Indigenous banking a bright spot for big banks as capital flows into communities

Michael McIntyre (left to right), Chief Financial Officer of the Membertou First Nation, Mark Shadeed, Director, BMO Indigenous Banking, Quebec and the Atlantic Provinces, and Andrew Giggey, Senior Relationship Manager, BMO are shown in a handout photo. THE CANADIAN PRESS/HO-BMO-Dean Casavechia MANDATORY CREDIT

TORONTO -- From complex energy-sector investments to infrastructure projects and businesses, the increase of capital flowing into Canada's Indigenous communities represents a bright spot for the country's big banks.

Deposit levels and loan demand in Indigenous communities are higher than ever, while projects seeking financing from banks have evolved, said Dale Sturges, Royal Bank of Canada's national director of Indigenous banking.

"The types of loans that we are being asked to support are much more complex and larger in size than they've ever been before," he said.

RBC has seen total volume growth in loans and deposits within its commercial Indigenous segment of 18 per cent from December 2017 to December 2018, the bank added.

Many financial institutions such as the Bank of Montreal, Royal Bank of Canada and the Canadian Imperial Bank of Commerce have invested time and energy into the fast-growing segment, establishing on-reserve branches and dedicated business arms over the years.

Capital and income in Indigenous communities have risen alongside the rise of land-claim settlements, bankers say.

"Typically, we would have seen maybe 10 years ago, loan requests to support infrastructure or small economic development projects within a community," said Sturges. "And now, we would be seeing very substantial requests for loans... Building in the oil patch for example, a lot of activity that is related to the energy sector."

The total amount of personal and business income within Canadian Indigenous communities totalled about $33 billion in 2016, nearly triple from $12 billion in 2001, said Brent Mainprize, a professor at the University of Victoria's Gustavson School of Business who teaches entrepreneurship and Aboriginal economic development.

"If you just think of the purchasing power of Indigenous people and Indigenous businesses, it's really growing very fast," Mainprize said.

"A lot of things are driving the growth. One is that Indigenous people are getting back their rightful resources in a way that is enabling them to start to fully participate in the economic environment, in a way that probably hasn't been that easy in the past."

Claims with the federal government are being settled at a "much faster pace than ever before," said Sturges. But Indigenous communities are also negotiating leasehold agreements and impact benefit agreements which are also generating income, he added.

In turn, the bank has seen "quite significant" growth on the deposit side among Indigenous groups due to the transfer of wealth, he added.

Another factor is an increase in procurement policies which prioritize sourcing services and supplies from Indigenous businesses, said Alicia Dubois, CIBC's market vice-president of Indigenous Markets. In turn, new Indigenous ventures are popping up to respond to the demand, she added.

"There's a recognition for large institutions, and that includes CIBC, that diversity within the supply chain makes for a very healthy robust economy," she said.

"Engaging Indigenous businesses as part of the supply chain is another means for there to be significant economic growth within the Indigenous economy."

Indigenous communities have long expressed a desire to increase their economic participation, but it is only in the past few years that banks are seeing large proposals that are workable, Sturges said.

One complicating factor involves the process banks use to lend to customers, which aren't easily applied in Indigenous communities.

Most lending is asset-based, where a home or land is used as a loan's collateral. That works in parts of Canada where the Land Titles Act applies, but Indigenous communities are subject to land ownership rules under the Indian Act which do not allow for the ability to borrow against their homes.

Circumstances vary depending on whether communities are involved in treaty process or title cases, but in a band council system, an individual is typically provided housing from the band, said Mainprize. That may provide a certificate of ownership, but it doesn't allow the bank to take the title if the person defaults on their loan.

"That becomes problematic. Even though you are living in a house… The bank doesn't necessarily have the authority to get control of that property if they need to. So that's really a challenge," said Mainprize.

Given that 80 per cent of entrepreneurs tap into wealth associated with a home or property to fund their ventures, that inability to borrow against their home is a disadvantage, he said.

"Through our history, we made it impossible for Indigenous groups to actually have something they could pledge... That conspired against success from even being possible," Sturges said.

As income starts to flow into these communities, Indigenous groups can now borrow against that income stream to tap more capital, he added.

The 2017 purchase of a 49 per cent stake in a Suncor oilsands storage facility by Fort McKay First Nation and Mikisew Cree First Nation for roughly $503 million is one recent example of the complex transactions being carried out. The financing for the deal was structured and marketed by RBC Capital Markets.

Some of the projects Bank of Montreal bankers have worked on in Indigenous communities have included an entertainment centre in Membertou First Nation in Nova Scotia and a hotel in Port Hardy, B.C., said Stephen Fay, BMO's head of Indigenous banking in North America.

"I don't think a lot of people understand that they're moving in the direction of the Canadian economy in terms of the diversity of what they do," he said.

The bank's Indigenous unit has been growing at roughly 15 per cent annually, outpacing the rest of the bank, Fay added. BMO's Indigenous book of business is worth roughly $4.3 billion, up from roughly $500 million in 2000, not including retail banking.

Now, the bank is eyeing prospects for its specialized banking services south of the border.

"There's going to be work done this year to land on our strategy … And once we have a strategy and a policy in place, then we can start hiring people," Fay said.

Meanwhile, RBC is bringing in different aspects of the bank to work with the division, such as capital markets, and CIBC recently added one more person to grow its team of Indigenous banking experts to 10, said Dubois.

"We're building as the need builds and we're definitely seeing growth," she said.