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 28, 2001

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I'm going to call the meeting to order. Pursuant to Standing Order 108(2), this afternoon the committee will hold its second of three meetings with the banks on the topic of small and medium-sized bank lending.

We welcome the representatives from the National Bank of Canada and from TD Canada Trust. We'll invite the National Bank of Canada to speak first, followed by questions at 4:30 p.m., and then we'll hear from TD Canada Trust.

The representatives in front of us from the National Bank of Canada are Mr. Steve Tremblay, the corporate manager of business development; Mr. Simon Ledoux, the senior manager, small and medium-sized enterprise development; and Mr. Peter Thompson, the vice-president of Commercial Outaouais for Ontario north and east.

As chair of this committee, I want to emphasize, as I did at the meeting last week, that the importance the members attach to this topic is very great, and if I may quote from the 1994 report of the Standing Committee on Industry entitled “Taking Care of Small Business” it said:

Small and medium-sized businesses, in Canada and elsewhere, constitute the vast majority of firms; they are vital to employment, important contributors to community cohesion, and the source of the large firms of the future.

This is a statement that very much still applies today.

Before I invite the witnesses to make their opening statements, I wish to note that the CBC television program Venture will be recording the proceedings for an element in a forthcoming story. This is in conformity with the 19th report of the Standing Committee on Procedure and House Affairs.

Without further ado, I'll turn it over to you for your opening statement, Mr. Tremblay.

[Translation]

Mr. Steve Tremblay (Corporate Manager, Business Development, National Bank of Canada): Madam Chair, members of the committee, thank you very much for giving us this opportunity to speak about the National Bank today.

I have an apology to make. This presentation was to have been by Benoît Loranger, Vice-President, SMEs and Partnerships, at the National Bank. Unfortunately, his brother died earlier in the week; we therefore agreed to make the presentation on his behalf. I would like to introduce Peter Thompson, Vice-President, Commercial, Outaouais and northern and eastern Ontario, and Simon Ledoux, Senior Manager, Small and Medium-Sized Enterprise Development at the National Bank.

Before getting to the heart of the matter, I would like to put the current economic context in perspective.

On September 11, the unthinkable occurred. The events of that day, however, should not mask the magnitude of the economic slowdown already under way in North America at a time when Japan's economy was in a nosedive, and Europe, with its shaky euro, was trying to find its way with its new central bank. Economic forecasts already looked as if they would be revised downward in the fall.

The collapse of technology stocks had dramatically contributed to the deteriorating labour market and had further prolonged the contraction in the manufacturing sector. Despite everything, under normal conditions, consumer confidence would have been able to pick up the slack.

What happened on September 11 seriously undermined what little confidence remained in the minds of consumers at a time when the economy needed it most.

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In fact, we believe that the weak Canadian dollar will further adversely affect business investment while the challenge of our tax burden will remain unchanged for all Canadians. Nonetheless, despite the uncertainty of current geopolitical conditions, the low inflation that allowed central banks to reduce the cost of capital will continue to give SMEs room to manoeuvre for their financing.

In its core market of Quebec, the National Bank is perceived as the bank of SMEs. In Quebec, businesses are generally smaller than in the rest of Canada. In fact, nearly 33% of Quebec businesses have sales of below $100,000 as against 23% elsewhere in the country. Moreover, 49% of Quebec businesses have sales of less than $1 million, whereas the figure is 59% for businesses in the rest of Canada.

The National Bank serves the business market through its SME and Commercial Banking sectors. The determining factors in deciding whether a business falls into one or the other category are total borrowings and sales volume. The SME market is defined as businesses that borrow $350,000 or less and have sales of under $3 million. The Commercial Banking division, for its part, caters to businesses that borrow upwards of $350,000 and have sales of over $3 million. The two sectors are headed by two separate Senior Vice-Presidents. There is also a Corporate Banking division which provides banking solutions to clients with sales generally in excess of $25 million. Today, we will look only at the SME sector.

The SME sector includes 180 Account Managers who manage 20,083 borrowing clients and 11,051 Business Latitude Lines of Credit, and serve 112,310 non-borrowing clients at 20 SME Centres, as well as a business banking service called Direct.N@t-OnLineSMEs.

The National Bank offers its clients a choice between a traditional type of service as offered in the SME Centres, which fosters the development of a business relationship through regular one-on-one meetings between Account Managers and their clients; and an Internet/telephone-based client relationship service.

So, commercial and professional business clients with credit requirements of $150,000 or less have access to OnLine financing, cash management and savings products. When clients complete their credit application on the Internet, they have telephone access to an Account Manager or an Account Officer during extended business hours.

To be an essential partner of SMEs is the mandate that the National Bank gave itself when setting up the SME business line in September 2001. Not only do we want to be a partner to our clients, but we also want to become the partner of their suppliers, their business markets and local members of the community who contribute to their growth.

We are partners because of the expertise and professionalism of our human resources, where knowledge of our markets allows us to offer our clients sound, proactive solutions.

National Bank's Internet Banking Solutions therefore offer, first and foremost, a virtual business forum called Clic Inc., which brings together suppliers and purchasers of goods and services for B2B transactions. We provide guidance to SMEs in designing a transactional website and we integrate the banking operations of our partners so that they can effectively and securely make payments, obtain references on suppliers and look for documents, all at the same site.

The National Bank holds to the belief that young entrepreneurs and professionals who have embarked on a long period of studies need made-to-measure financial packages, which are above all not costly and provide simplified access to credit. In this way, we recognize the power of knowledge in providing financial leverage. Complete packages ranging from no-fee bank accounts and reduced- rate financing to free account inquiries by phone or via the Internet are offered, among other things, to future doctors, lawyers, accountants and engineers.

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Business women are strongly represented in the National Bank's commercial client profile and account for 44% of our business client base.

New entrepreneurs generally appreciate simple, easily accessible financing products with rates that reflect the market. This is the reason why an increasingly large number of clients choose the Business Latitude Line of Credit at prime plus 3%. They then have a choice between the service provided by a traditional Account Manager or an OnLine Account Manager.

For the past two years, we have been distributing the “Virtual Advisor for Enterprises” CD-ROM free of charge to future entrepreneurs. Not only does it link up with the National Bank financial network, but the software also acts as a guide to entrepreneurs in designing a business plan and provides functional management accounting tools for start-up companies.

We also want to know what the concerns of small and medium-sized business owners are. With this goal in mind, I personally meet with about a dozen of our clients at what we call our SME Advisory Committee. Each quarter, we ask these clients, who have been recruited from among the National Bank's 20 SME Centres, to comment on our market development strategies. In this way, our contact with clients is personalized, and provides surprising results.

This leads us to mention the eighth edition of the “SMEs of the National Bank” recognition program, which spotlights entrepreneurs who have distinguished themselves through their dynamic management style and proved themselves able to lead their business to success. Four such businesses were recently selected as winners in the SME, Small Business, Agricultural SME and Export SME categories of the program.

Lastly, by establishing a direct link between the possibilities provided by information technology and the professional competencies required by human resources to establish an accurate prognosis of the needs of our business partners, National Bank of Canada has set up a re-engineering program designed to ensure optimal service to SMEs. With this program, which aims to streamline operating methods, the administrative tasks of SME Managers will be centralized, leaving them free to concentrate more on customer service. SMEs will also benefit from our revised operating procedures for granting credit as they will get faster answers that are better suited to their needs. Similarly, training in office automation, negotiation, credit, risk analysis, and banking and business development products are all on the agenda, with a view to enhancing the knowledge and skills of SME Centre staff.

Now that we have finished or presentation, Madam Chair and members of the committee, we will be pleased to answer your questions.

[English]

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

We're now going to begin with questions.

[Translation]

Mr. Bergeron, please, it is your turn.

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

Gentlemen, thank you for taking part in the work of the committee and thank you for your presentation.

As you have probably noticed, after the first sitting of this committee, when the first financial institutions were here, we are concerned about the support being given by financial institutions to small and medium-sized enterprises. I would like to say at the outset that the National Bank has a strong track record in this area in Quebec. However, at the last meeting of the committee, I mentioned the fact that, as everyone knows, in a market economy such as ours, entrepreneurship must be promoted and encouraged. These entrepreneurs are often young people coming out of university. This entrepreneurship therefore must be promoted. Many young people, however, who might like to get into business have relatively low incomes and have very often accumulated student debts. According to Statistics Canada, 30% of young people between the ages of 25 and 34, if I am not mistaken, have student debts, and 50% of young people have accumulated credit card debts. You can see where I am going with this.

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If our objective, despite the current economic slowdown, is to stimulate consumer spending and if we consider the successive decreases in the Bank of Canada prime lending rates and in the various interest rates for personal loans, mortgages, etc., how can we justify the fact that credit card interest rates are kept so high?

