Canadian Banks 2014 How strong are the Canadian banks?

Canadian
Banks 2014
How strong are the
Canadian banks?
Perspectives on the
Canadian banking industry
www.pwc.com/ca/canadianbanks
Contents
02 How strong are the Canadian banks?
24 Capital management
28 Credit losses
30 Snapshot of the Big Six
45Appendices
58 Financial Services publications
60 Financial Services leadership team
Preface
In the 2014 edition of Canadian Banks, we take an in depth look at
the strength of Canadian banks compared to their global peer group.
The Canadian banking industry is held in high regard by our global
counterparts, due to stability during the financial crisis. We’ve
also seen strong growth with overall profits for Canada’s Big Six
banks exceeding CA$30 billion for the first time in history. But new
economic, regulatory and competitive challenges have affected the
industry and many global banks have improved their position and
profitability over the past few years.
So how do we compare to our global peers? Can Canadian banks
maintain their position globally? Read on to find out the answers to
these and other questions.
With this edition, we also celebrate 31 years as a leading banking
publication in Canada in providing key industry trends and
insightful analysis.
Diane Kazarian
Bill McFarland
National Financial Services Leader
CEO and Senior Partner
Perspectives on the Canadian banking industry 1
01 | How strong are the
Canadian banks?
Perspectives on the Canadian
banking industry
Canadian banks have been held in very high regard by their global peers in light of their
strength and stability during the financial crisis. Buoyed by a calm domestic market and
a benign credit environment, they saw year-over-year revenues rise and overall profits for
the Big Six1 exceeding a combined CA$30 billion for the first time in history.
1. Big Six in this report refers to Canada’s six major banks: National Bank of Canada (NBC), Royal Bank of Canada (RBC), The Bank of Montreal (BMO), Canadian Imperial Bank of
Commerce (CIBC), The Bank of Nova Scotia (Scotiabank) and Toronto-Dominion Bank (TD).
2
Canadian Banks 2014
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Canadian banks enjoyed relatively smooth,
steady sailing in 2013. But risks and
challenges loom under the surface, with
downward pressure on return on equity and
an ever changing regulatory environment.
The strength of the Canadian banks is undeniable, but how
strong are they when compared to their global peers? After
the global credit crisis, the Canadian banks were seen by
many to be global leaders. New economic, regulatory and
competitive challenges have since emerged creating new
obstacles for all industry participants. It’s a testament to
the quality and leadership of Canada’s Big Six banks that
despite these significant challenges, the banks continue to
enjoy a high degree of success. However, over the past few
years in particular, many global banks have also improved
their capital positions and their profits are further
demonstrating a true turnaround. So as we move further
away from the credit crisis are the Canadian banks still in
the same dominant position?
Perspectives on the Canadian banking industry 3
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Canadian banks in a global context
ROE 17.4%
Efficiency 57.2%
ROE 12%
Efficiency 67.6%
ROE 16.2%
Efficiency 43.3%
The respect that Canadian banks have received from their global peers is supported by consistently
strong return on equity (ROE), at levels far exceeding those of their US counterparts. Data points
such as total shareholder returns (TSR) and limited credit losses help demonstrate this positive
competitive position. Beyond the data, the positive perception held by Canadians about their banks
and banking system adds further depth to the assessment.
Over the past year, the average Big Six TSR was a very strong 23.1%. With the global equity markets
producing convincing returns, other global banks also experienced healthy yields (Figure 1).
This past year was not an anomaly, as the Canadian banks have averaged an approximate 22%
annual return over the last five years. Emerging from the financial crisis, the Canadian banks have
outperformed their US peers in TSR by a healthy margin. However, similar results have also been
produced by the Australian banks showing similar strength exists in other parts of the globe. A key
contributor to these returns has been the resiliency of the housing markets in Canada and Australia,
avoiding the large scale write-offs experienced by the US banks. That being said, the US banks have
recovered from the losses experienced in 2008 and have produced solid results surfacing from the
depths of the financial crisis.
How does the productivity of the Big Six compare to that of their global counterparts? It depends.
US banks compared poorly as they delivered lesser income per employee (CA$90,000 on average)
than the Big Six (CA$120,000 on average), a worse efficiency ratio (67.6%) than the Big Six (57%)
and an average ROE that was decidedly lower than the Canadian average.
However, Australia’s banks continue to set the standard when it comes to productivity. Australia’s
major banks posted considerably lower efficiency ratios (44.9% on average) and higher revenue per
employee (CA$240,000 on average) than their counterparts around the globe. This productivity
performance can be linked to several factors: a higher net interest margin environment, lower
headcounts, a smaller branch network, an emphasis on digital and alternative banking channels,
differences in business mix, and a retrenching of international operations.
