All signs are pointing to an economic downturn. How will that affect the financial institutions and their willingness to lend money, especially to small businesses?
I don't see the risk appetite changing. What we will continue to focus on is helping to grow clients’ businesses, and lending more to clients. Of course, we always want to make sure that a company can afford the debt they are taking on. We will first look at how much revenue is going to be required, and what offsetting revenue will be needed to service that debt. We want to make sure that the company has somewhat of a cushion.
From a survey we did in September, the average entrepreneur is still optimistic. They set a two-year time horizon to grow or invest in their companies, or even within two years. RBC is aggressively looking for more clients – but again, we want to make sure that we’d be doing the right thing for each business, that the business can afford the additional debt. We also want to make sure the company can continue to grow. In other words, we need to establish that our loan will allow a business to grow, while not jeopardizing the future of the business.
Based upon the data from the last recession, how much was lending curtailed during the downturn?
We get that question a lot. Here's the interesting thing from our perspective. Our number of borrowing clients continued to grow at a fair clip! We are quite pleased about that. The difference between what we authorize in terms of credit, compared to what a client will use, is what we would allow them to go up to. For example, you might apply for $25,000 but only use $10,000 of it.
We've also seen our authorized credit levels continue to grow at a fair clip. A big difference from the last recession is that our clients’ utilization rate has decreased. Let me explain what I mean by utilization rate. Say we authorize $20,000 of an operating line for your business. However, you are only using at any given point in time $10,000 worth of that. Your utilization rate would be 50 percent. What we are seeing is that we are authorizing a fair amount of credit, but clients aren’t necessarily utilizing the full amount of credit we’re providing to them.
This kind of utilization rate is a North America-wide trend. I attribute it to a couple of things. It's a testament to our small business owners who want to make sure: a) they’re ready if there's an opportunity that presents itself, but b) they also want to make sure they’re not taking undue risk that can jeopardize the future of the company.
What we've seen over the last year and a half is that the utilization rate has gone down. We are also seeing the amount we authorize continue to climb year after year.
As compared to the last downturn, which was pretty much of a surprise, there is much more awareness that we may go into a downturn for 2012. How does that affect lending?
We are seeing a lot of companies continue to build up their deposits. And again, they are coming in to borrow, but they are not necessarily pulling the trigger to spend what they borrow. So, we are seeing an accumulation of cash. We are seeing companies be very prudent in terms of where do they want to invest, or will they invest now.
Here’s an illustration. If I'm going to buy a piece of equipment that could produce more units of whatever it is I produce, now is the right time for me to do that. At the end of the day, it's going to increase my fixed cost. But, if I'm concerned about whether my orders will increase, maybe I don't want to do that just yet. I'll keep my cash, and when I'm feeling more confident, I’ll buy the equipment. That’s the type of activity we’re seeing: clients keeping more cash on the books. Canadian entrepreneurs are getting ready to seize an opportunity by keeping their cash on hand. If an opportunity comes up, they’ll draw on that cash. What we are seeing – and this comes back to that survey we did in September – is that 60 to 70 percent of entrepreneurs feel good or somewhat optimistic about the future, specifically, the next two years.
Yes, things have somewhat changed since September, but the entrepreneurs are still getting ready. They are building up their cash reserves. They are cautious about whether they want to invest just yet in the acquisition of a new piece of equipment, or a new line, or purchasing another business. So, we are seeing a build-up in deposits with a reduction in the debt. But again, the reduction in the debt is something that they are managing themselves, and managing well. We know this because we are continuing to increase the amount of credit that's available. They are just not drawing on it – not yet.
Based on the most recent recession, can you identify any industries that will weather turbulence better than others?
From our portfolio perspective, we haven't seen any industry that has fared worse or better than any others. What I will say is that the optimism and robustness and growth in our clients have been a very pleasant surprise. There could be another factor at work here. If you go back to 2008-2009, a lot of larger companies started to scale back the size of their sales force. You had people who were formerly employed, and were specialists in a given domain, go out on their own and start a business. They had contacts in their industry, and they had skills and experience to make their new business work.