Mr. Steve Tremblay: Our first answer needs to be that we specialize in the commercial sector. If we are talking about the commercial sector, we are talking about business loans and, in that respect, we are very aware of this issue of interest rates on lines of credit and credit cards. In fact, we have created a program, called the Business Latitude Lines of Credit, that offers a credit card at prime plus 3%. So the rate that the client gets will reflect the drop in prime lending rates. As to credit cards and rates for personal loans, we unfortunately cannot answer that question. We work in the commercial sector and we have tried to resolve this situation and set rates that take these things into account.

I do not know whether one of my colleagues might be able to give you a fuller answer to that question on credit card rates and how they are set.

Mr. Simon Ledoux (Senior Manager, SME Enterprise Development, National Bank of Canada): I can add a few comments to what Mr. Tremblay has already said.

Let us first take the Business Latitude Lines of Credit. This service provides financing that is similar to a credit card, so for a maximum of $50,000. As Mr. Tremblay said, the rate is prime plus 3%. That is the current situation. We are now working to revise this product so that the best clients, that is, those representing the lowest risk, can still take advantage of rates as if they had a real line of credit.

You will see that there are clients who will be able to have access to this product over the coming months. It will be a line of credit on a credit card, at the prime rate or at prime plus 1%, 2% or 3% for other clients.

Mr. Steve Tremblay: I would even add, for your information, that people who do well in their studies and who have student debts, are eligible for special credit access programs, if they are studying engineering, law, medicine or dentistry, for example. They are also eligible for free banking access programs for a certain length of time, and students in knowledge-based disciplines have much easier access to the National Bank's banking programs. So our development programs give special preference to knowledge fields.

Mr. Stéphane Bergeron: When you talk about special programs, do you mean that they have easier access to a credit card with high rates or that they have access to a credit card with much lower rates?

Mr. Steve Tremblay: If a person is starting out in business, he or she will be able to take advantage of a line of credit with a rate of r plus 1%, 2% or 3%. If, for example, a dentist wants a line of credit to open up an office, he will be able to get a line of credit at a rate of r plus 1%, 2% or 3%. We are in the process of setting it. At the present time, we offer a line of credit at the rate of r plus 3% to self-employed professionals starting out in business.

Mr. Simon Ledoux: Just a short comment on that point. People often concentrate on the interest rate of the line of credit. The financial programs we offer to various groups of professionals are of course far more diversified. Financing is one thing but there are also several other cash flow management products, for example, to provide assistance to people starting out in business with respect to daily management. Our products allow these people to take advantage of such products at reduced prices or rates. Credit is, of course, important but it is only one aspect of all our programs that cover a wide range. I can understand that you are most concerned about credit but it is interesting to know, and it is something that is quite often forgotten, that only about 20% of our clients are borrowers. People tend to forget the 80% that constitute the majority, the non-borrowing clients. So the bank is often perceived as a mere provider of credit. That is of course one of our jobs but I would say that most of our work is in providing management tools to help these entrepreneurs. In the case of people who are starting out, it is even more important to give them the management tools that will get them off to a good start and help them manage their business in the soundest and most economic way possible.

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Mr. Stéphane Bergeron: The committee has just completed a study on the impacts of the events of September 11 on various industrial sectors in Canada. I feel like asking you the following question. Has it been your impression that the events of September 11 have had a direct impact on the level of financing requested by small and medium-size businesses or on the number of applications you've received? Have you noted any decline in the number of businesses being created or decisions to expand, renovate, introduce new technologies, etc.?

Mr. Steve Tremblay: My first reaction would be to say no. We haven't really noted any particular effects of this type.

Mr. Stéphane Bergeron: There haven't been any declines or increases?

Mr. Steve Tremblay: Not really. Peter, who is closely involved with commercial affairs, could perhaps—

Mr. Peter Thompson (Vice-Chairman, Commercial, Outaouais and Northern and Eastern Ontario, National Bank of Canada): There is no denying that before September 11, there were already difficulties in commercial affairs. So we were following our clients more attentively to keep track of what was happening and how they were being affected.

As for the specific impact of September 11, I might mention, as an example, the fact that some of my commercial clients had problems relating to exports. They have had management difficulties. They were exporting products to the U.S. and their truckers were held up for long periods at the border.

That is only one example of the way things have been affected but it was mentioned by our clients and it is important for this to be known. They're the ones who draw this information to our attention.

We are in a position to help certain clients. For some, it may mean increasing their credit margin or changing the terms and conditions to help them. There is a need for flexibility whether it be because of September 11 or the situation they already found themselves in. We can certainly be flexible but even more important is communication.

If we were informed about what was happening in their business—and this is something we try to make our clients understand—then there's a good chance that we might be able to accommodate them, but we have to be sure that we'll have time to react on our side so we can show some flexibility.

[English]

The Chair: Thank you very much.

[Translation]

Thank you, Mr. Bergeron.

[English]

Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): I have a couple of questions.

On page 2, when you outlined the businesses that have sales below $100,000 and less than $1 million, you point out that in Quebec, 33% of businesses have sales of less than $100,000, compared to 23% in the rest of Canada. For companies with sales of less than $1 million, it's 49% in Quebec versus 59% in the rest of Canada.

Why do you think there is that disparity? In both cases, there is a 10% difference. What is different in Quebec to cause numbers like that? Are there any reasons why? What is so different that makes it that way?

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[Translation]

Mr. Steve Tremblay: My answer would be that it is possible that Quebec does have a different business culture from that of the rest of the country. However, that may be a kind of interpretation that is not justified.

I definitely can say that it does create a market competition that is quite different from the competition in the rest of Canada. In Quebec, our competition is very much focused on SMEs, small businesses. Our competitor is known as Desjardins and they are not present on other Canadian markets. The focus of Desjardins is very much on small businesses and this goes back a few years.

So in the Quebec market, the National Bank competes with Desjardins, which has a cooperative structure, compared to the banking structure found in other provinces. So it is a different market. Personally, I cannot explain to you what demographic element has given rise to this state of affairs but I know that the fact that we do have smaller businesses created a different dynamic to that in the rest of the country.

[English]

Mr. Walt Lastewka: I know in my travels across the country I've seen pockets where those figures were all very close to being the same. There's a tendency for the businesses to be small, family-run businesses, and they wish to keep them that way. They're very efficient and very profitable, but they hesitate to expand.

My viewpoint many times has been that there's a golden opportunity to help businesses grow. Are there enough mechanisms in place to help those businesses grow? Is there something missing, or is that part of the culture of various areas across the country, particularly in Quebec?

[Translation]

Mr. Steve Tremblay: I know that there are programs to make people aware of funding possibilities for family businesses. So there are some programs of that type with a stronger emphasis on credit. We do provide support to understand such businesses and their very different culture. I can't really give you much more information unless Peter—

[English]

Mr. Peter Thompson: The only thing I can say is that as a banker—and I think this applies to most bankers—there's nothing more gratifying than to contribute to the growth of a small business; to help it go from the fledgling company to a big success story. That is what I think we all strive to do.

Those tools, whether they're from us or others in the industry in Quebec, are certainly all there, so I don't believe it's a lack of tools for these entrepreneurs to grow their businesses. It may be some kind of cultural difference, but I don't believe it's the lack of tools.

Mr. Walt Lastewka: I'm not being critical, but there are some businesses that want to stay a certain size, be very profitable, be very efficient, and have a good quality of work life. They're happy, and I guess we should be happy too.

On page 3 you talk about your commercial and professional business clients who request loans for $150,000 or less. I take it that when you say their credit requirements... those types of loans are mainly based on the credit of the people who are applying, rather than their business plans, businesses, and so forth. You're staying with the credit rating of the individual. Did I read that properly?

[Translation]

Mr. Steve Tremblay: May I answer that question? In the case of businesses applying for credit of $50,000 or less, the main approach is based on the so-called consumarized value. When it's a slightly higher credit, we can take guarantees based on the company.

[English]

Mr. Walt Lastewka: On page 4 you talk about a virtual adviser for enterprises. I'd like you to expand on the content of that. I don't think I've ever seen that CD. Could you explain what it is?

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One of the questions I continue to ask the banks is what they are doing to help advise their small businesses on how to be more efficient and effective, to help them grow. For a while it seemed that the banking industry got out of that field, and now they've come back to it with items on the shelf.

Could you just go a little further on what your virtual adviser is comprised of, and what benefits it has for small business?

[Translation]

Mr. Simon Ledoux: I can lend you a copy if you'd like. The virtual business advisor is a CD-ROM that we have developed and that is also available on Internet. In addition to the fact that it contains various management tools made available by the bank to entrepreneurs, I would say it has four important features.

