How to Improve Commerce Bank’s Income


asks today whether Toronto-Dominion Bank is overpaying for Commerce Bank.

They’re both customer-serviced, says RBC analyst Gerard Cassidy, but they have

very different profit margins:

The difference, Mr. Cassidy told The Times, is that Toronto-Dominion, which

operates in a much less competitive market, pampers its customers at a much

lower cost. The Canadian bank, Mr. Cassidy calculates, spends about 50 cents

for every dollar it generates. That amount is 74 cents at Commerce.

It’s true that Commerce’s home base of New York and New Jersey is less competitive

than, say, Toronto. But I’m not entirely sure what Cassidy is talking about

when he refers to dollars "generated". If he means loan income, then

he’s not really talking about the cost of pampering customers, he’s talking

instead about ability to generate loans. Here’s what Murray wrote in the comments

to my last blog entry:

CBH is great at attracting depositors. But it’s terrible at putting those

assets to work: it hates lending – at 36% its loans to deposit ratio is among

the lowest (TD’s is 65%). So it put majority of deposits in a securities portfolio

that it’s been losing money on here and there for the last 2 years. Not clever.

In other words, if Commerce’s costs remain the same, but it increases its loan-to-deposit

ratio from 36% to 54%, then – presto – its cost-to-income ratio

will fall from 74% to Toronto-Dominion’s 50%. And if TD can loan out the same

proportion of Commerce’s deposits that it does at the rest of its banks, then

Commerce’s cost-to-income ratio would fall (assuming costs stay the same) all

the way to 41%.

Now, it’s certainly possible that there’s some deep connection between Commerce

Bank’s customer service, on the one hand, and the fact that it makes very few

loans, on the other. Maybe it’s good at being nice to its customers because

it owes its customers money, rather than the other way around.

But banks buy and sell loans to and from each other every day: if Commerce

didn’t want to lend money to its customers, it could just buy loans from the

bank next door instead, and let that bank have the bad customer relationship.

Loan-to-deposit ratios are easy to increase.

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