4
Canadian Banks 2014
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Figure 1: Canadian banks compared with global banks
Canadian banks1
Key metrics
Net income
before tax
($ millions)
BMO
BNS
CIBC
NBC
Australian banks2
RBC
TD
Canadian
banks
average
ANZ
CBA
NAB
US banks3
WESTPAC
Australian
banks
average
BOFA
CITI
JPMC
WELLS
US
banks
average
5,377
8,460
4,048
1,817
10,617
10,658
8,945
10,658
8,472
10,276
16,172
19,857
25,914
21,900
45,631
83,645
43,278
16,736
74,812
78,896
47,512
44,844
42,164
35,597
257,158
253,000
254,063
274,300
Net income/
FTE
0.12
0.10
0.09
0.11
0.14
0.14
0.12
0.19
0.24
0.20
0.29
0.23
0.06
0.08
0.10
0.08
0.09
Net income/
FTE in CAD5
0.12
0.10
0.09
0.11
0.14
0.14
0.12
0.19
0.25
0.21
0.30
0.24
0.06
0.08
0.11
0.08
0.09
23.97%
19.77%
17.93%
28.47%
19.46%
22.79%
22.07%
25.66%
32.44%
21.34%
24.31%
26.03%
2.45%
-4.83%
15.43%
11.33%
13.38%
FTE (absolute
numbers)4
5 year TSR
(Reuters)
Notes
1.
2.
3.
4.
5.
Canadian banks’ values are in CA$ and include The Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), The Bank of Nova Scotia (BNS) National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD).
Australian banks’ values are in AU$ and include Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac Bank (WESTPAC).
US banks’ values are in US$ and include Bank of America (BOFA), Citibank (CITI), JPMorgan Chase & Co. (JPMC) and Wells Fargo (WELLS).
Headcount for US taken from mid-year results as year-end not yet available.
Conversion into CAD used average exchange rate for the year.
Perspectives on the Canadian banking industry 5
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Continued compression of
return on equity (ROE)
As we discussed in last year’s publication, one challenge that Canadian
banks are facing is compression of their ROE. Overall, the weighted
average of the Big Six banks’ ROE fell from 17.07% to 16.24% this year.
Strong performances in lending segments led to improvements in the ROE
by 1.62% year over year. Other income was also a positive contributor
adding another 1.05% year over year. However, banks continue to add to
their capital base as a result of Basel III and other regulatory requirements.
The capital additions reduced average ROE by 1.59%.
6
Canadian Banks 2014
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Operating costs: A key
contributor to ROE compression
Surprisingly, despite significant efficiency projects underway, the largest
change resulted from operating costs. Expenses in this area chewed away
2.04% from the average ROE. This highlights the impact expenses can
have on returns, and why the banks have made this one of their priority
areas. Additional costs have been incurred by the banks adopting various
new regulatory requirements and the impact is illustrated through the
pressure that is placing on earnings (Figure 2).
Figure 2: Factors affecting Canadian banks’ ROE
19.00%
18.50%
18.15%
18.00%
17.50%
17.00%
17.07%
16.50%
16.00%
15.48%
17.10%
-1.59%
1.62%
Capital
Net
interest
income
15.50%
15.00%
14.50%
1.05%
18.44%
0.29%
Credit
losses
16.40%
-2.04%
Other
income
16.24%
Operating
costs
16.24%
-0.16%
Other
14.00%
13.50%
13.00%
12.50%
12.00%
11.50%
11.00%
10.50%
10.00%
2012
ROE
2013
ROE
Perspectives on the Canadian banking industry 7
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Other risks
Besides ROE compression, Canadian banks face some other challenges in the
near future.
Low interest rate environment
The low interest rate environment is showing no signs of easing, with the
International Monetary Fund (IMF) predicting no movement in rates until early
2015.2 The low interest rate environment limits the amount banks can charge
on loans and earn on investments. With the banks funding a large portion of
their lending through deposits, increasing rates are often seen benefiting the
top line before any changes are made to deposit pricing. However, given recent
focus on liquidity we believe certain new deposit products may emerge with
tiered repricing.
Mortgage and housing changes
The low interest rate environment has allowed Canadians to take out record
levels of debt. Average Canadian household debt reached a record high level of
163.7% of income, but the rate of growth has slowed likely due to Canadians’
reduced appetite for new lending.3 These debt levels make it harder for the banks
to continue to find new growth in a market where consumers have their own
vulnerabilities.