First of all, we developed a very simplified business plan. The entrepreneur or the business that wants to do a business plan can make use of this software and enter the data. It is a business plan divided into five sections.

A self-employed worker, for example, is asked a number of questions for the preparation of a two or three-page business plan. At the other extreme, the director of a technological manufacturing company is asked the same questions as well as many others, resulting in a document of about 60 pages. So we have tried to break up the clientele according to their different requirements.

There's one thing we are very proud of. We have a document called a strategic plan, something different from a business plan. Once again, it is a software program that asks people to answer a number of questions. It is not only for businesses that are starting up. It is mainly intended for businesses that are already functioning. This software enables them to make a strategic plan for the following year or for the next three or four years. As far as I know, this kind of document was not previously available at any Canadian bank. We've often been told that entrepreneurs who wanted to make a strategic plan have had to see consultants or consulting firms. Of course, this is not something that everyone can afford. That is why we developed this tool.

The CD-ROM also provides small business accounting software, through a partner called Dynacom.

You know that the Internet is huge. In this document, we attempted to categorize some Internet addresses which are useful to business people, as we understand it and as the people with whom we discussed this understand it. Our purpose was to save people search time and provide useful information to someone who, for example, wishes to prepare a marketing plan and obtain information on the markets, or on export procedures. We have tried to put all kinds of information useful to businesses in a single document.

That's more or less it. The document is available to our clients, as well as to people who are not clients of the bank. It is also available on the National Bank's website.

[English]

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

Mr. Walt Lastewka: I've noticed, since the economy has slowed down a bit, that a number of businesses are having some difficulty with accounts receivable. Many times we talk about access to capital, and then we forget that accounts receivable are also capital. It's kind of historic that when the economy starts to slow down a little, the accounts receivable for small businesses tends to be more than 60 days, more than 90 days, and gets that small business into a problem.

Do your accounting packages advise how to improve or make sure accounts receivable are up to date, or is that an area you haven't worked on?

I'm very interested in finding out who's doing what to help small businesses on accounts receivable, because many times medium and large companies tend to put off their bills because they know they're not going to be taken to court by the small businesses, and then the small business suffers. Do you have any comments on that?

[Translation]

Mr. Steve Tremblay: The software comprises an accounting management system—Dynacom—that makes it possible to manage accounts receivable and accounts payable. This is very useful to companies.

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If we wanted to go further in the banking area, what would we do? Peter might be able to answer that.

[English]

Mr. Peter Thompson: Beyond, of course, it being every account manager's job, when they sit down with the client, to give them any kind of help they can, something that doesn't go as far as you probably would like it to go with small businesses, but certainly does go down quite a bit in relation to many other banks, is factoring. It is one product we've had a good deal of success with in Quebec and Ontario, as well as the rest of Canada.

Factoring is a product that historically has had sort of a negative connotation tied to it, as being only for those who were in financial difficulty, or that type of thing. We've really pushed that product, especially for businesses that were more cash-strapped and dependent on collecting receivables quickly from giants, such as Nortel or whatever, that would drag them down. We will buy the receivables from them.

This isn't the type of thing where it's a great deal more expensive. It's maybe 1% to 1.5% more than what business would pay on a line of credit. So that is one tool. I grant we aren't yet to the point where we can do that for smaller receivables, but we are trying to push that down from just large corporate customers into the mid-market and smaller-type businesses.

The Chair: Thank you very much.

Mr. Ianno.

Mr. Tony Ianno (Trinity—Spadina, Lib.): I notice in the numbers, starting from December 31, 1995, until today, that on December 31, 1995, the National Bank lent to small and medium-sized businesses with under $1 million in loans, $4.25 billion. At the same time, they lent $9 billion to larger businesses. On June 30, 2001, six years later, the small business loans were at $3.83 billion, and the large business loans were at $13.96 billion.

I guess the small business loans went down $400 million and the large business loans went up $4 billion, almost $5 billion. Can you explain that to me?

[Translation]

Mr. Steve Tremblay: Personally, I can say that authorizations for loans below $250,000 in the last quarter accounted for $1.335 billion at the National Bank. That represents an 11% drop in comparison with the same period last year. In nominal terms, we are talking about 46,000 clients.

You asked about $1 million loans. In the second quarter, we authorized $3.835 billion in such loans, a 6% drop in relation to the same period last year. Nominally, that is 56,000 clients, also somewhat lower than last year. There is a drop in both figures. There is a drop in the number of customers, and a drop in the number of loans authorized. We see the same trend for loans of $1 million and over, and for loans of under $250,000.

[English]

Mr. Tony Ianno: I read the information you sent before about the numbers. Part of the reason we keep this constant is that we, with the banks, in cooperation with the Canadian Bankers Association, came up with $1 million less for small business. Of course, you can subdivide, as your report does and as all the other banks do. They give up to $25,000, $50,000, and on and on. We use the same basis for the last seven years, so we can see what the bank is doing, compared to subdividing and throwing different numbers out into the air.

In the end, is it because you're losing market share? Is it because you're not as interested in going after the small business market? Is it that your percentage is very high in Quebec, where you feel the caisses or the credit unions are taking over the market share? Are you expanding beyond that in the rest of Canada, or are you concentrating mainly on larger businesses?

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Mr. Steve Tremblay: No.

[Translation]

Mr. Simon Ledoux: May I comment, Steve?

Mr. Steve Tremblay: Yes.

Mr. Simon Ledoux: As Steve was saying at the outset, things are a little different in Quebec because of the credit unions, les caisses populaires, which are a major competitor.

Is the National Bank losing interest in the SME market? Well, I can say that in the past eight months or so, I have been working on a project in which the bank is investing millions of dollars to review the operation of its SME business line. As we were saying earlier, that line focuses on loans of $350,000 and under, which are primarily for small businesses. That investment shows that the National Bank is certainly not trying to get out of the market; on the contrary, it is trying to increase its market share. We will give ourselves and our manager the tools to serve the small business sector more effectively.

Mr. Steve Tremblay: I would say we are going even further: we are developing a new sector called Direct.N@t-SME Online- which will serve companies applying for loans of $150,000 and under. We will treat those clients differently from businesses that visit an actual bank branch, where they are in direct contact with the account manager. Contact will be made through the Internet and by telephone. This will engender a different type of relationship with clients, who will be located in Quebec and across Canada, and submit their loan applications over the Internet. Once we receive the Internet application, it will be processed, and then someone will telephone the applicant to continue the process.

An account manager will be assigned to a market sector of professionals, or self-employed people, and perhaps also to a sector of retail companies, or manufacturing companies. We are still talking about loans of $150,000 and under. We will be able to offer guaranteed loans, with guarantees based not only on the individuals' financial assets, but also primarily on the value of the company.

At present, the only thing stopping us from going ahead with this is technology investment. But we are making those investments and will be fully operational within three years. So at present, we are establishing the infrastructure that will make it possible for us to help these companies.

We estimate that, at present, approximately 20% of our business clients could be doing business on-line. Inevitably, that figure will grow over the next few years. In fact, we expect it to grow enormously. The banking sector will therefore be investing a great deal into different ways of processing customer needs. We want to provide alternative services.

Account managers working with businesses like Peter, are always in direct contact with growing companies. But smaller companies will have a choice between on line service and direct, face-to-face service.

[English]

Mr. Tony Ianno: So in the next three months, when you come back, will we see a reduction still? You're concentrating on the micro-businesses versus the medium-sized, so you'll see a reduction in the amount of small business lending from $4.25 billion in 1995 to $3.83 billion. Do you see it going further down, in terms of your overall number? You're going after a smaller market, so are you going to get rid of all the medium-sized businesses?

[Translation]

Mr. Steve Tremblay: Well, to go by the efforts the National Bank is making to avoid losing customers, I don't believe we will see a further drop. However, we have to use those figures accurately. Many customers have migrated from Latitude card services to traditional loans... We can to some extent justify today's figures.

[English]

Mr. Peter Thompson: I'd just like to add to that. If you're targeting the $1 million—

Mr. Tony Ianno: That's what the committee has done for the last seven or eight years, just so that you get it...

Mr. Peter Thompson: Okay. That's fine. I was simply going to add that the idea here is that we are treating the $150,000 and under. I personally am responsible for $350,000 and up. That's how we define our small business versus commercial.

Mr. Tony Ianno: You do that within your bank?

Mr. Peter Thompson: That's right.

Mr. Tony Ianno: Because it's not the Canadian Bankers Association agreement with this committee that we take the $1 million or less as small business.

