most would have both; most wouldn't just have one.

Ms. Carol Gray: Actually, a lot of people do have one.

The Chair: Oh, I would be surprised about that.

Ms. Carol Gray: A lot use their personal credit cards for business purposes.

The Chair: So they don't have a special rate then?

Ms. Carol Gray: Or what they do, and what we actually suggest they do, is to take their credit card and use that for transaction purchases, and they align it with an operating line of credit, which is tied to prime. Again they get the convenience of the credit card and any benefits that those credit cards would attach to it.

The Chair: Maybe Mr. Tal can address this. I'm trying to understand why the credit card interest rate is so insensitive to the prime rate. Maybe there's an economic reason that I'm not understanding. I just see it as gouging, so maybe I'm missing something.

Mr. Benjamin Tal: Again, going back to what Carol mentioned, you're talking about one card. There are so many options.

The Chair: No, in general. I'm asking you a general question, an economic question, not a CIBC question.

Mr. Benjamin Tal: To my knowledge, again without getting into the actual rates, the credit card business is a high-risk one. The volatility there is very high, and whenever there's a downturn in the economy, they are the first to go, because you continue paying your mortgage but you will default on your Visa. So it's very high.

Also, there is a lot of abuse of this kind of card. So there are high maintenance costs. So these kinds of interest rates are supposed to compensate for this risk. So there's a big difference between pricing a mortgage and pricing a Visa card.

The Chair: I understand the risk, and I understand why it's higher than the rate. What I don't understand is why it's insensitive to when the rate goes down.

I can understand the risk, and I can understand that it's priced higher, but I can't understand why, when we have hit the lowest rates we've had in 40 years, nothing has happened. To me as a consumer, looking from the consumer side of things, economically I just don't see it. It doesn't make sense.

I can see it still being higher, but not at the extreme it is. I can see that the 18% should have come down to about 15% and the 28% card should have come down to about 25%, and that would still be high.

Mr. Benjamin Tal: Okay, I can see that it might be a legitimate question, but again, the people who sit here are not the people who deal with Visa.

The Chair: No, but I thought from an economic point you might....

Mr. Benjamin Tal: From an economic perspective, the only thing I can say is that the risk premium on Visa is much higher than any other card.

The Chair: Okay.

The other thing I have a question about, and I think Mr. Lastewka touched on this, was why it is that we're starting to hear.... Maybe this is a quick step back in time, but I have businesses that predict when there are going to be downturns in their business. There's one guy who has been in business for 36 years, and every year has been a bad year. He kept warning me that 2001 was not going to be a great year. He goes back to 1991, 1981, 1971, and in his business it has been a down year and there's been a downturn.

• 1630

Why is it that banks don't predict that? Or maybe they do predict that, I don't know. But when people project their growth or their figures and they're lent money on it, when they don't meet their targets, especially in this past year, all of a sudden we call their loan or we decide we don't want them as a client or they become too risky. And I've had this concern from several what I would consider to be small businesses, although I have a feeling you would define them as medium-sized businesses.

A good example is the steel business. I'm hearing from a lot of my steel businesses that banks don't like steel any more. I'm hearing from certain aspects of the agricultural sector that banks don't like that aspect any more, because it's too risky. I'm hearing from my hothouse-tomato guys that the banks are nervous because of the trade action with the United States.

This is a question we posed to you in March 2000 and again in March 2001: what are we doing to assure businesses...? And not just small businesses, Mr. Tal, because I consider my tool and die mould-making guys to be small. Your definition says they must be medium-sized, because all they do is export. They've grown 300% because all they do is export. There are 13,000 manufacturers in Canada that support the automotive business, and most of them export. They don't fit into the 5% classification. So what are we doing to ensure they survive? They're not meeting their targets. It's been a bad year, and it's become a little worse—or a lot worse in some cases—because of September 11. Where's the flexibility in the banks? I'm not seeing it.

I just travelled with the agriculture committee last week, the task force, and I've heard not good things about the banks.

Ms. Carol Gray: I'll try to answer in a number of ways.

You mentioned the agriculture industry. Actually, our market share and the utilization rates have grown; in other words, customers have used more credit that's been available to them in the agriculture sector.

I think fundamentally it comes down to understanding the company's business and understanding the industry they're in. It's our responsibility to ensure we understand that each industry has different business drivers.

It sounds like you are talking more about the mid-market level, rather than the small-business level, although—

The Chair: Well, I consider them small business. They employ 20 people, some of these shops. Maybe 15. They're not huge operations, but because.... Maybe you have a dollar figure somewhere in your small business definition—

Ms. Carol Gray: No, we don't.

The Chair: But to me, because they're corporations, they're still small businesses.

Ms. Carol Gray: Right.

The Chair: They're not large. There are 200 tool and die mould-making operations in Windsor and Essex County. There are a few that are larger. There are many that are 15 to 20 employees, but they wouldn't fit your definition of “small business”, or if they do, I don't know where they ended up, because they only export. Most of them export massive quantities of their goods.

Ms. Carol Gray: Right. And many of our customers do export. As I mentioned, about 12% of our customers in the small-business sector do export.

I guess it's really irrelevant whether they're small or medium-sized. They're an important sector. And the fact they're not meeting their business plan projections is not a reason we would call a loan, for example. It would be a reason for us to sit down with a customer and ask what plans they're making, how we could perhaps help recapitalize the business, and put some strategies in place so they get on a solid footing.

Fortunately, many companies who have experienced a lot of growth over the past few years have built up sufficient equity that they can withstand this weak economic time. If they have not taken advantage of the growth years and built up their equity, and they cannot meet their cashflow requirements, putting more debt into the company is not going to be a solution. If they can't meet their cashflow requirements, whether it's a loan requirement or even payroll, then that's something much more fundamental that has to be looked at.

Mr. Benjamin Tal: Let me refer to the numbers again. If you look at the performance over the past year or so, we've gained market share in 14 out of the 17 industry groups. The market share is broadly based, and it's most industries—14 out of 17. So in this sense you cannot say we focus on one or two industries and forget about the rest, because most industries have seen significant increase in market share over the past year and a half or so.

Ms. Carol Gray: But, Madam Chair, I would suggest, and this is the advice I give to all of my customers, if they are experiencing signs of distress—and hopefully they have good management information and controls at their disposal, so they can see those signs early—then they should talk to us early, because then we can put strategies in place and work with them. That's our intention, to see them through these difficult times. We can do that best if we have the information and we work early, when there are more options to explore.

• 1635

It's when a customer is really pushed against the wall that they come to us in the eleventh hour. That makes it much more difficult to deal with.

The Chair: With all due respect, Ms. Gray, I have to suggest that in light of September 11 and the evidence we've heard at this committee, there isn't a customer who could have predicted September 11.

Ms. Carol Gray: You're right.

The Chair: There isn't a customer who could have predicted what would happen at the border, and as a result, the loss of customers that some of them have already experienced and some still may experience.