At the same time, the federal government’s efforts to tighten mortgage lending
rules and reduce the role of the Canadian Mortgage and Housing Corporation
(CMHC) are beginning to have an impact on this traditionally sizable and
lucrative area of banks’ business. This will create further difficulties for the
banks to find growth in their portfolios.
The Canadian housing market didn’t experience the same level of contraction
that the United States did during the most recent recession. Continued pricing
gains have led many parties to call the Canadian housing market overvalued.
Rather than simply hoping to grow on the back of the economy, banking &
capital markets organizations will need to make sure their strategies reflect
the new realities of a market where customer expectations are being set by
developments outside the sector and where customers are better informed,
less loyal and readier to switch than ever.
—17th Annual Global CEO Survey: Banking & Capital markets industry summary, PwC
8
Canadian Banks 2014
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
While only the market will reveal if these predictions are accurate, it does add
another layer of risk for banks. The benign credit market cannot last forever
which is a risk the banks need to manage.
Expanding commercial lending is another strategy being used by the banks
to improve net interest margin. While commercial lending has greater risks, it
generally provides higher yields and is a growing market. The Bank of Canada
recently expressed that “the recent depreciation of the Canadian dollar should
help to boost exports. This, in turn, should lead to stronger business confidence
and investment here in Canada.”4 An improvement in the manufacturing
and export sector in Canada would open up additional commercial lending
opportunities for the Canadian banks and help them close the gap created by
a slowing retail market.
Changing competitive landscape
Finally, the confines of the banking industry aren’t as clear as they used to be.
New competitors are entering the landscape and have the potential to be a
changing force in the marketplace. For example, a large telecommunications
company is now an Office of the Superintendent of Financial Institutions (OSFI)
licensed bank and is looking to tie together telecommunications and banking
services.5 The way that we pay for goods and services is also evolving, as
concepts such as virtual wallets become reality. Other technology companies may
look at the financial services space as a way to sell other services, and potentially
offer them as a loss leader to benefit their higher margin products. The end result
is that new players offering new services are on the banks’ radar. At the same
time, banks can see this as a whole new area of opportunity to create additional
revenue streams and improve the customer experience in the process.
2. Egan, Louise. IMF sees limited room for Bank of Canada rate cut. Reuters. February 3, 2014. http://www.reuters.com/article/2014/02/03/
canada-economy-imf-idUSL2N0L80J620140203. Retrieved: February 10, 2014.
3. Ljunggren, David. Canada household debt-to-income ratio hit record high. Reuters. December 13, 2013. http://ca.reuters.com/article/
businessNews/idCABRE9BC0HY20131213. Retrieved: December 15, 2013.
4. Investment Executive. Trade deficit widens in December. February 6, 2014. http://www.investmentexecutive.com/-/trade-deficit-widens-indecember. Retrieved: February 17, 2014.
5. Schedule I Banks. http://www.cba.ca/en/banks-in-canada/61-banks-operating-in-canada/110-schedule-i-banks. Retrieved: February 8, 2014.
Perspectives on the Canadian banking industry 9
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
The impact of a changing Canadian credit market
Canada’s banks benefited greatly from a generally calm, even benign, credit environment in 2013.
However, ongoing government efforts to rein in mortgage lending and forestall the sort of housing
crisis experienced in the US, UK and other countries will begin to have a more significant impact on
banks’ business in the year to come.
The federal government is scaling back the role and size of CMHC in an effort to reduce Canadian
taxpayers’ exposure to housing-sector risk. Eventually, CMHC may only insure low-ratio mortgages
to those used in CMHC-backed securitization programs and prohibit the use of any taxpayerbacked mortgages as collateral in non-CMHC securitized vehicles. As Finance Minister Jim Flaherty
expressed recently, “Regrettably, CMHC became something rather more grand I think than it
was intended to be.” This scaling back can already be seen as CMHC insurance in force sat at
CA$559.8 billion as at September 30, 2013, down from CA$575.8 billion a year earlier.6
This change, along with prior adjustments to mortgage lending rules, will change both the way
Canadians obtain mortgages and the way their banks fund those mortgages. At the moment, roughly
half of the Big Six banks’ loan books are made up of CMHC-insured mortgages. Banks will need to
decide if they wish to underwrite more non-insured mortgages, increasing their credit risk, or lose the
business to non-bank lenders. The shifting of risk away from CMHC back to the banks could have the
potential to increase interest rates for some borrowers, even if long-term rates remain flat. While banks
experienced lower than anticipated loan losses in 2013, it may prove to be a temporary respite only.