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Mr. Peter Thompson: That's fine. The only point I want to make is that as far as I am concerned and my responsibilities go, for that segment of $350,000 and up, which I am responsible for, I can't tell you what the numbers will be in three months. Clearly the mandate is to grow that business. Of course, with that business, we have a very strong position in the Quebec market, but we want to grow that presence even more outside of the province of Quebec.

There's clearly no decision to try to really focus on either a very small segment or just the really big stuff. We are definitely going after that small to medium-sized business. That would fall into the definition as you have it.

The Chair: Last question, Mr. Ianno.

Mr. Tony Ianno: Thank you very much.

The last part has more to do with the economics of the times after September 11. Knowing that the small business numbers are going down with the National Bank, will you be doing something to ensure that you have a little bit more patience with the small businesses so that you don't pull the rug out from under them, as they need you most now?

Mr. Peter Thompson: This is something that's ongoing. It's certainly not our policy to pull the rug out from under businesses that need us.

Again, going back to what I was saying earlier, the key here is communication. It's certainly not in the bank's interest to do anything prematurely or anything that's not in the business's interest. What we try to do is to have a good handle on where exactly the business stands, where they expect to go, and how we can fit into that solution. Clearly it's a two-way street, and we need to have good communication with the clients so that we can help them.

Despite the events on September 11 and what was going on before, clearly we need to be more vigilant in terms of getting out there and really knowing what is going on with our clients. This has not sent us off in any kind of panic or anything like that. It's simply a matter of making sure we're listening, and listening well, to our clients' needs.

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

[Translation]

Mr. Drouin.

Mr. Claude Drouin (Beauce, Lib.): Thank you, Madam Chair. I would like to thank our witnesses for their testimony.

Earlier on, Mr. Lastewka talked about collateral. As you know, the Beauce is known as the heartland of small and medium-sized businesses. We have a great many projects, but we have problems with collateral. I'm not necessarily talking about your bank, but about financial institutions in general, which have very broad collateral requirements. People end up having to come to us to ask whether some level of government can help them meet the requirements of financial institutions. Without those loans, projects would never get off the ground. Many of the projects that governments were forced to support have been extremely successful. But the financial institutions did not participate at the initial stages because the companies in question did not have enough collateral. The institutions wanted wall-to-wall guarantees.

I would like you to tell me something about the National Bank's approach to such guarantees.

Mr. Steve Tremblay: I would like to talk to you not only about collateral, but about the bank's approach in general to projects submitted to us.

When a project is submitted to us, we consider it as an investor presenting an investment project to the bank. The investor has used resources from his own sector to collect funds and generate capital, then brings his project to the National Bank to obtain a loan.

In principle, the bank is there to lend money, and uses guarantees in making loans. The investor must generate capital with local resources. The bank is not an investor. The bank is a lender. Taking that as its fundamental principals, the bank asks for collateral whenever it feels it is necessary. It uses those guarantees to generate sufficient leverage for an investor to implement his project.

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Mr. Claude Drouin: What kind of guarantees do you ask for? Do you have the same requirements for everyone, or do you evaluate every project on a case-by-case basis? How does the system work? Do you set a percentage on the basis of risk?

I know that these questions can become a little tedious, since you do not wish to give your strategy away to your competitors.

Mr. Peter Thompson: Well, as we say, this is not a cookie-cutter approach. With commercial loans, we tend to apply a case-by-case approach. In some cases, one part of the company may have strengths while another part of the company has weaknesses.

For example, over the past 10 years, a company might have developed a super-strong history of self-generated funding. It might be very strong in that area, so we may request fewer guarantees. But we might take the opposite approach for another company. There are no magic numbers when we estimate the guarantees we need. We study each individual case.

Mr. Claude Drouin: Right, you take a case-by-case approach, but in some cases you may be asking for too many guarantees. A few moments ago, I gave you one example without giving the company's name. Some eventually successful companies were refused loans by financial institutions at the outset, because they could not meet the collateral requirements, which were very stiff. Governments had to step in and provide financial support for the projects in question.

Would it not be appropriate to review collateral requirements? In Canada, SMEs are very important to job creation. Mr. Tremblay, you stated that banks were investors, not lenders, and that they had to turn a profit.

I think that you have an important role to play in the development of our industries, and in job creation across the country. That is why we have to take a close look at collateral requirements. I'm not talking about you in particular, but about financial institutions in general. I think we have to look at this carefully.

Thank you, Madam Chair.

[English]

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

I just wanted to pick up on one point that was raised. During your presentation, you talked about loans at prime plus 3%. Do you look at what your competitors are doing out there in the marketplace for small business? My understanding is that one of the banks is now proposing a loan at prime for two years for small business. I think that's a very good thing, in particular in light of September 11. Would you consider doing something like that to try to assist in these difficult times?

[Translation]

Mr. Steve Tremblay: As Peter explained, the National Bank's approach focuses on a communication process. I do not believe that all Canadian companies have been affected by the aftermath of September 11, in spite of the magnitude of those events. Communication is still the primary factor. When a customer with difficulties comes to the bank, management obviously notifies junior managers and their subordinates accordingly.

Obviously, that calls for a case-by-case approach, and everyone involved is aware of the company's situation. If we instituted capital release, reduction in rates or any other process, we would notify the customer of new procedures. Rest assured that the National Bank has no discriminatory measures towards customers hit by the events of September 11. Each case is examined on its own merits.

[English]

The Chair: My point is not that you're discriminating. Do you look at what your competitors are doing and try to match those programs? I just learned of this program today, or maybe yesterday. One of the banks has rolled out this program to help small business.

Maybe it's just because of the weak economy, and not so much the events of September 11. We had a weakened economy prior to September 11, which I think is a good thing to try to help stimulate small business. We know it's a huge job producer and a huge opportunity in Canada. If the banks can assist in not only keeping them in business but allowing them to grow their business, especially during weaker times, this will help Canada rebound much faster.

So I'm asking if the National Bank will look at another bank's challenge and assistance to small business to try to help stimulate the same type of growth.

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[Translation]

Mr. Steve Tremblay: Obviously, the National Bank looks at what its competitors are doing in that area, but at this point I do not believe we have a plan to offer loans at the prime rate. Each case is studied individually. As I explained a few moments ago, there is a great deal of communication and awareness of customer needs. In my view, what that bank is doing may be more about strategy and positioning. I do not believe that all customers were affected by the events of September 11.

[English]

The Chair: Thank you very much. We appreciate the National Bank being here today and we look forward to meeting with you again in the future.

We're going to suspend for about three minutes while witnesses exchange places.

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The Chair: I'm going to call the meeting back to order.

We're very pleased to welcome now, from TD Canada Trust, Mr. Nick Stitt, vice-president, small business banking; Mr. David Marr, national manager, branch distribution, agriculture services; and Mr. Craig Alexander, senior economist.

I'm going to turn it over to you, Mr. Stitt, and let you begin.

Mr. Nick Stitt (Vice-President, Small Business Banking, TD Canada Trust): Madam Chair and members of the committee, before I begin I would like to introduce the members of our panel from TD.

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My name is Nick Stitt and I am the vice-president of small business banking at TD Canada Trust. Joining me today are Dave Marr, our national manager of agricultural services, and Craig Alexander, senior economist at TD economics.

I have mixed feelings as I appear here today. On the one hand I am very pleased to have the opportunity to talk about the things we have done to improve our banking services to small business customers in Canada. On the other hand, I am concerned about the impact of recent events—economic and other—on these customers. I will speak briefly on both these topics.

In the mid-nineties, TD Canada Trust recognized the value of the small business market and decided we wanted to be the leading providers of financial services to small businesses in Canada. Part of the revelation was based on looking at the whole customer relationship, whereas in the past most of our focus had been on the ups and down of credit, how little we made, and how much we lost on that particular product.

Until recently, a segmentation of our small business market was totally based on size of credit. But what about that 60% of small business customers who never borrow from us? All these customers want is great day-to-day banking service. So if you ask me today how we define small business at TD Canada Trust, I will answer that we really don't need to define it, and here's why.

We offer two very distinct service propositions for small and medium-sized businesses in Canada: a retail banking proposition and a commercial banking proposition. The retail banking service proposition is aimed at smaller businesses with relatively simple day-to-day banking and borrowing needs, whereas the commercial banking services proposition is tailored to the more complex needs of larger businesses, typically. Sure, there are norms about borrowing amounts and deposit amounts within these two groups, but our whole strategy is to encourage customers to bank where they think their needs are best met.

Having said that, our small business banking service proposition—that means our products, policies, and processes—is designed to best meet the needs of businesses with less than 20 employees and say $2 million to $2.5 million in sales. I'd like to spend a bit of time on that particular segment, outlining some of the steps we've taken in recent years to meet their needs in particular.