I would ask the banks to give that some serious consideration. I wouldn't suggest they've backed themselves into a corner or they have higher debt-to-equity ratios. Some do. Some do because they're financing the GST on huge purchases. For example, Ford, Chrysler, or General Motors take six to nine months to pay, and the small business is carrying this huge expense. It's hard for some of the smaller businesses. I would ask the banks to really rethink their strategy, because I'm telling you, the comments we've heard, and the comments I've heard over the last few weeks, are really quite disconcerting to me.

Customers are hearing things like “I'm calling your loan because I can”. That's not really great. I know the steel customers I've talked to tell me the banks are nervous. They don't want their business any more, because they're worried about steel. That makes me extremely nervous. A large part of Canada's economy depends on the steel business. I just ask you to maybe take some messages back or send some messages through your small-business banking operations that you recognize the difficult time we're going through and you want to help Canadian businesses make it through.

Ms. Carol Gray: I will take that counsel, but I will also assure you that is the message I personally deliver to small-business employees across Canada. While we're talking in general terms, I will also make the offer to any of the members here that if they are seeing specific examples, they can call me and we can deal with it.

The Chair: Thank you very much. We appreciate this very much.

We're now going to change witnesses and ask the Royal Bank to join us at the table.

We're very pleased to welcome the Royal Bank of Canada. With us we have Mr. Jim Hamilton, the vice-president of small business and agriculture; Mr. Russ Cook, the vice-president of knowledge-based market; Miss Anne Lamont, vice-president of government affairs; and Mr. Carlos Leitao, senior economist for the Royal Bank Financial Group.

There's an opening presentation, and I'm going to make the assumption that Ms. Lamont is going to begin. I could be wrong; maybe it's Mr. Hamilton. Okay, Mr. Hamilton.

Mr. Jim J.E. Hamilton (Vice-President, Small Business and Agriculture, Royal Bank of Canada): Thank you very much.

Good afternoon, Madam Chair and members of the committee. On behalf of RBC Royal Bank, I would like to thank you for giving us this opportunity to speak with you today about our bank's support for Canada's small business.

For those new members of the committee, my name is Jim Hamilton and I am vice-president of small business and agriculture for RBC Royal Bank.

• 1640

Before we take your questions, I would like to take this opportunity to discuss our approach to the small-business market. One question that has been consistently raised is how small business is defined. This is a complicated question, since there are many factors involved. For purposes of gathering information, Statistics Canada is using loan amounts to determine the size of a business. This is a common way of measuring that many financial institutions use, including non-banks such GE Capital, as well as foreign banks such as Wells Fargo.

For RBC Royal Bank, however, loan size is just one of many criteria we consider when segmenting our business customers. I outlined our segment definitions in my November 8th letter to committee members. However, since this is clearly important to you, I would like to provide you with additional detail.

Please refer to page four on your handout. On the vertical axis of this chart you can see that loan size is just one of many characteristics we use as a guideline when assessing a business. Let me stress that all the characteristics listed on the left-hand side, such as loan size, company sales, management characteristics, and so on are guidelines only. Not all businesses are neatly going to fit all of the criteria in each category.

We also segment our business customers based on other factors. These include characteristics of the business owner, industry grouping, or the life cycle of the business. In agriculture, as an example, we also segment by commodity grouping. These are guidelines. As you can appreciate, a business can fall easily into one or more of these segments.

Our goal in segmenting or dividing our customers in this way is to better understand their needs. Our customers tell us it is critical that we understand their industries. This is especially important to them in uncertain economic times. Through this understanding we hope to build a deeper relationship with our business customers. We wish to be viewed by them as more than just a supplier of loans. We want them to know more of our banking services, such as deposits, trade products, and cash management services.

For example a specialist account manager from Russ's knowledge-based industry team may finance a film production company. The account manager may provide advice on loan structure and financing of tax credits. This will help the customer with cashflow management. In addition, if the owner of this company is a woman, she can also benefit from the resources and tools we have developed specifically for women entrepreneurs. These include our network of women's champions across the country, our online virtual network, as well as the Champions Newsletter for Women Entrepreneurs.

Our fall 2001 edition of the Champions Newsletter is included in your package, as is an insert listing the top 100 women business owners in Canada in the year 2001.

Over the past 10 years the number of suppliers of business loans has increased. Domestic banks now provide only 50% of the total market. However, among banks, RBC Royal Bank is the clear market leader, with almost double the amount of available credit to small and medium-sized enterprises as our nearest bank competitor.

Let's now look at some statistics. For RBC Royal Bank customers borrowing less than $1 million, please refer to page five of your handout. As of June 30, 2001 the total amount of credit we made available to these customers was in excess of $19 billion. This is an increase of 20% over five years ago. Despite this increased credit availability, there has been a smaller increase in outstanding loans. New loans are up just 10%—evidence that businesses are choosing lower debt levels.

This reflects the overall trend in Canada, as indicated by the chart on page six. This chart shows the decline in the debt-equity ratio as well as the increase in interest coverage of business.

For small businesses borrowing less than $100,000, please refer to page seven. As of June of this year, the total amount of credit we had made available to small business was more than $4.5 billion. That's an increase of 48% over five years ago. It's also nearly double the amount made available by our nearest competitor.

We have a similar story with respect to our customer base. On page eight you can see that the total number of customers borrowing less than $1 million has increased by 37%. This is largely a result of the growth in the number of our small-business customers. Our small-business customers have increased one and a half times in the last five years.

• 1645

It is also important to note that we have over 200,000 non-borrowing business customers. Why do so many small businesses and entrepreneurs want to deal with RBC Royal Bank? As Canada's leading bank to small business, we know the answer is in our approach. In other words, we treat small business as a valued customer and a partner. Our objective is to understand their businesses and provide financial advice.

This means our commitment to small business is about providing innovative products and services that help entrepreneurs cut costs and improve profitability. It also means we actively involve small businesses in developing strategies to support them. Over the last two years we have established regional small business and entrepreneur advisory councils across the country. The councils meet quarterly and provide direct feedback to us on how RBC Royal Bank delivers services to small businesses. These councils have provided us with a sounding board for our approach to account management turnover, the online banking experience, and the credit approval process, to name a few.

Our small-business customers consistently tell us they need RBC Royal Bank to be a centre of expertise. They want access to strategic advice and planning resources as well as loans. Early this year we released our “Definitive Guide to Business Tune-ups”. This is a free guide for small-business owners to help them evaluate their finances, learn about human resource policies, find out about sales and marketing practices, and measure the overall health of their operation.

Just this month we released our ninth guide in this series, the “Definitive Guide to Marketing”. The remaining seven guides cover other top-line small business issues, including e-commerce, understanding business cycles, exporting, and electronic cash management. All nine guides are available free of charge through our call centre and our web site. For your reference, our two most recent guides are included in your package. These guides are an example of our comprehensive approach to customer needs.

Small-business owners and entrepreneurs can also access free business planning advice by visiting royalbank.com and clicking on the “Business” tab. Further information and tools are available under the “Starting a Business” or the “Expanding your Business” topic.