While there's not one industry that's performed better or worse, the overall small-business performance has been quite solid in the last year. We are seeing a wait-and-see approach as clients watch their balance sheet continue to grow in terms of deposits. They are getting ready on the lending side, but not doing anything. Their balance sheets are looking stronger than they have in the last little while.
How would you compare the liquidity in Canada’s banks versus US banks at this moment in terms of capital available and ease of acquiring loans?
I wouldn't want to comment on the US situation. I can say that, in Canada, there is sufficient liquidity out there to help small businesses. For 2012, I think we'll continue to see more clients come to us to talk about their borrowing needs. I think we'll continue to see an increase in clients who have borrowing facilities with us. I would put forward that we are not going to see an increase in utilization. I think people will continue to take a wait-and-see approach. They are looking for a bit of more positive news. The uncertainty out there is holding people back a little bit.
What is exciting for me as I speak to our clients, and as I look at some of the trends, is the balance sheets: lots of deposits on hand, available credit if they need it. When the opportunities do present themselves, Canadian entrepreneurs – from the way they are setting themselves up – will have huge opportunities. They can invest in equipment that will help increase their productivity levels at a reduced cost per unit. They will also be able to look around for a competitor, or another line of business, they might want to get into or acquire. They will have the funds to do so, while somebody else may not, and may be looking to get out.
Would you say that, because of the liquidity, there would be more activity on the mergers and acquisition front?
That’s a little outside my field. I will say that the liquidity puts people in a good position if an opportunity presents itself. I don't think we'll see that in 2012 just yet; maybe towards the end, but not at the beginning. With the messaging we're hearing about the world economy, I don’t think much is going to change in the next couple of months. If we start to get consecutive months with positive information coming out, that could change behaviours.
Canadian academics have routinely criticized this country for its weak performance on innovation compared to other industrialized nations. Do you share the sentiment? Is there anything we can do to realistically correct it?
It's a tough question. The Canadian dollar is kind of a barometer for how you leverage innovation. If you are exporting, and all of a sudden your dollar is stronger, you are looking at how your products can be sold at more competitive pricing. I think people will start to look at innovation to try and improve their efficiency levels. Usually innovation comes at a certain cost, and people need a certain confidence about the return they'll get on their investment in innovation. They want to know how long it will take, and whether their company can absorb the extra cost, or if there might not even be an extra cost.
It all goes back to the balance sheet: you have plenty of cash on hand when an opportunity presents itself; you feel there's a certain confidence in the economy, and that your customers will buy more from you. That would set Canadian small businesses up for a great opportunity to move forward very quickly.
With the crisis in Europe, there's been a lot of movement away from the Euro and back to the US dollar, which has, in turn, pushed the Canadian dollar down a bit. What impact will this have on small business?
In the crisis of 2008 and 2009, when the US economy started to slow down, there was similar questioning around what would happen to Canadian businesses that do a lot of exporting.
What ended up happening was they continued to export. Perhaps the volumes weren't the same, but businesses were also looking for opportunities to export elsewhere. What you are seeing is small businesses showing their versatility again. They’re able to find other customers elsewhere, and became less dependent on our US partners.
If the Canadian dollar falls and you are an exporter, that can give you an advantageous pricing scenario. The key problem that most entrepreneurs or businesses will face is uncertainty. There might be fewer orders or less demand because the people they sell to feel cautious about having too much inventory or buying too much. It all comes back to what small business clients are actually going to be doing, and how diversified they are.
The good news is some old businesses have shown their resilience to be able to adapt to decreasing economic environments. Now the question is: can they continue to diversify, to find other markets, for example, with the Internet? Can they achieve the ability to ship goods and services anywhere? The entrepreneurs I've spoken to are still optimistic. They are just also somewhat cautious about doing anything major for the next little while.