A seemingly subtle but very important change for the bank, TD Canada Trust, has a specific business unit in the bank focused on understanding and meeting all the banking needs of small business customers. Our small business banking group is concerned with not only how to lend to small businesses, but also how they want to bank and whatever other services we might be able to provide to them to support them. This is one change that has led to all the other changes I will speak about.

We recognize the importance of access and convenience to banking services for small businesses, as well as the value of providing business banking and personal banking services to a small business owner through the same person at the same branch. As a result, we have introduced one-stop banking at all 1,300 of our retail branches across Canada. We also offer any-branch banking, ABM banking, and web and phone banking. Our aim is to give small business customers the same access and convenience we give personal customers.

We also continually look for new ways of delivering our services. A great example of this is our leadership in developing third-party crop input financing programs in association with farm supply companies. We now offer crop input financing through 400 locations in western Canada, most of which are in communities where TD Bank does not have branches.

We offer a complete range of products specifically designed to meet the needs of small business customers, including credit, deposits, merchant services, cash management, and group savings plans.

On the lending side, we participate in the Canada Small Business Financing Act lending program, and last year we increased our share of loans under this program by 3.6 percentage points.

We were also the only bank to take advantage of the Ontario small business investment tax credit program for financial institutions. In 2001, we authorized $79 million in loans to 3,800 small businesses, at rates of prime minus 1%.

In addition to our core banking products, we are also looking at ways of offering other services, through alliances with third parties that can help small businesses in the areas of marketing, accounting, human resource management, and legal services.

The services introduced this year by TD Canada Trust include the Custom Click program, a direct marketing product offered by Davis & Henderson via our website; the content we sponsor on Profitguide.com; Online Mart, our affordable e-commerce solutions that we offer in conjunction with Bell Canada; and a fixed-priced legal services package that we offer through another third-party supplier.

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We have improved our credit service to small business customers through centralization and the use of technology. People may wonder how I can make this statement, because before, the local branch manager used to have a limit and decided who got money and when it had to be paid. Today we can make pre-approved offers. We can respond to some requests at the branch in minutes, and we can respond to all requests for credit from small business customers within 24 hours.

We didn't offer this level of service consistently in all branches before. Before, we didn't know how many or who of our small business owners were getting declined for credit and why. Now we do, and we can use this information to refine our policies and processes, so we can improve upon our lending decisions. At the same time, our branch people remain fully focused on serving the needs of our customers and are not preoccupied with the fear of making or collecting bad loans. That is why centralization is good for our customers.

In addition to our branch staff, we have 150 specialized agriculture account managers supporting 250 rural branches, and a small business sales force of 75 supporting our retail branches across Canada.

We think we have made significant progress in recent years, but more importantly, the numbers speak for themselves. Being a leader in small business banking means two things to us: great service and growth.

At TD Canada Trust we measure service through ongoing surveying of our small business customers. Each day we sample a group of small business customers who have interacted with their branch that day, to determine their level of satisfaction with the service that was provided. These surveys are tallied and reported as a small business customer satisfaction index on a bimonthly basis.

In addition to this, we have recently conducted extensive research in determining what a small business customer wants, in their own words, and we then measure how we measure up against these needs. We also participate in the annual Thompson Lightstone syndicated survey on small business customer satisfaction. Based on the most recent survey, TD Canada Trust has again ranked at the top in overall customer satisfaction among its six major bank competitors.

We've used small business banking as a good growth opportunity for TD Canada Trust; therefore we are definitely interested in growing our share of this market. The measure we use for this is CBA market share data, and since June 1999, TD Canada Trust market share of loans, with authorizations less than $250,000, has increased 2.5% from 13.4% to 15.9%. This is a significant increase in market share, and we don't intend to stop there.

Our growth rates in the areas of credit authorized, credit outstanding, and customers with credit under $250,000 over the last year were 6.8%, 5.8%, and 3% respectively, whereas all our major competitors were negative. Our historic growth numbers since 1996 have also been stronger than all of our major competitors. That's the good news.

Let's talk briefly about the bad economic news, its impact on our small business customers, and what we are doing in response. First let me assure you we have not changed and do not intend to change our lending policies to small business customers as a result of the current economic situation. We will continue to do business as usual because we have made a long-term commitment to the small business market. Does this mean approval rates for small business credit will not go down? No. Approval rates for new credit requests may go down if the financial resources and the situations of our small business customers deteriorate significantly. However, the benefit of our centralized credit model, especially in times like this, is that we can ensure greater consistency in the application of our credit policies.

Whereas before a local branch manager with a limit could react independently to the news of the day, especially since the branch would suffer the loss from any error in judgment, now we can contact the managers of our small business credit centres and assure them it is business as usual.

In fact this is what I did just several weeks ago, and here is the gist of what I told them: We expect the downturn to be short-lived. We want you to work with our small business customers to help them get through these difficult times, if at all possible. Yes, we recognize that these are more difficult times to lend in, but we're not going to change our policies. We accept that we may take more losses, but this is part of being in this business, and we are committed to this business for the long term.

I asked the small business credit centre managers to ensure that their people understood the current situation and our position.

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Just as importantly, we closely monitor the condition of our existing borrowing customers. In addition to more conventional means, we use advanced scoring models to help our small business credit centres detect which businesses might be heading for tough times. Again, we have asked our account management people to work with customers who require help on a case-by-case basis and to do all they can to support them through the difficulties they are experiencing. This may include temporary additional credit, restructuring of debt, extension of payment terms, or forgoing payments for a period of time. At the end of October, our credit centre approval rates were holding at just above 80%, and the overall quality of our small business credit portfolio had not deteriorated significantly.

TD Canada Trust has great confidence in the strength, vitality, and resilience of small businesses in Canada. We also recognize that their health is important to Canada. As I said at the outset, we are determined to be a leader in this business, and we recognize that being a leader means demonstrating ongoing support and commitment to the growth and prosperity of small businesses in Canada. Thank you.

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

We're now going to turn to questions.

[Translation]

Mr. Bergeron, do you have any questions?

Mr. Stéphane Bergeron: Madam Chair, I would like to reiterate the questions I put to the other banks that appeared before this committee, so that people from TD do not feel left out.

A little while ago, I was telling representatives of the National Bank about the statistics on debt among young people. But I quoted the wrong figures from Statistics Canada. We are talking about people aged between 25 and 34. Statistics Canada says that 50% of young people between the ages of 25 and 34 have credit card debt, and that 30% of people aged 25 and under have student loan debt.

As we know, young people who finish university or who leave school don't necessarily have very high salaries. We must therefore do all we can not to snuff out entrepreneurship among the young. The fact that the indebtedness of young people is already quite high when they begin their working lives is not the best incentive to go into business.

Without further preamble, since you probably already heard what I said to the National Bank, given the significant downward trend, I would say that no later than yesterday, the Bank of Canada reduced its base rate again to 2.25%, which is the lowest rate in the past 40 years. I'd like you to tell us whether we can expect interest rates on credit cards to follow this downward trend that we've seen for mortgage rates, personal loans and business loans. Can we expect that the interest rates will be lowered on credit cards, first of all to promote consumption during this economic slowdown and secondly, to help young people so that they can reduce their level of indebtedness in order to support entrepreneurship?

[English]

Mr. Nick Stitt: First of all, credit cards are a great tool for purchasing something. From a business perspective, many business people use credit cards to buy things to rack up points on their credit card or to take advantage of the other features that are offered on a credit card—the insurance features and other features like that.

But from our experiences, businesses don't typically use a credit card to borrow. They typically use a line of credit or they pay the card off, because they don't want to borrow. Lines of credit are offered at rates of anywhere from prime to prime plus three. There are other credit cards in fact that do have a line of credit attached to them, one of which we offer, that has a rate of prime plus four. So a credit card is not an ideal vehicle to do even short-term borrowing. It's better to use them for a purchasing tool. They're a very convenient tool to do that.

[Translation]

Mr. Stéphane Bergeron: Thank you, Mr. Stitt. I think I understand your answer very well. The people from the National Bank gave us that type of answer too. I put myself in the shoes of someone who's not yet in business, of a young person who wants to start a business, who already has student loans or credit card debt and who only has a modest income.

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If the interest rates on credit card balances were lowered, people would also have less debt, which would favour consumption and might constitute an incentive for young people to start up businesses. Of course, you're looking at it from the viewpoint of someone who's already in business, of an already operational company. Obviously, I fully agree with you that using a credit card as a line of credit is not an ideal situation. But what would be the situation of someone who wants to start up a business?