We also have specialized information for young entrepreneurs, agriculture, and knowledge-based industries. In your package we've included some screen shots of our website, which was relaunched at the end of October this year.

Finally, RBC Royal Bank remains committed to serving the needs of small businesses in Canada. We are continuously looking for ways to foster their success through all economic or commodity cycles. When customers do have difficulty, we have experienced account managers available to assist them on how to restructure their debt where possible.

Following September 11, we communicated to our 1400 account managers across the country that some customers could require even more flexible credit support. This could be a result of delays in receiving accounts, goods, or raw materials. By using our understanding of their businesses through our segmented approach, we have been able to continue to provide advice and support to our customers through this challenging period.

When I was an account manager, the toughest discussions were the ones with a business customer who was having difficulty and was requesting additional funds. In some cases it was possible to restructure debt so the business could stay viable; however, sometimes it was not. It was those discussions that I remember. I've had to turn down a loan request from a business customer because putting the business more deeply in debt was the wrong thing to do, both for the customer and for the bank.

Madam Chair, we have outlined our approaches to small businesses and how important they are to us. In both good times and bad, we evaluate each customer based on that business's financial situation. We know the work we do with small businesses helps them create jobs, provides security for families, and helps drive the Canadian economy. We are proud of the role we play in helping Canadians achieve their business goals.

Madam Chair and members of the committee, thank you for your attention. We would now be very pleased to take your questions.

The Chair: Thank you very much, Mr. Hamilton.

We'll start with Mr. Penson, please.

Mr. Charlie Penson: Yes, thanks, and welcome to the panel from the Royal Bank.

Mr. Hamilton, you're involved in the agricultural sector too, I gather.

Mr. Jim Hamilton: Yes.

Mr. Charlie Penson: The cost of borrowing money for your bank has gone down significantly in this last year. How closely does the cost of borrowing for farmers reflect that decrease?

• 1650

Mr. Jim Hamilton: I would say quite directly, because most of the borrowings under the farm loans would be prime-based. There is a large percentage of what we call RoyFarm mortgages, which have fixed rates like personal mortgages. So they follow five-year or four-year terms. As they renew, the customers avail themselves of lower market rates.

Mr. Charlie Penson: Let's take the case of borrowing for farm land out in the prairies. What is your mortgage rate for 20 to 25 years?

Mr. Jim Hamilton: I don't have the exact rates at any time. We can certainly get them, but we have fixed rates that are very competitive. They're very similar to the mortgage rates you see on the personal side.

Mr. Charlie Penson: I'm hearing from farmers wishing to buy land now. It's still in the range of 7%. Considering that the Bank of Canada's interest rate has dropped significantly, how much spread does a bank need, in those kinds of cases?

Mr. Jim Hamilton: Again it depends on the individual term and conditions. They certainly move with market rates, though. I would have to get you our exact current posted rates.

Mr. Charlie Penson: I understand, but in general can you give me some kind of idea? I know they move with market rates, but is it prime plus 2%, or...?

Mr. Jim Hamilton: The variable-rate loans definitely move with prime. They are based on prime, and that's probably 50% to 70% on the agricultural side.

The RoyFarm mortgage rates are set as posted rates in the mortgage market, and they move with the bond market. So even if the prime rate moves, as we've seen in the last two weeks, the bond market takes a huge upswing, as we've seen in the last two weeks. Those rates can change, as well. That's why it's very hard to directly associate them. They're based on the bond markets.

Mr. Charlie Penson: You talked about the need to know the industry you're dealing with. Let's just follow that up a little with agriculture, and I might ask your economist to get involved in this.

Have you been monitoring the negotiations that have been taking place at the World Trade Organization on agriculture?

Mr. Jim Hamilton: Yes. Our people are obviously very in tune with those, as a result of discussions with their clients. Clearly, trade is one of the most important issues for our clients. So we definitely look at that with interest.

Mr. Charlie Penson: Maybe I can ask just one more question, just to further this along.

On what appears to have been put on the table in Davos, it sounds like the export subsidies may be on a phase-out. How significant is that for our Canadian grain farmers, and how soon could we see improvement?

Mr. Carlos Leitao (Senior Economist, Royal Bank Financial Group, Royal Bank of Canada): That would be crucial, but again we go back to the Uruguay Round. We heard that before and it didn't happen. I guess in this case it really is a question of Europe and the United States really being serious about reducing export subsidies.

We can only hope that Canada and the other members of the so-called Cairns Group, the mid-sized exporters, put enough pressure on Europe and the U.S. to really terminate those silly export subsidies. But for grain farmers out west, the end of export subsidies is absolutely necessary.

Mr. Charlie Penson: You seem to have some doubt that this may actually happen.

Mr. Carlos Leitao: I don't doubt it may actually happen. I have a serious doubt as to how long it will take. It's a question of real politics, and your guess is perhaps better than mine on that front. I don't know, but from what we've seen with the Uruguay Round and how long it took to have some effect, let's say I'm not very optimistic on the time lag.

Mr. Charlie Penson: Yes, but the reforms that were incorporated in the Uruguay Round were basically a six-year process. Now we seem to be at another round that's developing. Do you have no feel for what the phase-out period may be?

Mr. Carlos Leitao: The current export subsidies, even under the Uruguay Round, shouldn't exist, yet they do. So it's more a question of real politics, of real power plays between the U.S. and Europe on agriculture. It's really a matter of how serious Europe and the U.S. are, in that respect.

Mr. Charlie Penson: You know that our agriculture sector was subject to anti-dumping charges in the cattle industry, by the United States. Subsequently, the U.S. lost that case. But my understanding is that the United States has put their anti-dumping trade law up for negotiation at the WTO, as well. Are you familiar with that?

Mr. Carlos Leitao: No.

The Chair: Thank you, Mr. Penson.

Mr. Bagnell.

• 1655

Mr. Larry Bagnell: Thank you for coming.

You can answer my first question quickly, because I've already asked it before, but maybe you could send me something later in writing. Have you taken steps to improve access to capital in rural and northern Canada? Previously, there was such an outcry that people couldn't get capital.

Mr. Jim Hamilton: The rural network is absolutely critical to the Royal Bank. We've been in some of these communities in rural Canada for over a hundred years. We have new streamlined processes that open up more outlets in remote communities. We are constantly testing new avenues of access. We're presently testing a new site for an agency arrangement on reserve in Manitoulin Island. It could have further applications.

We have a lot of mobile bankers out there in different communities who are linked electronically. They can do credit applications with their laptops. We have been growing our numbers too, in those regards.

Mr. Larry Bagnell: Some of the rural communities don't have banking at all. If there were broadband access to those areas, which doesn't exist at the moment, would that help convince the bank to put some services in those locations that don't have them now? Would that be useful at all?

Mr. Jim Hamilton: I'm not a technical expert on branch premises, but my first thought is that broadband itself wouldn't be enough to change the feasibility of having a branch. Again, different models can help that. The agency model is one, and I don't think that requires broadband service.

