Interview: TD Bank CEO Bharat Masrani on the future of banking

"It took us 160 years to build our Canadian business. We've been in the U.S. about nine years. So give us time"

TD Bank CEO Bharat Masrani

(Portrait by Markian Lozowchuk)

Over the past 28 years, Bharat Masrani was responsible for TD divisions in India and Europe before spearheading the bank’s expansion into the United States. In 2013, Ed Clark announced he was retiring as CEO and tapped Masrani, then head of U.S. operations, as his successor, promoting him to chief operating officer during a 19-month transition period. Masrani officially took over in November, and announced a 5% boost in adjusted earnings in the first quarter of 2015, with net income in Canada and the U.S. increasing by 8% and 15% respectively. TD announced in February that it will become the first Canadian bank to offer customer service by text message.

Almost all the major banks have changed CEOs in the past couple of years. The transition at TD seemed like one of the smoothest. Why do you think it went so well? 

Number one, there were no surprises. We had ample time for the transition. Second, which is probably more fundamental, is that there’s total alignment with respect to the bank’s strategy: what we stand for in our culture, our set of values, our model, what TD’s all about. Total alignment between myself and Ed [Clark, the former CEO] and Frank [McKenna, the deputy chair], and many others in the senior team. That stems from the fact that anything major we’ve done in the bank over the past 12 years or so, I’ve been very much a part of the change. When we got out of the structured products market, I was the chief risk officer. When we headed to the U.S., I was a key part of that. So when you take all that and put it together, I felt I was an equal partner in making the bank what it is now.

It’s easy to say you’re totally aligned, but how did you get everyone on the same page?

We started with the basic question of what should be our core business. Are we a retail-focused bank, for example, or are we an investment bank? And we decided we should be retail focused, which is one thing that provided clarity. So if you have a basic premise like that, you say, “Now, how are you going to make that happen?” And that’s the point where a lot of discussions take place and, sometimes, you might have disagreements. But we are a very deliberate bank. Sometimes it takes us longer to make decisions, but we are OK with that, because we like to build consensus as much as possible, to have the whole team going in the same direction.

You mentioned that you’ve been involved in all aspects of the bank. Was that part of the succession plan, or did you get the job because your experiences just made you a natural fit?

Hey, listen, I like to think I was the best guy for it. But in all seriousness, the bank has always had a robust succession plan. We are a large institution. We’ve been around for 160 years, and we always need to remember that our leaders are temporary custodians of a great institution. One of the jobs you have when you get higher in the bank is to make sure you’ve got solid succession plans for all the positions that might be there. That’s a core part of what we do in the bank. You might be surprised to hear this, but my board has already said to me, “You’re great, but should something happen to you, what’s your recommendation?” Not that they’ll take my suggestion, but it shows everybody takes this very seriously.

Analysts still seem unimpressed by the bank’s progress in the United States. What do you think it will take for TD to crack the U.S. market?

After TD entered the United States, there was a very deep recession. And we’ve had essentially six years of zero rates. In our kind of business, zero rates are not friendly. Low rates are good, but zero rates are not friendly, because we are in the spread business. If there’s no spread, you’re not going to make as much money. Do we think that will last into perpetuity? The answer is no. That’s a long way of saying that we’ve been in the build phase. It took us 160 years to build the business we have in Canada. We’ve been in the U.S. about nine years. So give us more time.

You’re on the record saying that you’re not interested in growing through U.S. acquisitions….

Our model is focused on organic growth. We opened 35 new stores in the U.S. last year. We plan to open about 25 this year. We put out a goal three years ago that within four years, TD will be the third biggest retail-oriented bank in New York City—the biggest banking market in the world—and we were able to achieve that goal one year in advance. Now we’ve got about 125 locations just in New York City. So we will continue to do that. And with respect to acquisitions, what I’ve said is, if we were to get a good deal, especially in the southeast of the United States, would we look at it seriously? The answer will be yes, because our model works remarkably well when we have sufficient scale in every market we are in. And are we close to that in the southeast of the U.S.? Yeah, we are. And we’ll continue to build our organic strategy. But if we get an attractive deal that’s small enough and accelerates our organic plans, like what we might build in new stores over the next three or four years, we can instantly get great locations at a good price. Why would we not look at it? So I’ve said we’d be open to that.