Looking closer at the household debt-to-income ratio demonstrates the challenge faced by the
Canadian banks from a global perspective. As shown in Figure 3, Canada now has the highest
household debt–to-income ratio as compared to Australia, US and the UK. We can’t simply conclude
that Canadians have the highest debt levels from this graphic as there are differences in the method
used by each country to calculate this figure. These differences relate to the treatment of interest paid
on non-mortgage loans, the types of groups included or excluded such as non-profit institutions and
how health spending is accounted for. However, what we can take away is that the trend in the other
three jurisdictions is stable to declining, while Canada is still on an upward trajectory.
10
Canadian Banks 2014
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Equifax reported that consumer debt, excluding
mortgages, climbed 4.2% year over year but the
delinquency rate hit a record low of 1.12%, down
from 1.19% a year earlier.7 How long can this trend
continue and at what point do Canadians finally stop
adding to their debt levels is a critical question for
the banking sector in Canada. This directly impacts
the ability for banks to grow their loan portfolio,
and as the ratio continues to climb additional credit
risk is generally added to the market. It’s fair to say
that not all Canadians with high household debt-toincome-ratios will have a hard time paying off their
debt. Nevertheless, the trend is showing a unique
situation in Canada that cannot be ignored. It may have
implications from a wider macro-economic perspective,
so it is not simply an issue for a few of the banks but
could potentially impact GDP growth, consumer
business confidence and the broader economy.
Figure 3: Household debt-to-income ratio
6. Canada Mortgage and Housing Corporation. Quarterly Financial Report. September 30, 2013.
http://www.cmhc.ca/en/corp/about/core/upload/2013_Q3_QFR_Publication_English_Final.pdf.
Retreived: February 7, 2014
7. Market Wired. Equifax Canada Reports Consumer Debt Grows to Over $1.4 Trillion.
February 9, 2014. http://www.marketwired.com/press-release/equifax-canada-reports-consumerdebt-grows-to-over-14-trillion-nyse-efx-1877093.htm. Retrieved: February 10, 2014.
Perspectives on the Canadian banking industry 11
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Operating costs and productivity
Bank productivity changed little in 2013. The Big Six banks’ overall
efficiency ratio was 57%, negative slightly to 56% the previous year,
as non-interest expenses grew a shade faster than revenues. Revenue
per employee edged up 2.7% over the year, to CA$317,000, as overall
headcount grew 1%. However, ROE fell from an average of 17.07% to
16.24% (Figure 2).8 The efficiency ratio is driven by a numerator and a
denominator. By virtue of expenses growing at a faster rate than revenue,
we see a deteriorating trend in productivity from 2012 to 2013. This is a
reversal of the trend where banks saw an improvement in efficiency from
2009 to 2012.
RBC continues to lead in Canadian banking productivity, boasting
not only the lowest efficiency ratio (53%) but the highest revenue
per employee (CA$375,000) and highest ROE (19.1%) among peers.
Scotiabank also delivered a 53% efficiency ratio, but lagged in terms
of revenue per employee. And while BMO’s efficiency ratio trails that
of its peers, it achieved the second-highest revenue per employee. Not
surprisingly, while banks generally reported improved results from their
US operations, international operations taken as a whole, continue to act
as a drag on banks’ overall productivity.
8. The Big Six banks’ reported ROE and this publication’s calculated basic ROE differ, please refer to Appendix 1 for the
numbers used.
With Canadian banks facing ROE
compression due to challenges with
operating leverage, productivity
becomes a key issue.
12
Canadian Banks 2014
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Responding to the challenges
It’s clear that Canadian banks face numerous challenges as they chart
their path forward in 2014 and beyond: slowing growth, downward
pressure on ROE, and an ever more complex and costly web of regulatory
requirements. In response, we’ll see banks take action—and continue
initiatives already begun—to reduce costs and improve productivity.
Today’s hyper-connected customers
now expect the intuitiveness and
responsiveness of digital retail from
their banks and want to do business
when they want and on the channel
of their choice.
—17th Annual Global CEO Survey: Banking & Capital
markets industry summary, PwC
Perspectives on the Canadian banking industry 13
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Cutting non-essential costs
Most efforts will begin by cutting non-essential costs. Here we’ll see banks
continue to target the low-hanging fruit, identifying and eliminating
redundancies. Ultimately, however, these quick wins have limited impact
on the overall cost structure.
Figure 4: Cost restructuring options
Focus of activities
Savings levers
Opportunities
Restructure the cost base
‘Do different’
Closures and exits
Closure or divestment, sub-scale lines
of business, customer segments and/or
product offerings.
