Canada’s financial services sector has been getting a lot of attention these days, particularly as America’s banks struggle to rebuild their brands after the mortgage crisis and subsequent recession. Toronto in particular has come out on top as North America’s second largest financial services hub, outpacing Chicago in employment growth. Nearshore Americas dug up some key data points and spoke with Brad Duguid, Ontario’s Minister of Economic Development and Innovation, to see what’s under the hood of Toronto’s successes (and challenges) in the industry.
NSAM: Would you say there is a financial services boom in Toronto?
Duguid: Employment in Toronto’s financial services industry grew from 162,000 to 224,000 between 2000 and 2010, an increase of more than 38% compared to the 0.3% increase seen in the U.S. The finance industry also generated just under 20% of the city’s economic output. Ontario (province of Toronto) has a diverse economy. We are a major auto producer, biosciences, food processing, top three in aerospace, and mining. But there’s no question, financial services is the mainstay of our workforce and GDP.
Researcher’s notes: After a recent investor mission to New York, Duguid explained that Toronto is an “easy sell” given its competitive labor market and sound reputation of its banking industry. However, in order to remain competitive with other global financial centers, the sector is focusing on efficiency and productivity, by strengthening synergies with technology and business process services companies. Toronto is also looking outward to emerging economies to diversify its financial services export market away from the United States.
NSAM: What makes Toronto’s financial services sector so attractive?
Duguid: One huge reason for our recent successes is due to the fact that Canada’s largest banks averted the hits that U.S. banks took as a result of the financial crisis. Investors have come to see our financial institutions and the Toronto Stock Exchange as stable and sound havens for investments and vehicles for investing. There is also an exceptional workforce here. We always rank among the most educated within the OECD. More importantly, annual operating costs for [international financial services companies] are significantly lower in Toronto than in many leading centers.
Researcher’s notes: Among 44 cities with a metropolitan population of at least 2 million, Toronto ranked second lowest in terms of typical business costs (labor, facilities, utilities, and taxes) for financial services operations. Employee healthcare costs for a typical firm are about one-third the U.S. average. Corporate income tax rates (federal and provincial combined) are lower than in most U.S. states and roughly 13% below the U.S. average.
NSAM: What is the nexus between financial services and outsourcing in Toronto?
Duguid: As the finance industry grows, we’ve found room for greater efficiency within the sector. Information and communications technology (ICT) and financial services are inextricably connected. Canada’s largest banks spent $7 billion on technology in 2011, a large proportion of that in the Toronto region. Toronto is North America’s third largest center for ICT surpassing Chicago, Boston, and Los Angeles. There also seems to be less employee turnover in Toronto’s ICT sector compared to other hubs. In places like Silicon Valley, one challenge there is talent poaching and talent costs associated with rampant competition. Google is increasing its footprint in Ontario for this reason.
NSAM: What’s the Biggest Threat to Toronto’s financial services industry?
Duguid: Toronto is very much an export-driven economy, primarily to the U.S. market. Seventy seven percent of our exports – both products and services – go to the U.S. This leaves us vulnerable to fluctuations in the U.S. economy. We’ve shown resilience over the last five years having regained 140% of jobs lost during the recession – so we’re actually in better shape than we were pre-recession. Yet we recognize our dependence on the U.S. market and are actively building relations in developing markets, primarily in China and India, but we also see opportunity in Latin America. We’ve recently opened a trade office in Brazil, but admit that we could do more in the region.