So you haven’t said never.

Never is a long time. It would have to make strategic sense. It would have to make financial sense. It would have to make timing sense.

I was looking back at an analyst call from December and was struck by how much has changed in a few months. Interest rates have been cut; oil has dropped more than expected. How do you adapt?

Interest rate cuts can come and go. So I wouldn’t want to call it a secular change. But with the oil prices, even if they were to come back, there’ll be some effects that are going to be lingering here for many, many years to come. So there’s a steep hill to climb. We’ve got to say, “All right, we’re probably not going to have the revenue growth you saw over the past few years because of various reasons, but given the cycle we are in, how do we become more efficient?” In the U.S., we opened our first teller-less store in Baltimore, with smart ATMs. In Canada, here in Mississauga [Ont.], we’ve opened an advice centre. There’s no cash there. There are no tellers, but the branch is there to help customers decide on products if they want to buy a home or save for their children’s education. We can have a good conversation with a lot of our customers, potential customers, as to what they should do, and that’s what we do out of those locations. So we are adapting to this new world, and we can become more efficient in areas that are probably not going to be as key in the world tomorrow.

When you say “areas that aren’t going to be as key in the world tomorrow,” what do you mean?

Well, at one time, we opened 60 new stores in the U.S. Last year we opened 35. But at the same time we closed 30 locations because demographics had moved and the traffic wasn’t there, so we have to adjust to that. So the store [count] in the U.S. went up by five or six. So that’s what we do and that’s what I mean. We’ve got to become more efficient. We’ve got to be faster in doing these things. And, frankly, we also have to adapt to newcomers to our space. In the payment space, they are already out there, you know, new players coming in all the time. Do we need to adapt to that? Yes. We need to adapt to that.

How does an old-fashioned bank compete when a company like Apple launches a payment system?

These are not fleeting changes. We are making more investments in areas that we might not have made a few years ago, like digitization and mobile banking. We introduced UGO [pronounced you-Go], which is a mobile wallet where you can flash your phone in front of a terminal to pay and the rewards are updated immediately. All of our ATMs in the U.S. now are image enabled, so when you deposit a cheque, the receipt will come out with a picture of the cheque. People always struggled with using the ATM for deposits. They would say, “I put the envelope in. Now it’s my word against the bank’s that there was a cheque in the envelope.” Here, the customer gets proof. So those transactions that ought to be done on a self-serve basis are done that way, and our people can provide more advice and high value–added services.

It’s interesting, because over the past few years, TD focused on good, old-fashioned customer service. How do you maintain that personal touch when people are banking through a smartphone or ATM?

A lot of people ask me, “So, what’s the big deal about opening on Sundays? What’s the big deal about opening early? Any bank can do that. You know, all the banks are rich.”And I say, well, yeah, they can replicate everything we have, our hours, our products. But they can’t replicate our culture. We are a customer-centric bank. Everything we do starts with that. But in today’s world, how do we make sure we do that with the new technologies as well? We have to create the same “wow!” moments in our electronic channels as we do in our branches and stores. We weren’t the first one to offer what I call “cheque image transfer.” That’s where you take a picture of your cheque and immediately send it to your bank. But a guy like me can have a bit of a shaky hand when taking a picture on an iPhone, and then you’re trying to hit this little icon so it takes a picture. By the time you get all those things done, it’s probably going to be a blurred cheque—the bank is not going to accept it. So we were one of the first banks to let customers touch anywhere on the screen in our app to take a picture. If you were having to take the picture four times because it would shake a bit, then you look at this new system and say, “This bank is thinking about me.”