Strategic sourcing
Consolidate sourcing of activities
and vendors, create shared services,
outsource non-core processes and
platforms, off-shoring, and core systems
replacements.
Reduce infrastructure
‘Do with less’
IT consolidation
Consolidate IT platforms, hardware,
infrastructure and data centres.
(15–20% savings)
Property improvement
Review property demand to maximize
space utilization, identify asset disposal
opportunities and reduce all property
related spend via sourcing and vendor
reviews.
Create efficiencies
‘Do better’
Process improvement
End to end process improvement to
reduce complexity, errors and rework
and standardise around key processes,
applying Lean and Straight Through
Processing.
Business simplification
Simplification and de-duplication of
roles and activities; consolidation and
rationalization of similar functions and
activities.
Activity and headcount
reduction
Review and challenge of team activities,
workload capacity and line management
structures and reporting lines leading to
headcount reduction.
Spend reduction and
demand management
Demand challenge and discretionary
spend reduction, and policy compliance
• Reduce/eliminate discretionary spend
• Reduce contractor spend
• Re-negotiate vendor contracts
(20%+ savings)
Improving efficiency
Other initiatives will target efficiencies. Uncovering and eliminating
inefficient or duplicative processes and unravelling unnecessary
complexity can help banks free time and resources and redirect them to
improving revenues or customer service.
Reducing infrastructure
Moving to a larger scale, banks will also look to reduce infrastructure,
especially in the areas of real estate and IT. Significant savings can be had
by reducing branches and corporate office space and moving to new IT
solutions that are less expensive to operate and maintain.
(10–15% savings)
Cut costs
‘Do without’
(5–10% savings)
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Canadian Banks 2014
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Identifying core businesses
Finally, many banks will be exploring significant, strategic
decisions about their organization’s core businesses and
competencies. Banks may choose to exit businesses or
markets entirely, deciding the risks and returns no longer
justify the investments and in some cases the increasing
capital burden. They may also turn their attention inward,
rightsourcing non-core or non-strategic functions.
Understandably, these are large, complex decisions with
long-term implication for the business, and banks won’t
make these choices lightly.
To achieve the maximum benefit from these efforts to reduce
costs and improve productivity, it’ll be essential that banks
apply them across the entire organization.
•
Distribution, home to the majority of channel, property
and staff costs, typically yields the largest amounts of
savings. We’ve already seen banks focus on this area,
moving from a traditional branch network in favour of
more self-service channels and increasing sales capacity.
•
Operations is commonly where banks’ complex
administrative functions (and costs) reside. Over the
last few years, banks have looked to other industries
for best practices on how to simplify and improve
these processes.
•
Information technology can yield sizeable savings, and
banks around the world are taking a long look at their
IT portfolios, improving applications, consolidating
infrastructure and outsourcing ‘commodity’ work and
skills to reduce expenses.
•
Real estate, tax and third-party spending can easily
consume a significant proportion of bank spending,
and a close look at these areas will likely identify areas
where costs can be cut.
Figure 5: Catalogue of banking cost restructuring hypotheses
Front office
Operations
IT
Branch network improvement
& rationalization
Back office outsourcing
Application rationalization
Channel shift – leveraging
digital channels
Processing digitization &
automation
Data centre consolidation
Cross business
Indirect taxes
3rd party spend
Workforce improvement
Front to back office
operations alignment
Process simplification
Data quality management
Product/customer
rationalization
Operations demand
management
IT workforce improvement
Contact centre improvement
Processing centre
rationalization
Function effectiveness
e.g. finance, HR
Shared services
IT supplier management
Corporate real estate
improvement
Data quality management
Perspectives on the Canadian banking industry 15
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
It’s not just about costs, it’s also
about the customer
Cost-containing efforts such as those described above are a significant
part of any bank’s efforts to improve productivity. But cost cutting alone
doesn’t guarantee productivity gains. This is why banks will need to
concentrate on initiatives that drive efficient usage of the resources and
funds available. In some instances, using resources more efficiently will
translate into desired cost savings. Yet in other cases, this newfound
efficiency can be seen as a means to generate more revenue and create
additional sales capacity.
Figure 6: Customer-centric approach to achieving productivity objectives
FTE
Banks will likely see the biggest impact as they tackle their distribution
channels. Here, it’s absolutely vital that banks approach any overhaul
of their distribution methods by putting the needs and wants of their
customers first. By all means, banks should improve their distribution
functions—they should do it for their customers and improve their
customer experience.
