Bank compensation schemes changing banking says Merrill Lynch report

The Merrill report focuses on the banks’ personal & commercial divisions. It says that aggressive loan pricing has kept the banks from making money in these areas for years. At the same time, it has also kept foreign competition at bay. This is set to change however, Merrill suspects.

“A major change to implement variable, incentivized compensation at the sales level in P&C banks, led by Toronto-Dominion Bank about two years ago, is sweeping through the banks,” says the report. Merrill expects this will improve bank margins by limiting the discounting to posted rates.

Merrill believes more performance-related compensation will focus bank employees on division and product profitability and away from battles for simple market share regardless of profitability. Royal Bank of Canada is the bank best positioned to benefit from this change, followed by TD, Bank of Montreal, Bank of Nova Scotia and the Canadian Imperial Bank of Commerce, says Merrill.

While CIBC may be least leveraged in its personal and commercial banking divisions, Merrill still likes the stock, suggesting second quarter earnings will be strong because of CIBC’s U.S. underwriting business and an upcoming buyback. It also notes that CIBC’s new chief financial officer Tom Woods is, “in our view more than up to the task.”