Over the course of his 42-year career, Hugh Brown became the dean of Bay Street's bank analysts, working from his perch at BMO Nesbitt Burns and its predecessor firms. On Jan. 31, he retired at age 64, which will allow him to spend more time back in his beloved Maritimes. He stopped analyzing and picking individual stocks a decade ago to become a big-picture financial sector guru, but he still recalls the hits and misses.
What's your favourite bank stock over the past four decades? Probably Bank of Nova Scotia-not because I'm from Nova Scotia, but because of their culture and business mix. Scotiabank was never a pioneer in technology; they don't care if they are the biggest in anything. They'd rather watch all the pioneers cross the street first and see how many get arrows in the back. They like dealing in places like Jamaica and the Philippines. And probably because one of the best bank CEOs was Cedric Ritchie, from Bath, New Brunswick.
Which one let you down? You know what it is: CIBC. It's always finding new ways to destroy shareholder value. But analysts don't want constant boring success-we want excitement. CIBC has produced its fair share. It's a testimony to the underlying retail business franchise of all the big banks that they can earn their way out of problems-Enron, Dome Petroleum, Olympia & York or structured credit writedowns.
What was your best call? When the trust companies were imploding in the late 1980s, we were quite negative on them. They had exposure to commercial real estate, and most trustcos were driven by entrepreneurs such as Peter Pocklington. Then you add a lot of leverage and declining asset values in their specialty.
What call makes you cringe? During the bank mergers debate of 1998, it looked like the mergers were going to occur. Obviously that didn't happen. So the stocks ran up the day John Cleghorn [CEO of Royal Bank]and Matt Barrett [head of BMO]announced their deal, and they ran down as Paul Martin and Jean Chrétien blocked the mergers.
How do you feel about the mergers now? I thought they made sense, mainly because I'm a free-market guy. Underperforming companies should disappear as a natural cleansing that happens with consolidation. On top of that, a concentrated financial system is good for a big country with a small population. Canada has rules to protect the public, such as limits on any one investor's holding in a bank. And banks are only allowed in the financial business; they can't own, say, a steel company.
How has your business changed? I didn't use technology as efficiently as I could have. And the lawyers now check everything you say. For example, our analysts can't own stocks they follow. As long as you disclose it, it's good to own stocks in your area-it focuses your interests.
Was it ever a problem covering your employer, Bank of Montreal? I had some early concerns, but there was never any attempt to prevent me, or my successors, from doing our job.
Even when it was awkward? Well, it's hard to play five-card poker when you only have four cards in your hand.
What was the most traumatic thing that happened? In 1982, Third World debt collapsed. The Big Five Canadian banks had 2 1/2 times their equity invested in Third World loans, and those loans plunged to 50 cents on the dollar. On a mark-to-market basis, the banks were insolvent. Canada was also in its worst recession in 40 years. But it was another testimony to the banks' core franchise-give them time and they can earn their way out of trouble. It took seven years to absorb the Third World writedowns.
How did the 2008 crisis compare with that? I was scared again because the world is so interconnected. But the domestic industry was strong and our banks were the best of a bad bunch worldwide. We were at the centre of the storm in 1982. We were at the fringe of a bigger storm in 2008. That was like a hurricane going up the Nova Scotia coast-if it misses the province by 75 miles, you just get a little breeze.