Customer
experience
Cost reduction
Revenue growth
Finding the balance between three productivity
levers to improve the customer experience
16
Canadian Banks 2014
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Fewer branches,
smarter service
Is the traditional branch banking model still viable? It depends on
customer needs in local markets. We expect to see Canada’s banks reassess
their geographic footprint, especially in low-density rural areas, closing
and consolidating branches and championing digital, direct channels in
their place. Understanding the needs and behaviours of customers in these
markets will be essential to helping banks find the right balance between
branch, digital and direct channels. Simply pulling up stakes and leaving
will potentially push their customers into the arms of competitors.
Perspectives on the Canadian banking industry 17
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Branches that reflect local
needs and character
The traditional branch, with its emphasis on transactions as well as
advice, may no longer work in every market, as consumers grow ever
more mobile, digital and self-service savvy. And although Canadians still
see the branches as a main distribution hub, they will soon catch up with
their global counterparts’ views on the value of branches (Figure 7). What
a branch offers, and the experience it delivers, will need to adapt to the
needs of local markets.
• In high net worth areas where customers are very digitally savvy,
branches may focus on showcasing technology, delivering financial
advice and helping customers with certain, major financial transactions
such as mortgages. For the rest, ATMs and kiosks may suffice.
• In more commercial or industrial areas where deposit volumes are high,
more automated facilities may be required. Where small businesses
concentrate, banks will want to align their branches with customer
needs by ensuring they have more business banking and mobile
advisors on hand.
• In areas where community identity is strong, there’s a strong community
element to banks’ operations. Banks should seize the opportunity to be
a part of that community—delivering a highly local experience, with
products tailored to the unique needs of the local community.
This rethink of the traditional branch is already well underway in some
areas of the US. Canadian banks such as BMO and RBC are experimenting
as well. BMO is testing micro branches in neighbourhoods that can’t
accommodate a full-sized branch and RBC has investment advisors who will
go to the customer whether it is at their office, home or a Starbucks.9 Bank
of America remodelled over one third of their branches last year, adopting
Figure 7: Future outlook for branch banking
Global
Branch banking and its heavy fixed expense will become a liability, limiting the
ability of banks to invest in servicing customers
Canada
Branch banking will change significantly as banks start to compete more with
specialized providers of individual products
Branch banking importance will diminish as consumers migrate to online
and mobile channels
Branch banking will remain the main distribution hub for the foreseeable future
Source: Banking 2020 Survey, PwC
0%
10%
20%
30%
40%
50%
60%
9. The Canadian Press. Banks are changing with the times to compete for new clients, keep old ones. http://www.globalpost.com/dispatch/news/the-canadian-press/130929/banks-are-changing-the-times-compete-new-clients-keep-old-on. September 9, 2013.
Retrieved: February 7, 2014.
18
Canadian Banks 2014
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
a flagship layout in key centres and emphasizing advice
and conversation over simple transactions. Wells Fargo
is also experimenting with a mini-branch concept in
areas where the population is particularly young. TD,
promoting itself as the most convenient bank is opening
34 new branches in the northeast US, each having
approximately a 25% smaller footprint.10
Day-to-day banking
continues to go digital
and mobile
The costs of maintaining an extensive branch network
and call centres can be significant. As more customers
choose to do their day-to-day banking via the web or
their smartphone, we’ll see banks continue to invest in
online and mobile services. The day when these digital
channels handle the majority of customers’ banking
needs isn’t far off. Already CIBC, ING and the majority
of US banks allow cheque deposits via smartphone
camera and RBC, CIBC, and BMO Investorline provide
service and advice via online chat.
We expect to see banks encourage customers to
migrate their simple banking needs to digital
channels, by levying additional fees on transactions
done through branches.
10. The New York Times. With Technology’s Aid, Banks Squeeze Their Branches Into Smaller
Locations. http://www.nytimes.com/2014/02/05/realestate/commercial/banks-squeezebranches-into-smaller-spots-with-help-from-technology.html?_r=1. February 4, 2012.
Retrieved: February 24, 2014.
Perspectives on the Canadian banking industry 19
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Will mobile sales forces become
more common—and effective?
Customer sales channel preference is changing. In the mortgage domain,
the broker channel currently represents 28% of market share.11 To
counteract this trend, the banks are looking at ways to engage their
customer and prospects outside of the branch network (Figure 8).
Several Canadian banks got out of the broker business some time ago,
opting instead to invest in their own mobile sales forces in order to lower
commission expenses and open the door to cross-selling opportunities.
We also expect continued investment in mobile investment sales force and
partnering with third parties for mobile distribution.