[English]

Mr. Nick Stitt: We do have a variety of credit cards, one of which has a rate as low as 12.9%. The going rate on a lot of the credit cards is 18.5%, but there is one at 12.9% that can be used if they would like to borrow.

The beauty of a credit card is that it is offered to a wider spectrum of people than might qualify for a bank loan or a bank line of credit. There is a much broader risk spectrum, and I think that's reflected in the pricing of the product. So especially at times like this there's much greater volatility in the losses, and there are a lot of other costs that go into a credit card that don't go into a line of credit that affect the pricing. So it's not only the volatility of the loss, it's the fact that you're lending to a broader spectrum; you're actually giving cards to people you might not give a line of credit to.

There are also the fraud losses, which have been increasing dramatically in recent years. There is also the cost of providing the insurance. The actual fees for the cards have not been going up, whereas the price of the features and benefits attached to the cards, and the insurance costs, have been increasing significantly for the bank.

So all of those costs go into the determination of the rate, but I think the key one is the risk and how many people actually qualify for a credit card, and that presents a lot of volatility in the losses.

[Translation]

Mr. Stéphane Bergeron: Mr. Stitt, I agree with you that credit cards are one of the highest-risk products. One could understand that in a normal situation, with interest rates fluctuating around 10, 11 or 12%, the interest rate applied to credit cards should be about 18 or 19%. But what we fail to understand is that when interest rates are about 7%, credit card interest rates are being maintained at 18%, regardless of risk. I imagine that the risk is not any less. Since the interest rates applied to various products are lower, I imagine that the risks are no lower, but the fact remains that in the general context, maintaining interest rates of 18% whereas the average rate is about 7% is somewhat prohibitive.

Having said that—and you can perhaps get back to this issue—what I understand from your presentation is that when it comes to supporting small and medium-sized businesses, the TD Bank emphasizes client service. You'd assess that very few small and medium-sized businesses borrow from you.

I'd like to get back to a point that was raised by my colleague, Mr. Drouin, earlier. I'm still speaking about the situation of people who start a business. When dealing with young people who want to start up a business, very often they are already in considerable debt and when they go to a lending institution, they are asked for guarantees that they often cannot provide because they have no assets or property that enable them to provide the expected collateral.

My question is very simple. Although it does not seem to be the TD Bank's priority to offer favourable loan conditions to small and medium-sized business, generally speaking, in terms of the guarantees required to obtain a business start-up loan, can these conditions be considered relatively excessive in some respects?

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[English]

Mr. Nick Stitt: First of all, since 1996, I think the number of customers we have borrowing under $250,000 has increased by 55%, and that is the highest number of any of the major banks. A lot of that growth has been in the smaller credit amounts under $25,000. With respect to guarantees, many businesses, I think probably 45% of them, are unincorporated, so it's a moot point. A guarantee comes into play when businesses incorporate, naturally.

Our collateral requirements are directly proportional to the risk of the loan. If you're lending money to a start-up venture—a younger person who doesn't have a lot of net worth—it is a higher-risk loan. Regardless of what their personal situation might be, you're going to ask them for a guarantee. We're a lender; they're the owner. They stand to benefit from their success far more than we do. We get our interest margin and that's all we'll ever get, so we ask them to guarantee the loans as evidence of good faith.

If they don't have collateral, then we take advantage of the Canada Small Business Financing Act program, and we've had considerable growth in that program, particularly in Quebec. That's a program, as I'm sure you're all aware, that allows us to use the same due diligence we normally use in doing loans, except it may be a situation where it's a young person starting a business and they have a great plan but not much capital. We tend to use that program. It's very effective.

The Chair: Merci, monsieur Bergeron.

Mr. Savoy, please.

Mr. Andy Savoy (Tobique—Mactaquac, Lib.): Thank you very much, Madam Chair.

Thank you, gentlemen, for appearing today.

Since September 11, and actually prior to September 11, we've seen an economic downturn. And I think as spokespersons for the SMEs in Canada, we have a responsibility to identify how banks may be able to help SMEs, because when you look at our society and the impact it has on the economy, I think it's in everybody's best interest to look at initiatives that will help SMEs, and not just existing ones but also small business start-ups. I think it's imperative that we as a society look at issues that can help those groups.

Do you have any specific initiatives you're launching in response to the economic times we are in now?

Mr. Nick Stitt: We don't have any specific initiatives that are tied just to the economic situation. Our belief is that with interest rates at the level they are, really it's not the cost of borrowing that's determining a business's success, and what we feel small businesses need right now if they are experiencing difficulties is an understanding ear, someone they can talk to and tell their story to, and someone they can work with. That's where our focus is.

So when I talk about our small business credit centres or account management people, I stress that we're in this business for the long term. We're not just focused on credit. It's about the people behind the businesses. It's about the deposit part of it. It's the whole thing. We're committed to the business for the long term and we can't be in and out; we have to support them and be patient.

In terms not only of small business but also the commercial bank, we think we pick the customers we lend to fairly well, and I think we're doing a better job at that. So obviously we have a role in the economy to make sure we pick people who are going to prosper, do well, employ more people, and succeed over time. With those customers, the key being good management, we have a lot of patience when they get into difficult circumstances. If there's good management in place and good communication, we're very patient people, because lots of times we hurt ourselves more by taking any action than by being patient.

Mr. Andy Savoy: Some of your competitors, and the chair alluded to this earlier, have taken the initiative to lower their prime rates to small businesses, to lower the rates to prime at 4% for small business customers between $50,000 and $250,000. Have you people considered an initiative as such, which would have the impact of increasing your market share, I would assume, but also would have a significant impact on the cost of borrowing and ultimately the economy and SMEs' prosperity?

Mr. Nick Stitt: We're very aware of what our competition is doing and we are looking at all the advertising and press releases they do. We know that some banks have reduced prime rates temporarily, or reduced borrowing rates to their customers temporarily. We're looking at the situation. I can't make a commitment one way or the other. Our average small business loan is $30,000. Eighty-eight percent of all the customers in our bank, including corporate borrowers, mid-market borrowers, and small business borrowers, have credits authorized less than $250,000. So in that market the average loan outstanding is $30,000, and if you take a reduction in prime rate of 3% for a few months, it translates into $20 or $50. That's a nice gesture, but I would like to be more focused on helping customers who are in difficulty and getting those customers through.

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Mr. Andy Savoy: Mr. Marr, I understand you're involved with the agricultural side. You mentioned your increase in market share at TD for small business loans in general to SMEs. How has agriculture fared in that regard in the last few years? Have you noticed the same trend?

Mr. David Marr (National Manager, Branch Distribution, Agriculture Services, TD Canada Trust): In the small sector of agricultural loans we've increased our market share by over 1%. In the large sector, it hasn't been as significant, but in general terms we've increased our volume market share by about 20 basis points. Some of that has been through the launch of our new program, our third-party program, which Mr. Stitt spoke of.

That's been a great success, and it's brought services to areas where we didn't have branches, and customers needed those services. There was a trend for those dealerships, or farm supply outlets, to try to finance those customers on their own, and that created challenges for them. So we've tried to work with them to help them with this problem they had, and it's been a big benefit to ourselves as well.

Mr. Andy Savoy: Thank you very much, Madam Chair.

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

Mr. Lastewka.

Mr. Walt Lastewka: First I want to compliment TD Canada Trust on their business planner. Since last June I obtained every planner that I could get from any institution possible, and I have a foot and a half of material. I found out that yours, with 11 pages, is the shortest, most concise, and easy to fill out by a business. I wish everybody else would adopt a nice, short 11-page-or-less business planner in the age we live in now. So I wanted to compliment TD Canada Trust. Whoever the people were, the working people behind it, they deserve a lot of credit.

In fact, I would recommend to the CBA that we should adopt a business planner like yours and everybody use it, so there'd be less confusion for the entrepreneur who's starting out there, who has to do what I did and get all these copies of various types of business planners. I wanted to ask you to pass that on to the people who put it together—I know you didn't, but the people who put it together.

I think you heard the question I asked earlier on accounts receivable. When there's a downturn, there always seems to be a problem within the small business community. It's almost a planned effect by some medium-sized and larger corporations to keep putting off small business because they know they're not going to take them to court and they can't afford it, so they get delayed and delayed. They almost have a program in place, and I could go over that program with you in private, on how small businesses are suffering.

My question to you, which is similar to the question I put to the National Bank, is, what program do you have in place to assist those businesses to make sure they have a proper methodology to collect accounts receivable?

Mr. Nick Stitt: The first advice we give to small business, and probably any size of business, is to make sure they have good financial advisers in terms of an accountant, or a bookkeeper, someone who can keep their business on the straight and narrow.

