Careful what you wish for, Tony

News Report: "Ottawa leery of approving Globalive" bank deal

“Sometimes, the best deal is the one that you don’t do,” as my favourite banking mentor is wont to say.

For the life of me, I can’t imagine why OSFI would be “leery” of letting Tony Lacavera and his Globalive investment team solve their main problem at Wealth One Bank of Canada. Surely that outcome must be superior to the ongoing embarrassment that flows from that fact that someone in Ottawa approved the licencing of a new bank in 2016, only to have CSIS reportedly open an investigation in 2021 into that same bank and three key shareholders/Directors (H/T Globe and Mail).

Things got more formal in 2022, “when Ms. Freeland sent a letter telling [the three shareholders that] they could be susceptible to Chinese government pressure. She also raised concerns that the bank might have engaged in money laundering.” (Ed. note: Might have? Isn’t every bank facing this challenge?) It may well be that Mr. Lacavera et al aren’t the issue at all, and OSFI is unhappy with whatever has been negotiated among the soon-to-be minority investor base.

If Minister Freeland’s divestment direction is being ignored, it might make sense for the Liberal government to sit tight until her order prevails; even then, there’s no guarantee that additional patience will solve OSFI’s problem. And I have no confidence that Minister Freeland can get a Court to force a sale of private property that was legally acquired, which makes the absence of a Red Carpet for Globalive all the more surprising.

As for Mr. Lacavera’s business plan, I have no unique insights. I do wonder what the point of the exercise is, however. Having worked for / around banks and government for >35 years, I hope that he knows what he’d be getting himself into. Unlike the Canadian Telecom space where the “little guy” is the Belle of the Ball, there’s not a soul in Ottawa who wakes up in the morning and asks the question: “what can we do for the tiny banks today?”

What was an asset at Wind Mobile is the Achilles heel in bank land.

While the Globalive team has an affinity for tech investing, and Mr. Lacavera’s profile at Toronto’s Creative Destruction Lab will attract plenty of exciting start-up clients, that profile of firm is rarely yet credit-worthy — and the Big 6 have various free (ie. money-losing) commercial account offerings that Globalive Bank will need to match if it wants to play in that space. Credit Cards? I think Rogers Bank is already doing that. In the event that growth lending is the actual business plan, my former team at CIBC Innovation Banking has all of the flex that comes with a $500 billion balance sheet.

Deposits? Good luck with that. There are hundreds of Credit Unions and Caisse’s that can provide CDIC deposit insurance, and I cannot see there being much profit to be made if you are paying 5.2% for a one year term deposit and hoping to win a 3-year mortgage at 6.5%. In case you missed the Superbowl, I think I saw some ad spots from EQ Bank — those Levy’s can’t be cheap, which means that you’ll have to boost your marketing budget accordingly.

It might be tempting to think that a bank licence is a regulatory gift that’ll give an entrepreneurial owner a leg-up on the variety of Fintechs that have designs on attacking the Big Six’s consumer banking stranglehold. There’s a logic to it, I’ll admit. Our man Christian Lassonde expects Open Banking to eventually obviate much of that advantage (see prior post “What is ‘Open Banking,’ and why should we care?” Jan. 16-24), and Wealthsimple has concluded that such niceties are not integral to that Power Corp.-backed firm’s own pre-IPO growth plans.

If a licence is a key success factor, I’d argue that Questrade is better-positioned to succeed given its existing install base. If Globalive were given approval to recapitalize Wealth One Bank, Questrade’s four year application process deserves a positive, and immediate, ending. That assumes, of course, that Questrade management haven’t changed their minds after four long years of regulatory Q&A.

Speaking of small banks, Canadian Western Bank hit almost $32/share in 2007; you can buy more for ~$27 a pop today — a mere 0.8x 2024e book, and that place is well run. If the comfort of a big bank is more to your liking, Globalive can buy all The Bank of Nova Scotia it wants for 1.0x that bank’s estimated 2025 book value. Best of all, someone else has to take the weekly check-in calls from the Regulators! Yes, I said “weekly.”

In the event that Tony, Brice and crew still want to proceed, the Finance Minister’s Office needs to tune folks in; I’m not sure how much longer Ottawa can look this gift horse in the mouth before it gets wise.

MRM

(this post, like all blogs, is an Opinion Piece)

(photo: Drayman, London, 1950 by Irving Penn)