Figure 8: Five year plans for customer channel distribution changes
Global
Look to other industries for leading distribution
practices in sales and servicing
Canada
Understand evolving customer
channel preferences
Use emerging channels like social media
Investigate alternate ways to reach
customers through unique partnerships
or marketing campaigns
Transition more customers to self-service channels
Redesign digital distribution
Update the branch and ATM network
0%
10%
20%
30%
40%
50%
60%
70%
Source: Banking 2020 Survey, PwC
11. Canadian Association of Accredited Mortgage Professionals. Annual State of the Residential Mortgage Market in Canada.
http://www.wdunning.com/docs/CAAMP-2013-Fall-Facts.pdf. Retrieved: February 10, 2014.
20
Canadian Banks 2014
Analytics: The holy grail?
We’ll see banks continue to pour significant funds into data analytics in
order to reap the value of the vast amount of data they possess about
customers’ banking, purchasing and investing habits. Analytics will enable
banks to better understand their customers to deliver much more tailored
offers and services, improving the overall customer experience while
reducing the cost of sales and service in the process.
The majority of credit cards issued by Canadian banks are sold through
their branch network, in contrast to the growing global trend of digital
and direct acquisitions. Leveraging data-driven insights into customer
behaviours, purchasing patterns and channel usage can enable banks to
target credit card customers at key decision points with targeted offers and
identify cross-selling opportunities.
Banks can also use their analytics-derived insights to identify increasingly
micro market segments, tailoring their message based not only on
demographics, but existing client relationships and potential lifetime
value. For example, banks can identify the right mix of self-service and
assisted banking solutions for a mass affluent market.
01 | How strong are the Canadian banks? Perspectives on the Canadian banking industry
Making it simple
Banking is a highly complex business—even more complex today than ever
before in many ways. Inefficient onboarding and document management
processes drive up administration costs and cause revenue delays.
Client on-boarding and document management processes should be made
simpler, clearer and faster—and some banks are doing just that (Figure 9),
by rolling out sales and client origination transformation programs to
automate and replace outdated, inefficient manual processes still in use
today. It’s better for banks and customers: customers get improved service,
while banks get more efficient and cost-effective processes.
Figure 9: Focus areas to achieve simplification
Global
Middle office
Canada
Front office
Back office
Process
Technology
0%
10%
20%
30%
40%
50%
60%
70%
80%
Canada’s banks are up to
the challenge
There’s no shortage of challenges facing Canada’s major banks. Yet time
and again, these institutions have proven their resilience, flexibility and
adaptability in a changing business environment. As new leaders take the
helm at many of the Big Six banks, we’re confident that they and their
teams will seize opportunities to drive out costs, improve productivity and
achieve the best results possible in a slow growth market.
The demands being placed on
business leaders to adapt to the
changing environment are increasing
exponentially; CEOs are having
to become hybrid leaders who can
successfully run the business of
today while creating the business of
tomorrow.
Source: Banking 2020 Survey, PwC
—17th Annual Global CEO Survey: Banking & Capital
markets industry summary, PwC
Perspectives on the Canadian banking industry 21
01 | How strong are the Canadian banks?
banks?:Perspectives
Perspectiveson
onthe
theCanadian
Canadianbanking
bankingindustry
Regulatory pressures continue
to weigh on operations
With banks facing an influx of new requirements, regulatory
compliance continues to tie up more and more bank capital and other
resources. Costs continue to rise as banks hire additional staff into
their compliance teams, while management finds itself spending more
time on navigating the complex regulatory environment than it does
on charting a path to grow the business.
In 2013, the Big Six adopted the initial stage of Basel III with little
fanfare, as they easily surpassed the minimum capital requirements
set out by both OSFI and the Basel Committee on Banking Supervision
(BCBS). However, the year ahead will see banks devote considerable
resources to several regulatory developments.
Basel III leverage standard
While Canadian banks have followed OSFI’s asset-capital
multiple (ACM) since the 1980s, they’ll need to adopt the new
Basel III leverage ratio instead. The new Basel III requirements
are similar to the ACM, but define capital more closely, capture
more off-balance-sheet assets, and eliminate differences that
could potentially arise when different accounting methods are
used. The base leverage ratio for Canada’s banks is set at 3% and
is to be reached by 2018; however, Canadian banks are required
to publicly disclose their leverage ratio beginning in 2015.
