Business boomers are cashing out, so big banks are cashing in
But report finds ownership transfers require ‘more flexible lending practices’
TORONTO Canadian banks have been surfing a grey wave — and cashing in on aging business owners who are looking to cash out.
National Bank of Canada chief executive Louis Vachon outlined the trend earlier this month at a Bloomberg conference in New York, where he noted that a large proportion of businesses are owned by baby boomers who are now poised “to pass the baton” to the next generation.
“This business ownership transfer is fuelling a lot of financial transactions,” Vachon told the audience.
The balance sheets of most small and medium-sized companies are also “very healthy,” Vachon said, so a buyer will usually take on some debt to make the acquisition. “And that phenomenon, which we’ve seen that fuelled M&A activities in investment banking, and I’ll say all of you are familiar with this, it’s also fuelling increased activity in commercial banking.”
That transfer was one factor Vachon cited as driving healthy commercial loan growth among Canada’s Big Six banks.
Canada’s population, like those of other developed countries, is growing older. Aging alongside the rest of the population are business owners, many of whom have begun heading for the exits. This has driven some demographic-related business the banks’ way, which arrived as mortgage growth slowed amid stress tests and foreign-buyer taxes brought in by regulators and governments.
CIBC World Markets analyst Robert Sedran wrote in an Oct. 27 report that, in recent years, the Big Six “have benefited from general commercial growth that has helped offset decelerating consumer growth.”
Aging owners also provide opportunities to pass business along to other parts of a bank, such as their wealth management or capital markets divisions.
“As someone who owns a business is aging and ready for retirement … they are referring that client to their commercial banking or capital-markets business,” said Robert Colangelo of ratings-agency DBRS.
Business succession has been an opportunity for Toronto-dominion Bank, according to Teri Currie, the lender’s head of Canadian personal banking. “As people are thinking about selling their business, we have wealth advisers that can come in and help with that,” Currie said during a September conference.
The pipeline of small business owners seeking to cash out may be pretty full. The Canadian Federation of Independent Business published a survey in November 2018 that found 72 per cent of business owners, sitting atop more than $1.5 trillion in assets, planned to exit their companies within the coming decade.
Retirement, at 81 per cent, was cited as the chief reason for exiting a business, the CFIB found. The most common expected exit route for owners was selling to someone unrelated to their family, at 48 per cent. “It’s something we’ve been following and identifying for the last decade or so, because small business owners are not immune to the demographic shift that’s happening right across Canada,” said Corinne Pohlmann, senior vice-president of national affairs at CFIB.
Still, more than half of business owners told CFIB that finding a potential buyer was a problem, and 37 per cent surveyed said securing financing for a successor was an issue. Banks can also be “pretty risk averse,” Pohlmann said, and the smaller the business, the tougher it can be to get a loan.
“Sometimes the banks themselves see the value in the previous owner,” she said, adding that if the previous owner leaves, a bank can become more risk averse, as they lack a relationship with the incoming proprietor.
The CFIB’S report recommended financial institutions adopt “more flexible lending practices that take into consideration the financing needs related to business succession.”
There has been some catering to the small-business crowd. Bank of Montreal, for instance, announced a lending platform a year ago that it says has already helped thousands of small Canadian companies in accessing capital.
There are, however, expectations that general commercial loan growth will slow among the Big Six.
Another trend driving commercial lending, according to Vachon, was a time-sensitive one: the federal government’s decision to bring in faster tax writeoffs of capital investments by businesses, which spurred recent spending on equipment and machinery.
Banks have also benefited from a boom in commercial real estate. The past two years have seen the Big Six add more than $50 billion in commercial real estate and construction loans, a rate that will be tough to keep up, Sedran said.
“While there have been few signs of slowing commercial growth, we do not believe the current double-digit pace is sustainable and are forecasting a slowdown in growth to the high single-digit range (approximately nine per cent),” he wrote.