Mr. Larry Bagnell: My last question—if I leave, I'm suppose to be somewhere else to vote—is related to September 11. Maybe you can just tell us your strategy on how you're helping. Generally companies are down because there's a whole recession. But some specific companies, such as travel agencies, are down even more and have even more critical needs.

Mr. Jim Hamilton: Although September 11 has had a huge impact, even more than anyone could have ever encountered, we are approaching it in the same vein as any other type of cyclical downturn or business tension that happens on a day-to-day basis.

We are working through our account managers to talk about the short-term consequences of a business impact such as this, and extend terms where necessary. We are trying to work out situations, and hopefully in short order we'll see some things returning to normal.

We're already seeing some good work done by the federal government on the trade border issues. There's an article in the National Post today that trade is resuming and coming back strong. That cross-border trade access is absolutely critical.

I spoke to an entrepreneur in Quebec a couple of weeks ago in the food services business. He can sell bagels in Texas and be competitive, but if his truck waits for five hours at the border his margins are gone. So I think there's been a lot of good work done on that, too.

We look through all of these circumstances and try to work them through the short run, if there's no structural change to the industry. The tourism industry still has great long-term demographics, so hopefully this is a short-term situation.

Mr. Larry Bagnell: Thank you.

The Chair: Thanks, Mr. Bagnell.

[Translation]

Mr. Bergeron, please.

Mr. Stéphane Bergeron: Thank you, Madam Chair.

Thank you for being here today and thank you for your presentation. To follow up along the lines of Mr. Bagnell's question, I was reading in your paper that following September 11, you communicated to your 1,400 account managers across the country that some customers could require more flexible credit support. Besides telling them that they might be asked to be more flexible, did you recommend they in fact grant more flexible terms?

[English]

Mr. Jim Hamilton: Again it goes to dealing with each client on an individual basis. But we want to set the tone that because of the gravity of the situation, they should anticipate these issues coming in. We've done that in the past in several examples, obviously nothing like this one. When Walkerton happened here in Ontario, we communicated immediately with all our small-business account managers about potential impacts to the businesses in Walkerton.

Through commodities ups and downs we are constantly in touch with our account managers. The specialization that allows them to understand these things allows them to get more flexible in some of the programs, where warranted, when there are short-term aberrations.

• 1700

[Translation]

Mr. Stéphane Bergeron: I'd like to go back to the discussion I started to have with Ms. Gray of the Canadian Imperial Bank of Commerce, particularly the subject of credit for the young. Let me tell you first where I'm coming from.

Besides existing small and medium-sized businesses, there are some which are just emerging or would like to emerge. Statistics show that it's mostly young graduates who are interested in starting a business, creating their own company, but that very often, these young people—according to none other than Statistics Canada—already have a heavy debt burden, as they enter the job market, and relatively modest revenues.

Ms. Gray was saying earlier that high rates of interest were maintained on some credit cards because customers who carry that type of credit card don't pay the balance owing periodically, every month. Very likely, people who would have a problem doing so are also the ones whose revenues are low. I was talking about young people a moment ago. According to Statistics Canada, half of the people in the 25 to 34 age group carry a credit card debt and among the less than 25 age group, 30% owe money on a student loan.

Let me ask you the same question I asked Ms. Gray earlier. Given the economic situation, the need to boost consumer spending and the fact that it's mostly people with the lowest revenues who have credit card problems, are financial institutions, particularly the Royal Bank, going to follow the downward trend of interest rates and cut their credit card interest rates?

[English]

Mr. Jim Hamilton: Well, first of all with respect to young or youth entrepreneurs, that's a strategic market for us. We have several programs aimed at that, and as you can see on our website page, we have a section where young entrepreneurs can go and get tools and financial advice.

We find, in the youth entrepreneur market, the most important factor is access to financial advice: business planning, mentorship, and all those things. We are actively involved with enterprise centres all across the country built on the model, actually, that Mr. Lastewka's enterprise centre in Niagara and others have assumed. We find that this is the most critical part for a young entrepreneur getting started, the mentorship part of the equation as opposed to $15,000 in a start-up loan, but we also do the access to capital.

With respect to credit card interest rates, we have a low-fee option. The committee before, with the Bank of Commerce, was talking about 15% or 16%. We have a fee option that is about 10.5% now, I believe; that's our current rate. We have also introduced in the last month a variable-rate credit card product designed specifically for small business, so that should fluctuate with prime.

[Translation]

The Chair: Okay?

Mr. Stéphane Bergeron: Yes. Thank you, Madam Chair.

[English]

The Chair: Mr. Lastewka, please.

Mr. Walt Lastewka: Thank you, Madam Chair.

I have a couple of questions similar to ones for the previous witnesses. I'm always concerned about the assistance financial institutions give to their small business in advance or as a downturn occurs. My question to you is, what type of work have you done in advance and what type of work from the bank's viewpoint are you doing now to assist as we go into this slight downturn?

Mr. Jim Hamilton: Madam Chair, we feel our segmented approach and our understanding of business cycles is our key strategy for that. For any downturn we feel that we are best served by understanding our customers' industries, and that goes for small business all the way up to medium-sized business and commercial business as well.

• 1705

We have industry specialists people can access who will help proactively plan for changes in dynamics that would be short-lived, and we can restructure facilities for short-lived issues. Where there are longer-run structural issues for the industry, we try to work with business so we can allow them to move to the new structure and survive, and the essence of that would be good management. Good management can adapt to new structural change in a business. Very rarely—but it does happen—the structural change in the industry is so significant that, if management has not kept pace or cannot keep pace, in a downturn they face a windup of the business.

Mr. Walt Lastewka: But the bank representative plays a key role in calming the waters sometimes. When I review, which I've been doing since June, I take the time to visit small businesses that are successful, and I ask about their relationships with their bank representative. I find out that in successful businesses there's a very close relationship, with ongoing visits, not just when something blows up, and more of a partnership. When I review businesses that are having trouble, there seems to be a lack of that. What is your bank doing to correct that?

Mr. Jim Hamilton: Well, that's something we would work on every day, and we would, again, try to anticipate needs, understand their concerns, meet with them proactively, and encourage them to be proactive with us as well. The example of what we did after September 11 was that we had national communication for our account management team, including our risk managers and all the people involved in business markets, to the effect that we needed to be especially on the lookout for situations where we could help because of the extreme nature of the situation.

Mr. Walt Lastewka: I earlier asked a question concerning times when you do have businesses that go bankrupt or go out of business for one reason or another. What, as you back up and go over what happened with that business, are you finding as reasons with your customers?

Mr. Jim Hamilton: I would say there are a couple of main causes. It all starts with management. I believe that management can in most cases, in anticipation of a huge structural change, react and change their business dynamic in some way to allow them to survive, maybe in a different format. But where management loses track of that or if in some cases it's just too quick—the pace is just too quick, and they can't keep up with it—that's when you would get it.