With respect to receivables, I understand the situation you're talking about. Large companies do tend to lean on smaller businesses and stretch them out sometimes. If they are dealing with our commercial bank and they have a dedicated account manager, while we do not do factoring, that account manager will know, depending on what industry and the industry in that local area, contacts who they can refer these people to factor receivables, whether they want to sell their whole receivable book or just discount one receivable. There are services out there. TD Canada Trust does not provide them. We've looked at doing that, but we tend to stick to our core competencies, and there are people who can do that better than we can. What we'd do is put that customer in touch with someone who would do that for them. There are businesses out there that do not only mid-market factoring and discounting, but also go right into small business factoring and discounting.

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On the small business side, we have the sales force. Their role is to help our retail branch people with customers. If a customer is experiencing difficulty, like collecting receivables, we're not the primary financial adviser for businesses. So they would refer them to the small business specialist, who would then have a contact like me in the community to hook them up with to help them with a receivable problem.

Mr. Walt Lastewka: From my standpoint—and I've become more and more aware of this since September 11—access to capital is one area that small businesses have been complaining about and so forth. In the meantime, they have their capital, but it's in accounts receivable. It would sure be nice for you to make an additional booklet along that line—simple, short, but right to the point—on how a small business person should be doing things.

I happen to live in the Niagara area, where there's a lot of tourism, and of course you know what happened to tourism after September 11. There's almost a planned approach by some middle-sized companies to just discard small companies, small businesses. What happens is that small businesses, who have done the work, who themselves are trying to keep afloat, are the ones that are suffering.

As I get into it more and more, I find there's not enough communication and training and things out there, without having to be referred to five other people. I know our local media is doing a special article this coming Monday on that, on the simple form of trying to get at accounts receivable. So I'd ask you to take that under some advisement.

One of the areas I wanted to ask you about is that I know some of the other banks, on loans under $50,000 or under $100,000, are basically looking at the credit of the individuals and less at the business plan. They are mainly telling people that the business plan is for your use, not necessarily always for the bank's. Any comment?

Mr. Nick Stitt: It's a continuum; for very small loans, it's often based almost entirely on personal risk.

Mr. Walt Lastewka: At what level?

Mr. Nick Stitt: It's not that scientific. It's based on the judgment of the underwriter, whoever is looking at the loan. We don't all look at financial statements. Obviously, for very small businesses, financial statements sometimes don't mean a lot, so we tend to look at the individual behind the business. As the business gets larger and the loan request gets larger, we get into more detailed analysis of the financial statement, the business plan, the cashflow, cashflow statements, and pro forma analysis. There's no hard and fast formula.

You're right, on the smaller side, we do tend to place a heavier weight on the personal characteristics and the personal credit bureau. Regardless of what size of business you're lending to, you always look at the person behind the business and their character and financial resources.

Mr. Walt Lastewka: Using some general stats—I know in Industry Canada and a few other areas we're trying to get better data—in Canada, we basically initiate 145,000 new small businesses a year. At the same time, we lose 125,000 businesses each year, for many reasons: wanting to retire, merging, selling, and so forth. But then there's an area of going bankrupt or going out of business.

There's a question I always like to ask the banks. When you have these companies that go bankrupt or go out of business, what are you finding are their main reasons for having lost their businesses?

Mr. Nick Stitt: I don't have anything scientific to tell you. I get anecdotal things from our account management people and our recovery people. It's often due to the financial management abilities of the owners of the business.

I was reading some research that I think Industry Canada did. They did a survey of bankruptcy trustees and asked them to give the primary reasons that businesses went bankrupt. I think they said in only 18% of the cases was the willingness of the bank to lend more money a factor. It was often that they weren't aware of other sources of financing and didn't tap into those. They weren't willing to give up ownership, so they couldn't access partners' capital.

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The key thing was just bad financial management. They were unable to get new customers, unable to market.

Mr. Walt Lastewka: Thank you.

The Chair: Mr. Ianno, please.

Mr. Tony Ianno: Thank you very much for the presentation. Nick, we had a good discussion before in terms of where the bank's going and its new role and what you hope to accomplish, and I wish you lots of luck with it.

In terms of the numbers, where we were at on June 30, 2001 was $5.36 billion for small business, as compared to $5.22 billion in 1995. For large business, it was $18.26 billion in 1995 versus $23.26 billion on June 30, 2001, which is an increase of $5 billion versus a $134 million increase in small business. What can be done to fix the numbers?

Mr. Nick Stitt: I don't know if we can fix the numbers. Our focus is to grow—

Mr. Tony Ianno: Let me change the words. What can you do to lend more to small business so you get a healthier economy for the TD?

Mr. Nick Stitt: We would like to lend more to small business. Obviously, we've been growing pretty significantly in loans to small businesses, whether it's under $1 million or under $250,000. The demand just hasn't been there. I think the sustained economic boom for the last ten years has meant that a lot of businesses retained earnings, built up capital, and decided not to borrow. Now what we're finding is that because of the uncertainty in the economy, some businesses aren't making capital expenditures and are therefore not borrowing. So the demand is down.

There are other providers of loans to small businesses. Leasing companies and others now lend up to 50% to small businesses, so they've taken part of the market.

A lot of the growth in small businesses is reflected in our numbers. When you look at the number of customers at TD with loans under $250,000, since 1996 that grew 55%. That's not including Canada Trust numbers yet. So a lot of the growth in our lending has been in self-employment and businesses with one to four employees. They don't tend to borrow as much as large businesses.

Mr. Tony Ianno: In other words, the large businesses grew by 25% in terms of the amount. It wasn't so much the number of businesses you attracted, right? It was just more usage of it from the large businesses?

Mr. Nick Stitt: As you know, large businesses are involved in mergers and acquisitions, and that generally involves a lot of debt. A corporate bank does that kind of stuff. However, having said that, it has no impact on what we do in the small business market or in the commercial market. I can lend as much as I can lend. If I could stimulate more demand somehow, without taking on an unacceptable level of risk...

Banks lend to a certain risk spectrum. It's fairly narrow because we can only charge a certain rate of interest and collect a certain revenue, and that defines what our loan loss expense is. We have a certain spectrum we lend to.

Mr. Tony Ianno: On the loan loss ratio for large business versus small business, do you find a difference in your bank?

Mr. Nick Stitt: The loan loss ratio for small businesses is a lot higher than it is for corporations.

Mr. Tony Ianno: Oh, it is? Can you give me the number?

Mr. Nick Stitt: I don't have the number off the top of my head because we've just closed the books for the fiscal year-end.

Mr. Tony Ianno: Okay, let's deal with last year's numbers. So it's higher. What percentage higher would it be? Is this what you think it is, or is it what you know it is—the small business loss versus the large business loss?

Mr. Nick Stitt: This is what I think it is based on numbers we gave to you after our appearance in March.

Mr. Tony Ianno: Okay.

Mr. Nick Stitt: Based on those numbers, if I recollect, the small business loan losses were higher than the corporate, in percentage terms.

Mr. Tony Ianno: Yes. You don't have that, though.

Mr. Nick Stitt: I don't have that number.

Mr. Tony Ianno: Do you remember? Does anybody here remember?

Can you send it to the committee?

Mr. Nick Stitt: Yes.

Mr. Tony Ianno: Does the clerk have last March's TD loan loss ratio for small business versus large business? Did you receive it from them?

The Chair: We received a response to the questions at the committee.

Mr. Tony Ianno: Could we get that?

The Chair: It was actually circulated to the members of the committee, Mr. Ianno, but I forgot to send it to you. It's no problem.

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Mr. Tony Ianno: Thank you very much, Madam Chair.

I'd like to have that number handy all the time because that is not my understanding in terms of loan loss ratio between small business as a portfolio versus large business. I'd like to see if TD is different from the other banks.

Mr. Nick Stitt: Just to add to that, most corporate customers borrow at prime or BA rates, which are less. So I would find it hard to believe they could sustain the losses we've sustained in small business because we're charging higher interest rates. I'll get the numbers for you.

Mr. Tony Ianno: Thank you very much.

The Chair: Thank you, Mr. Ianno.

I have a couple of questions, if I could. Maybe you can help me, Mr. Stitt. In your presentation you talked about the Ontario small business investment tax credit program. Maybe you could just explain that a bit more to me. I read that you actually lend money at prime minus 1%. Will that continue into 2002? Is it a one-year program or a five-year program? How does it work?

Mr. Nick Stitt: There are loans up to $50,000 for the full five years at prime minus 1%. The qualifying businesses must have assets of less than $500,000 and revenues of less than $500,000. The Ontario government gives us a rebate, via capital tax, for 4% on the loan amount.

The Chair: You're the only bank that did that.

Mr. Nick Stitt: Yes.