Maybe I'll ask Russ to elaborate, especially with respect to the knowledge-based or high-technology industries, where we see that a lot.

Mr. Russ Cook (Vice-President, Knowledge-based Market, Royal Bank of Canada): What we have with all our clients is a client strategy, and we would share that with the client. In that document it would include the client's goals, the client's plans, and even the client's financial plans. That document will also include the bank's part of the relationship. We would talk to a client and discuss with them 12 months out what kind of support we can provide.

Certainly in my market, which is high-growth technology companies, in 2000 everything was up as fast as it could go. In the last 12 months it's been down in the opposite direction just as quickly. We've met with clients one-on-one to understand who their customer base is, what's happening to their revenues, who their suppliers are, what their critical business relationships are, and where the bank fits into that.

One of the things we do is supply credit. We also supply cash management, treasury management, and foreign exchange, and increasingly we're involved in the entirety of the company's life cycle.

There are many providers of capital beyond the banks, and we would work with the local Canadian venture capitalists, venture capitalists out of the United States, and private investors, trying to link up companies and put them in touch with the right individual to meet the next stage of their business needs.

The other interesting thing that's happening is that given the pace of change in the markets, many companies, suppliers, and customers are getting together and reforming businesses. This is an opportunity, given our level of specialization, to put companies together that might not have been together otherwise and to help them get through.

Mr. Walt Lastewka: I didn't have a chance to have a second round previously, but I don't want to miss this next question. It concerns accounts receivable.

• 1710

Small businesses' access to capital and collecting on accounts receivable are to me almost the same thing. It's the small businesses that suffer especially when there's a bit of a downturn. The medium and larger businesses don't pay small businesses. Are you doing anything special to assist your small businesses to collect their accounts receivable, even if it's from some of your own bigger clients?

Mr. Jim Hamilton: Absolutely. First of all, we wouldn't draw that linkage to the client in itself. We would counsel and coach all of our clients around receivables. One of our main financing areas, obviously, is accounts receivable—inventory working capital. We're always coaching our clients to optimize their working capital; there's no question. Wherever possible, we can extend the terms, as appropriate, to satisfy their needs.

There are also other types of arrangements in some of our other divisions where they can get more terms, factoring services, as well as counsel on the use of Export Development Corporation for foreign receivables. It's an active part of our dialogues with our accounts.

Mr. Walt Lastewka: I want to make sure my question is clear. Basically, I see—and this has been happening since about August—a number of small businesses saying they are unable to do accounts receivable. When I ask them about their procedures, their procedures are very loose. So I thought, well, I'll call a few chambers of commerce and find out what they do. I was quickly referred to others. I said, “Well, don't you have anything on a check sheet of how you should be doing things—on a simple computer program, and so forth?”.

Much to my surprise, I found there was very little out there for a small-business person who doesn't have a lot of time and asks for guidance, without being referred to somebody else. Do you have something you supply to your small businesses?

Mr. Jim Hamilton: I'd have to check on accounts receivable specifically in the definitive guides. I would assume in the cashflow guides there would be a section on management of receivables. It's a pretty core element, but I don't have that right now, so I can—

Mr. Russ Cook: We do have several online products that, depending on what the client chooses, would allow them to see what their cashflow is every day. If they have good credit management practices, it allows them to follow up and—

Mr. Walt Lastewka: No, you hit the problem: they don't have good management practices and they're looking for guidance—simple guidance.

Mr. Russ Cook: Let me give you one example. In my media market, we deal with many small Canadian producers who, typically, don't have sophisticated accounting systems, because each production is a stand-alone production. In some cases we certainly have gotten involved, because we know the suppliers—we know the chain of cashflow all the way along—to help facilitate some of those payments. So where it makes sense for us to be involved as an advocate, we certainly can be and are, based on our level of specialization in a particular market.

The Chair: Thank you.

Mr. St. Denis, please.

Mr. Brent St. Denis (Algoma—Manitoulin, Lib.): Thank you, Madam Chair.

Thank you for being here. Let me go along the lines of Mr. Lastewka's questions, but maybe, shall I say, from the beginning of the process. First, let me acknowledge, Mr. Hamilton, that you mentioned the first nations' business that has the on-site agency service in my riding, Wikwemikong First Nation—

Mr. Jim Hamilton: That's right.

Mr. Brent St. Denis: —Andy's Shell. He's quite the businessman, Mr. Manitowabi. So I'm glad that—

Mr. Jim Hamilton: I'm very pleased with the way it's going.

Mr. Brent St. Denis: Yes, he's a very smart businessman, so I'm glad you're there. I also participated in the opening of the First Nations Credit Union for Ontario, which is headquartered at another first nation in my riding, and they're hoping that, with broadband, they can actually take face-to-face video-screen applications down the road. Possibly that would apply, or whatever range of services could conceivably be done face-to-face, through cyberspace. They're hoping it will happen to them, and presumably it'll happen also to the big banks.

But turning specifically to business plans, in my experience in this job for eight years now, most of the difficulties I see with small businesses, apart from maybe a business running up against a particular manager or person they don't get along with—at least that's the constituent's point of view—more often than not have involved a lack of planning at the outset. That's my take on it.

• 1715

It's important for banks, as it is for Microsoft, to have an educated customer. The educated customer is going to buy more Microsoft services, or if you are a car dealer, with the more sophisticated the customer you can compete on quality and things that maybe favour your particular firm.

You mentioned things like a business tune-up. If a young or new entrepreneur comes in with a good idea, to what extent does either the Canadian Bankers' Association or individual banks have in place an infrastructure where that person can be guided through the creation of a business plan? They know intellectually they have to have a business plan. There may or may not be issues of just how one actually writes it down. In fact, in my part of the country there may be very few people you could actually hire to do a business plan, and the few you can find are overwhelmed. So there's not only a lack of access to capital, some would say, but a lack of access to the people who can help you put plans together.

I'm wondering if you have an infrastructure where you can help educate—if I can use that term—your customers, or your potential customers, so that when they get through the portal of becoming your customer they are already at a much higher level of sophistication when it comes to understanding really what it was they wanted to do, having come from the notion of an idea to a realization of what that idea really means.

I'm wondering if you could comment on that.

Mr. Jim Hamilton: Sure. First of all, I think we have a lot of resources, which we use. “The Big Idea”, as you say, is our name for our business-plan writing model, which we use for entrepreneurs starting out. It has been very popular. Even the press recently, in Small Business Week, have commented that it was a very good program. We have a lot of those tools that they can draw on and use. They are easily accessible in the branches or call centres.

With respect to individuals, we have account managers in business centres who will look at some of these plans, there's no question, and give tips and guidelines. By and large what we find works very well are these enterprise centres the local communities have. The one that comes to mind is in Sudbury, where I was recently. They have a very large enterprise centre there in the civic square, which we were very close to in our branch. It's a great operation, and they have trained people to give guidance on business plans. We sponsor that and sponsor a lot of them around the country. We help contribute in that way too. We think the enterprise centre is a very critical component to that business advice.

Two weeks ago I was in an aboriginal conference with the Conference Board of Canada. The aboriginal business leaders too were saying that the enterprise centre, within first nations, and the mentorship from those types of enterprise centres is absolutely critical.

That is the right linkage, the more we can build those enterprise centres out. They supplement the universities; they supplement the banks; they all work in harmony. I think you will see youth especially getting a lot of use out of them.

Mr. Brent St. Denis: Thank you for that.

Concerning outreach to high schools, we expect our kids to graduate from high school, university, or college knowing everything about life insurance, how to buy a house—all the things they end up, as we did, learning the hard way. I'm wondering if there's any program where either the association or individual banks provide materials or inspiration to young people to get them to think along the lines of entrepreneurship and be ready for it.

Mr. Jim Hamilton: First of all, there's a lot of outreach by our local branch staff in schools and other areas. There is definitely outreach; presentations are made, and that sort of thing.

Perhaps, Anne, you can elaborate. I know there's a program the CBA has that was just recently surveyed and had tremendous success as well.

Ms. Anne Lamont (Vice-President, Government Affairs, Royal Bank of Canada): You're probably familiar with “There's Something About Money”, a series of seminars that went across the country. I've forgotten the number there have been, but all banks have participated. They've usually partnered with a local member of Parliament. It's been a very successful program. As you say, we all learned it the hard way, or we didn't learn it at all until it was too late. I think that as our financial life becomes more complex, we're now seeing that if we can track those young people when they're in high school and teach them some good life management and financial management skills, it will make things easier for them later on.

• 1720

Mr. Brent St. Denis: No kidding. If you get a small-business consumer or the average citizen....

Ms. Anne Lamont: When you talk to young people today, and you ask them what they want to be, there's such a significant number who are saying they want to be an entrepreneur, they want to have their own business. So there's clearly a vested interest on their part.

The Chair: Thank you, Mr. St. Denis.

That's a wonderful seminar...something about money. Perhaps the banks should think about turning it into a video. There are places—I'm thinking about Mr. St. Denis's riding—where they would not have a bank in their immediate community, and perhaps there would be some benefit to considering other means of getting that message to schools, because delivering it in person is often very difficult and expensive.

Mr. Brent St. Denis: We'll have to deal with that. Along those lines, perhaps you could convey that to the CBA. Those materials came across our desk one or two years ago. Being deluged as we are, I'm wondering if it would be possible to have a reminder of those services available to us to help our communities.

The Chair: Actually, it should have been received in your office in September. It went out to all the new committee members and to all committee members once again. CBA has been very good about giving us that information, but it's an excellent suggestion, and I hope there are representatives here that are noting that. I'm sure they'll send them to us all again.

Mr. Ianno, please.

Mr. Tony Ianno: Hello, everyone.

The Royal Bank is still one of the leaders in small business, which I continue to commend you on. I would like to see, of course, more. Since December 1995, $12.7 billion; June 30, 2001, $12.45 billion.... Large business: $25.9 billion in 1995, $34.3 billion in June 2001, an increase of $9 billion—as compared to the small business loan, which went down.

I'm hoping that with this slowdown in the economy you might be able to explain the strategy you might utilize to ensure that the small businesses do not get hit under similar to normal circumstances. And are you actually going to do anything about trying to help them through this period so that they can continue supplying you with a profitable return?

Mr. Jim Hamilton: Yes. Looking at this slowdown, first of all, our economics forecast is that it will be shorter and shallower than the one in 1991, so that's the assumption we're hoping for as well. So in that vein especially, we're working with any temporary situations where we can bridge any companies that have a need through that cycle. Then, hopefully, they'll come out stronger as we start to come out in March and April, which we're all hoping will be when the economy starts to grow faster again.

Mr. Tony Ianno: What about increasing the number of outstanding loans to small business?

Mr. Jim Hamilton: We try to do that every day, and it's a very competitive market. We are increasing the number of accounts at a rapid rate, as the CIBC stated, so we hope that the formation of that base will lead to further loan utilization. We're opening 5,000 business accounts every month at the Royal Bank, and hopefully most of those are start-ups as well and medium-sized enterprises. That would be the vast majority. So yes, we're hoping that all our measures will lead to further growth.

We're also exploring some new avenues. We're putting more resources into asset-based financing. We've mentioned that 50% of the loans are now given by other suppliers, such as leasing companies, and so on. We're trying to hit that market head-on, so we're developing out more in the asset-based financing, which we haven't traditionally done. So we're going to try to finance individual pieces of equipment and so on, to try to stimulate it as well that way.

Mr. Tony Ianno: That's good.

One comment indicated earlier that you're double the size of your next competitor. From the statistics I have, the Bank of Montreal is almost at $9 billion and the CIBC is at $8.2 billion, and you're at $12.45 billion. Am I missing something?

• 1725

Mr. Jim Hamilton: I think when we did that statistic we used the $19 billion in authorizations.

Mr. Tony Ianno: I guess in the future.... Most of us use the outstanding versus the authorized, so that you can do it from that end.

The other question I have is on the program that you introduced several years ago about credit—I can't remember the proper title, but the application form that everyone else is now following form on. I wanted to also ask this to the CIBC, but unfortunately I didn't have the opportunity.

In terms of right now, with a profitable company that's been in business for ten years, it has some assets. Of course, when it goes bad the assets aren't worth the full dollar, and right now most of the banks require a personal guarantee on a $50,000 line of credit or something of that nature, even if the sales are $1.5 million or $2 million. Have you considered where your credit system and your risk management data come into play, where someone has been in business for ten-plus years, has done well, hasn't changed the name of their company or gone bankrupt or anything of that nature, and generally is fairly solid, where you might move away from a personal guarantee for the line of credit of $50,000 to $100,000? It might get you more on your small-business loan number.

Ms. Jim Hamilton: First of all, where we take our personal guarantee, very often the business and the personal dealings are so intertwined.... You mentioned a $50,000 loan. In that case, the business owner and the entrepreneur, the business and personal are definitely intertwined, so you need the support from the business owner to a line to the company. What you've described with a ten-year company with a great track record, lots of retained earnings, available security...if you did have that situation, they could certainly apply to release their guarantees.

Mr. Tony Ianno: I'm not talking about releasing. I'm talking about getting for the first time a line of credit, because they chose not to have it because they don't really need it. They're not going to sign their personal guarantee; therefore they're not getting it from you, so you are stuck with the same number you continue to have.

Mr. Jim Hamilton: Our experience has not been that this would be a huge driver to new loans. For facilities of $10,000 to $15,000, the entrepreneur realizes that it's his own personal credit that is driving the decision, and I don't think that would be—

Mr. Tony Ianno: You went to $10,000 to $15,000. I'm talking about $50,000 to $100,000, so let's deal with the same number so that we understand each other.

Mr. Jim Hamilton: I'd say if you say $50,000 to $100,000 it's probably a similar story. The entrepreneur realizes that at that level it's primarily based on his own track record and his own personal track record.