The Chair: Why would that be?

Mr. Nick Stitt: I think you'd have to ask the others.

The Chair: I'm going to ask the other ones when they come. I just wondered if you had any idea why.

Mr. Nick Stitt: It's been a very successful program, with 3,800 new loans this year, for a total of $80 million. I think we have about $180 million outstanding since 1998, when it started.

The Chair: I know Mr. Bergeron already touched on credit cards, and I just want to go back to some questions I had last week. Maybe, Mr. Alexander, you can help me with this.

Are we comparative now? I'm hearing that prime is the lowest it's been in 40 years. Are credit card rates where they were 40 years ago? Did we have this 18% credit card rate? I'm speaking on behalf of consumers here. I understand credit cards aren't a good way to finance small businesses, but we all know that consumers have a tendency to use them when times are tough. Times are tough.

I just read in the paper today that the U.S. economy is still expecting a bit of a weak spending... even for Christmas, which means consumers are going to use their credit cards, which is what they normally do. Do you have any comments on that?

Mr. Craig Alexander (Senior Economist, TD Canada Trust): First of all, it's hard to make historic comparisons, because there's been a huge proliferation in the credit card market over the past ten years.

The availability of credit has gone up exponentially. In fact, one of the systemic risks that developed in the U.S. economy was due to the fact that the banks were giving away platinum cards to just about anybody who wanted one.

The Chair: We don't do that here?

Mr. Craig Alexander: I don't think it was quite as prolific in Canada. But the key thing here is that the credit card environment is different today from what it was in the past. Interest rates have come down significantly. From a personal sector point of view, which would be households and unincorporated businesses, when you look at the liabilities on a personal balance sheet, the vast majority of them are actually mortgages, by a huge amount. Close to 80% of the personal liability component across the economy is mortgages.

Mortgage rates have come down quite significantly. They've tracked bond yields lower, so we've seen a significant reduction in mortgage rates, which is key in terms of providing support to the personal sector's balance sheet.

Credit card rates haven't come down much during the cycle, but they're not really keyed off economic cycles. They're based on personal bankruptcy rates and the risks associated with lending on those vehicles. But interest rates in other areas outside of credit cards have come down more than credit cards. Credit cards are not the right vehicle to finance expenditures over a long haul.

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There's an issue there because there's the availability of credit, and there's the risk of individuals taking on large credit and then incurring large interest costs, at which point the best thing they can do is consolidate their debts and get them off the credit cards.

The Chair: I recognize it's not the best way to do it, but we see this all the time. I guess my concern is that as we have this somewhat weakened economy, what's going to happen? Are we going to see bankruptcies go higher? Are we going to see credit card rates go higher, when we're at the lowest prime rate in 40 years? If that's a trend, it just seems the gap is going to get really wide. The people who usually don't understand the system are the ones who are hurt the most by it.

The lower-income individuals who actually have credit cards don't understand that you should get a loan and pay off and consolidate your debts. Other people don't like to do that because they don't want to have a debt for five years. They think they'll get ahead of themselves, and they dig themselves deeper in debt.

I'm quite concerned that we have consumers out there—and I don't really see a huge effort on behalf of the banks to go after those individuals who are carrying these debts and say, we have a better solution for you. Maybe that's coming.

Mr. Nick Stitt: I used to run personal lending, and the growth in lines of credit has been phenomenal. It has really cannibalized any borrowing on credit cards over the last five years. TD Canada Trust's share of lines of credit has grown hugely. I don't know the exact number, but many customers have personal lines of credit now at rates of anywhere from prime to prime plus 2.5%, generally speaking. At today's rates, that's 6.5%.

The rate of borrowing on personal credit cards has gone down. I can tell you that when most people come in for a loan from a bank, one of the things they look at is their debts. If they have credit cards, not only with banks but also with other providers that charge 28.8%, the first thing they'll do is recommend that they consolidate their cards and get down to one card. If they can, they'll put them on a line of credit and get the card paid off using the line of credit, or consolidate them on a term loan with a payment so they're reducing their debt.

They do get some advice, but the problem is, as Craig mentioned, credit cards are so available. You can do that one day and the customer will be out accepting another credit card offer the next day.

The Chair: On the future economy in Canada, Mr. Alexander, do you have any predictions?

Mr. Craig Alexander: As Nick said, our assumption is that this current downturn is going to be fairly short-lived, and in terms of an overall economy point of view, fairly shallow compared to prior downturns. We're quite optimistic. We're probably going to see a couple more quarters of weakness, but by this time next year things will look a lot better.

The reason we're optimistic is that there's an awful lot of monetary and fiscal stimulus in the pipeline that's going to turn around the U.S. economy. The fiscal policy comes to a total of two percentage points of GDP, so that's a huge amount of money. The fed has been exceedingly aggressive in cutting rates, and we're already seeing the impact in terms of auto sales and mortgage refinancing.

The end result will be that the U.S. economy will turn around; it's just a matter of time. It's going to help turn Canada around as well. Also, the Bank of Canada has now cut aggressively, and we think that is going to have a significant impact next year.

The question is all a matter of timing. Whether the turnaround will happen in the second quarter or the third quarter we can't say, but we have every reason to believe things are not different this time, and we will have a recovery under way by this time next year.

The Chair: Mr. Marr, I have a question before I go back to Mr. Ianno. In agricultural lending, I'm just not sure what's happening. I know that TD Canada Trust is still going through what I guess you'd call growing pains or some kinds of pains, where it has still not been decided where branches are going to close.

What is that going to mean for agricultural lending? Are you seeing any differences in how it's operating? Have we encountered any difficulties in reaching customers or in responding to their needs?

Mr. David Marr: The first answer is we have not seen any difficulty in responding to their needs. For those who may not be aware, Canada Trust did not offer agricultural loans. They may have had agricultural customers, but they would have borrowed through personal means or personal lines of credit.

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At TD Canada Trust, we see it as a real opportunity because there were Canada Trust branches in agricultural centres where we did not have a TD presence. So we have aligned our agricultural sales force with those branches and made sure the staff in those branches understand our products and understand that we do have a product to offer those customers they may have been dealing with before. We see it as a good opportunity. Through our mobile sales force, we're making sure all our branches basically have access to those agriculture products.

The Chair: Just to follow up on the agricultural sector, one of the concerns we're hearing from agricultural lenders or those involved in agriculture, and one of the difficulties we're having as a government... We set up programs such as NISA, the net income stabilization account, to try to help them through bad times. We come up with these programs believing this is the way it should work, and then instead the banks say, “We'll lend you money and we'll take that as collateral”. How do you deal with that?

It kind of puts us in an awkward situation. Right now in the whole agricultural sector, when you look at the ability to provide a sustainable fund for them, they're saying to us, “Well, you have all this money in NISA. The money is not being withdrawn.” We're saying, “We're using it as collateral because the banks want it as collateral.” That was never the intention of NISA. So how am I supposed to deal with that?

Mr. David Marr: First of all, we cannot take a NISA account as collateral or assign a NISA account. Until about two years ago, the trigger out of a NISA account was assignable, but all the banks agreed to waive that part of the program because it was creating the possibility of tax implications for customers. They had assigned it in a year when they thought they might need it or there was pressure on their lines, and then the proceeds from the NISA came out in the year they had a good revenue. It created some tax problems. All the banks agreed we would waive that, so we cannot use that as collateral or assignable.

We do try to work with our customers to do what's best for them. If they have funds in their NISA account and they should be utilizing those for asset purchases or for working capital needs, then an account manager may recommend that they try to access through the limitations of the program, keeping in mind that there are limitations on the program to get funds out. We don't encourage them to collapse the program if they don't have to, because if they collapse it, they have to stay out of the program for a couple of years.

To answer the question about the balances continuing to rise in NISA, there will always be challenges with that because we have a diverse agriculture sector across the country. While we might have a bad situation in southwestern Ontario because of a drought this year, southern Manitoba had an extremely good year. The cattle people in Alberta just joined the program, and they just came off a good year. So the balances are going to go up and down, and sectors are going to draw on it as they need and put into it as they need.

It's a good program. We try to help our farmers manage the assets in the program. There are always going to be challenges with balances there and whether they take it out or not.

The Chair: I appreciate that. I also appreciate that clarification, Mr. Marr, with regard to NISA. I understand why farmers are telling us it's being used as collateral. In fact, you're not exactly taking it as collateral, but the suggestion is to leave the money there because they'll be out of the program. So I see where they're maybe confusing what's happening.

I want to thank you very much for being here.

I apologize, Mr. Ianno. We have a vote, and they're telling us it's in ten minutes. So we are going to have to adjourn.

Thank you very much. We look forward to meeting with you again in the future.