Mr. Tony Ianno: Okay, so now he realizes that, but what are you doing to allow for that so that he doesn't have to sign a personal guarantee?

Mr. Jim Hamilton: As I say, I don't think that would be a driver to a huge growth, to stimulate that growth for that $12 billion to $15 billion.

Mr. Tony Ianno: What if I were to tell you that it probably would help a great deal, would you do anything about it?

Mr. Russ Cook: I would say that we do customize by markets, so within my market, typically, there aren't a lot of assets. They're knowledge-based. There's cashflow and there are customers. Rarely do we take personal guarantees. So depending on the market we're operating in and the dynamics of that market, we certainly tailor structuring the credit facilities in an appropriate way.

Mr. Tony Ianno: So in a high-tech business you would do that. In a traditional business you wouldn't, because that's what I'm hearing.

Mr. Russ Cook: No, I think what I'm saying is that we have many different markets. We've segmented the market to customize the needs of the entrepreneur—

Mr. Tony Ianno: Yes, I heard that. What I'm saying is from your market, which is the high-tech, you do that. In the traditional market, from all the experience I've had, you don't do that. So what I'm asking is how do you marry the two so that in effect your way becomes the norm?

Mr. Jim Hamilton: I'm not sure that's the norm in Russ's market for the small loans. We take security, we take covenants where the collateral isn't sufficient, potentially, to pay out the loan, where, again, the business owner is intertwined in the business to the level that they are the business.

There are a lot of factors that go into deciding the mix of collateral and the collateral guarantees. We're always evaluating those. If there's something that's going to work better, we're happy to look at things. That's our success. That's our competitive strength. The ability to manage the risk and return and operate in a competitive environment is the way we'll thrive. We'll always look at different ways to try to optimize that.

• 1730

Mr. Tony Ianno: But you won't look at this, or you—

The Chair: Thank you very much. Thank you very much, Mr. Ianno.

Mr. McTeague, lastly.

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thanks, Madam Chair.

Thank you for being here today.

Your bank is certainly prominent in my community. I must say, over the years it has done good work in the community—Jenny Gould, and people like Sherry Robinson. You do not have my loan, by the way.

Mr. Jim Hamilton: We're still working on it.

Mr. Dan McTeague: It's encouraging to see them working so well at community organizations, and particularly with small business.

I have a couple of questions. We've seen in the past, and if history is any indication, that with downturns in the economy a lot of people tend to lose their jobs, some more permanently than others. As a result, there's been an increase in the number of small businesses, which have gained a tremendous footing in Canada and now constitute basically the bulwark of our economic activity.

This may very well happen again. Notwithstanding the reasons for its happening, I'm wondering if, being the largest of the banks, you've perceived or have the ability to perceive changes in the employment patterns with new technologies and what kind of contingencies your bank has set aside in anticipation of a larger growth in the number of people who'll be making small business loan demands.

In the context of this evolution—the rapidity of change—I'm wondering if you're also taking into account and bridging those who are caught in the unfortunate aspects of various trade disputes. I'm not only, of course, referring to softwood lumber clients. How are people who may service those industries, and also those who may be affected by the border closures, faring? A couple of comments from you on that would be very helpful.

Mr. Jim Hamilton: The trade disputes, or the border crossings, or any of those hopefully short-term impacts, are exactly what we're trying to deal with when we segment our business and develop understandings of our business. We would try to understand the impact of border delays on our customers in terms of receiving inventory, delays in receiving goods, their customers' delays, or the accounts receivable problem mentioned before. In all of those things we try to work with our customers, knowing that hopefully that will be a short run and things will get back to being relatively normal.

Normal may be a new state in three months. We would help our customers adjust to that new state as well. That's how we would deal with all of those types of impacts, which we hope are short-term.

Mr. Dan McTeague: I take it, Mr. Hamilton, that businesses may well be able to anticipate problems down the road faster than you can. How agile, how adept is your lending institution, being the largest in Canada, at being able to change pragmatically with changing times—in particular, for those who may be subjected not simply to a trade annoyance at the border but perhaps a question of a tariff suddenly imposed by a few protectionists south of the border?

How much tolerance will you have for those Canadians who are being very effective, but for whom the level playing field is being suddenly and dramatically shifted for ulterior purposes?

Mr. Jim Hamilton: The softwood's a good example. We had that case around 12 years ago, when the first round of softwood or lumber tariffs was imposed. It caused huge hardship for our forestry industries. The Royal Bank was and still is a key supplier to the forestry industry.

We've had the same issues in agriculture, with up-swings and down-swings in commodity prices. I can remember, three years ago, the price of hogs was so low everyone was wondering whether the industry would survive at all, and it's come back nicely.

Again, I come back to our key strength. We feel the key way we can deal with it is by having experts who understand their industry. We have an expert group that understands the automotive sector—tool and die, all those sorts of things—and the impacts. They get quite involved in the industries—the industry groups. Hopefully they can work with those clients, anticipate impacts, and know when the impacts upon their customers will be short-lived.

Mr. Dan McTeague: Mr. Hamilton, my final question involves a very specific example where I think sometimes things get off track a little. I have a constituent, who also does business in a number of other ridings, by the name of “Bathtub King”. I have talked to some of the people at your bank concerning their opportunities, which have been made abundantly available in other jurisdictions. They have an offer, for instance, from the Chinese government to remodel a lot of the bathtubs in anticipation of the Olympic bid they received.

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Unfortunately, they're being restricted in their line of credit because they don't necessarily have a lot of capital. A lot of their work is in fact labour-intensive. They find themselves unable to expand and make the kinds of changes to their own personnel to meet a demand in the marketplace.

I know, given the reputation of your bank, those things are few and far between, but I worry sometimes that perhaps we don't understand the potential of certain businesses. What assurances can you give to this committee that we won't have more examples of the “Bathtub King”, and that these small companies may very well prosper and create the kinds of jobs that pay the kinds of taxes that keep us employed?

Mr. Jim Hamilton: Right, and keep us employed as well.

Mr. Dan McTeague: Absolutely. Agreed.

Mr. Jim Hamilton: We recognize that fully. I can't comment on any individual case or any customer, and I don't really know the specifics of that one. But that's what we work through every day. We try to work with customers, especially high-growth customers. It creates new challenges.

You mentioned exporting to China. That's a huge issue for small business. It is very complex. The complexity of exporting to China is often underestimated by the entrepreneur. We have specialists in trade finance that can help and assist with that, but often there are a lot of misunderstandings by entrepreneurs about how they can do business in China, as an example.

Russ, maybe you can also add some of the nuances in your industry around some of those types of issues where they're high-growth, high-yield companies that we're trying to service. It is always a challenge for the company's growth, and for us.

Mr. Russ Cook: The reality in Canada is that there are lots of great resources, like the Export Development Corporation. We put on seminars with the Export Development Corporation to talk about the steps they need to take. Then we work with clients one-on-one to actually structure a particular trade deal.

Most of my clients, certainly in an IT space, export 95% of their product. Some of it stays in Canada, but a lot of it goes to the U.S. and other parts of the world. A key thing we do is bring in all the other resources that are available for free, in many cases, for an entrepreneur.

The second thing, going back to what we said earlier, is we have a specific strategy for every client. Again, I can't comment on the example you gave, but in most cases we look at their plan, and their plan to go to China, 12 months out. We try to build in the pieces they're going to need, which may be from the bank and some other enterprise centre. There may be another supplier we're aware of that they might go and talk to about their experience. So we do a lot of putting people together.

I think that's the result of us being deeply involved in a particular market. We know the players. We know other people who have been there before.

The Chair: Thank you.

Thank you very much, Mr. McTeague.

I just want to pick up very briefly on an earlier question from Mr. Bergeron and my earlier question about credit card rates. Maybe Mr. Leitao can explain this. I can't get this economics part right, no matter how I try to come around it.

I go back to 1991, when we were in the last recession and interest rates went way up. I know there was inflation and all that, but credit card rates stayed very high. I can understand that.

Now I look at the fact that inflation's not there, rates have come tumbling down, but credit card rates remain high for the consumer. There is the same risk. The risk is always there with credit cards. That's why they have higher rates to begin with. But isn't there a proportion? As rates come tumbling down, shouldn't a proportion be there economically?

Mr. Carlos Leitao: As was said before, there are credit cards with rates of 10.5%. They're not all at 18%.

The Chair: But 10.5% is still extremely high. Have those come down recently, or is that just where they're at?

Mr. Carlos Leitao: They've come down a bit, although not as much as other credit instruments. Again, I think that has to be seen in the context of credit cards being one instrument. There are many other types of credit instruments.

I would just add that if one consumer is carrying a unpaid balance month after month, maybe it's time to think of other alternatives. Maybe a credit card is not exactly the most efficient use of credit. Maybe they need a personal loan, at a much lower rate.

I grant you the relationship between the prime rate and the credit card rate is less obvious than other types of loans or credit, but it's also a very different type of market. Some clients just use it as a means of payment, not necessarily as a credit tool. It's a highly complex situation.

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I would only suggest that if someone is carrying a big balance month after month, they might be better off considering another resource.

The Chair: That's a very good point. It would be a good time for consolidation. I'm sure that would be prime plus whatever, at this time.

Just very quickly, Mr. Hamilton said he thought problems were short-term, from September 11. I'm quite concerned that if the government doesn't take a lot of action—what we've seen in the paper indicates we're going to take action—I'm hearing in my community....

I know in the past the banks have used the automotive sector as a gauge for when we're heading into a deep recession. When we're coming out of recession, people start spending money buying cars. It seems to be a gauge for when the confidence level is back, for some reason.

I'm quite concerned about what I'm hearing about longer term investment. If we don't do things in a much more expedient fashion and the government doesn't make some strategic announcement in the budget, it could be a longer term problem. I'm wondering if you have a comment on that.

Mr. Carlos Leitao: I wouldn't be that pessimistic, but around our shop I'm known as Mr. Optimism—

The Chair: That's good.

Mr. Carlo Leitao: —for whatever it's worth. I would say that when we talk about recession, the first image that comes to mind is 1991. But this is a very different environment.

In 1991 we had a triple whammy. We had a decline in demand in the U.S., as we now have; we had very high interest rates, a very tight monetary policy; and we had free trade, the coming down of tariffs.

This is very different. We have the decline in demand in the U.S. that hits particularly the auto industry. But monetary policy is not at all restrictive, and free trade has already been implemented, so there are no more hits on the tariff side. It's a very different type of environment.

Monetary policy does work, but it takes time. Its effect has been delayed by September 11, but it will work. Low interest rates work their way through the economy, and we think that by the second quarter, by March or April 2002, we'll see a cyclical bounce-back. So cyclical industries, such as auto, will come out of it also fairly strongly.

The Chair: I find a lot of satisfaction in what you've said, but I have one concern about something you said.

I agree with you that what happened in the early 1990s had a lot to do with the introduction of free trade. I saw it very dramatically in my community. However, there's something else that's happening right now with our trading relationship with the United States.

I point to the steel industry, the softwood lumber industry, and now the hothouse tomato industry. It causes me great concern. Maybe Mr. Hamilton wants to reply to this. I look at the hothouse tomato industry as an example of an industry that has a very high debt ratio. They have a very high capital investment. They can't sustain a 24% duty. It's just not reasonable.

Where do the banks figure in all this? Although we don't have oncoming free trade, we seem to have all these free trade disputes happening. I'm hearing rumours of other ones starting in my area.

I agree with you, Mr. Leitao, we don't have that, but we have something new and different that seems to be multiplying. I'm not sure how we're going to react to that or how the banks are going to react to that.

I'll just leave that as my final question.

Mr. Jim Hamilton: Maybe I'll just start and then refer back to Carlos.

First of all, I'm hoping the forecast will come back in the spring and the recession will be shallow. Clearly there's still an impact out there that could happen in the normal course and impact that. But we are predicting we will see some comeback in the spring.

On the greenhouse industry in agriculture specifically, one thing that is really helping is the natural gas prices. It's one of their key inputs, as well. So we're hoping that is going to help. That's another new industry we have assigned a team of specialists to work through.

We have a fairly large business base of clients in that industry across the country. The challenges they have been facing over the last 12 months have come to us, and we feel we can work with them on that.

As a lender, we can't control tariffs or things that become long-term and change the dynamics of the industry. All we can do is work with our customers to help them adapt to the new realities, whether it be softwood lumber or anything. Anything the government can do around access to trade or a reduction in the tariffs on any of those industries is absolutely critical.

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In agriculture, our clients and our own agronomists are happy and proud to say that Canadian agriculture is as competitive as any industry in the world. What we need is a level playing field on trade, and we can compete. I would say the same thing with these other industries.

That's where we can help in the interim period to adjust, but in the long run the trade issue is something government policy must try to deal with.

Carlos.

Mr. Carlos Leitao: I will just add very quickly that in the United States there are three sectors that are notoriously protectionist: steel, lumber or forest products, and agrifood. Most of the trade disputes tend to centre around these three sectors, and that's just the nature of.... I guess it's up to the government to try to diminish those tensions. But those three sectors tend to be the most protectionist.

The Chair: I hope, recognizing that, the banks will not give those sectors a lower rating or a non-positive rating when it comes to lending. As I mentioned in the earlier session, I'm hearing that the banks are nervous about steel and agriculture. I hope that as we ride through these trade disputes, the banks will take that into consideration. I would appreciate that.

We appreciate you being here. This has been very good. I have enjoyed the sessions and the opportunity to meet with you on an individual basis, as I know all the committee members have. We look forward to meeting with you again in the future.

We know that all the banks have the interests of small and medium-sized businesses at heart. We hope we can find solutions together. Thank you very much.

The meeting is adjourned.