22
Canadian Banks 2014
01
01 ||How
Howstrong
strongare
arethe
theCanadian
Canadianbanks?:
banks? Perspectives on the Canadian banking industry
Basel III liquidity standard
FATCA implementation
In November 2013, OSFI released draft guidance regarding the Basel III
liquidity coverage ratio (LCR), which is designed to ensure banks have sufficient
liquidity to withstand liquidity disruptions for up to 30 days. OSFI’s draft
guidance also included outlined how its net cumulative cash flow supervisory
tool will be used. The comment period for this draft guidance expired in
January 2014; the new rules will come into effect in 2015.
One of the largest regulatory projects occupying the Big Six banks is
creating the infrastructure needed to meet the requirements of the US
Foreign Account Tax Compliance Act (FATCA). As of July 1, 2014, the US
law will require non-US banks to report any accounts with a US connection
to the Internal Revenue Service. Considering the immense number of
transactions banks process each year on behalf of a vast number of banking
customers, addressing FATCA has proven to be a major undertaking for
Canada’s banks.
The BCBS is also in the process of finalizing guidance for the net stable funding
ratio, which addressed longer-term liquidity events. This ratio examines banks’
funding sources, and the extent to which they rely on short-term sources versus
long-term sources. OSFI will adopt this standard effective 2018.
Enhanced Disclosure Task Force recommendations
The Financial Stability Board’s Enhanced Disclosure Task Force (EDTF),
established in 2012, had developed 32 recommendations covering risk
exposures, management and disclosures. Canada’s Big Six banks adopted many
of the EDTF’s recommendations in 2013, and will adopt the balance in 2014.
One recommendation that had come under scrutiny recently involves
disclosures relating to how bank risk models are influenced by data inputs,
modelling assumptions, mathematical formulas, manual overrides and point-intime versus through-the-cycle assumptions. This scrutiny is notable: Questions
have been raised about the reliability of some of the models banks use to
calculate risk weights in the Basel III capital ratio.
The risk and regulatory environment for banks is continually evolving and
growing ever more complex. The scope of compliance activities is far broader—
and the impact of those activities far greater—than ever before. In response, banks
are exploring a variety of strategies to help cope with the regulatory burden. Some
are looking to integrate operational and compliance risk functions to close gaps
in risk coverage. Others are looking at big data technologies, data analytics and
standardized testing processes to achieve desired results. While it may not be clear
how banks will alleviate the demands of regulatory compliance, it’s certain that
regulatory concerns will be a management focus for years to come.
Perspectives on the Canadian banking industry 23
02 | Capital management
Globally, Basel III is being phased in gradually between 2013 and 2019. In Canada, OSFI has
required early adoption of aspects of the rules, given their opinion that the banks were already
well capitalized (Figure 10). In addition, all Big Six banks have been designated as domestic
systemically important financial institutions (D-SIFIs), requiring a 1% increase to their CET1
ratio beginning 2016.
Basel III hopes to address the shortfalls in capital management that led to the financial crisis of the late 2000s, bringing
parts of the global banking industry to its knees. Among its developments, Basel III introduces a minimum leverage ratio,
new liquidity management standards and changes to the counterparty risk capital. With respect to capital ratio, Basel
III prescribes a more restrictive common equity Tier 1 ratio, in addition to the Tier 1 and total capital ratios. This more
restrictive definition of capital only includes common shares issued, share premiums, retained earnings, accumulated
other comprehensive income and other disclosed reserves, less dividends.
24
Canadian Banks 2014
02 | Capital management
A look at the Big Six
Tier 1 capital ratio of the Big Six banks showed slight declines with an
average of 11.38% in 2013 and 12.96% in 2012 (Figure 11). A slight
deterioration was expected due to the more stringent risk weighted assets
calculation introduced under Basel III, designed to steer banks away from
assets which contributed to the financial crisis. That said, all Big Six banks
are well capitalized, with buffers ranging from 2.52% (TD) to 3.20%
(RBC) over the 8.5% Tier 1 capital ratio required as of January 1, 2014.
Comparison with US banks
Seven US banks have been identified as Global SIFIs, and are required
to comply with an additional CET1 charge, effective January 1, 2016
(Figure 12). Currently, no Canadian banks have been—or are expected
to be—designated in the near future.
US banks are required to begin adopting Basel III requirements as of
January 1, 2014, with phase-in provisions. They’ve however issued
estimated Basel III calculations in advance. As at September 30, 2013,
the US banks reported CET1 ratios of between 9.3% and 10.8%, with
an average buffer of 1.4% over the fully phased-in requirements. That
said, the banks have actively undertaken strategic shifts to de-risk their
businesses in order to meet these requirements. Those changes need to
also consider the additional leverage and liquidity phases of Basel III.
Perspectives on the Canadian banking industry 25
02 | Capital management
Looking forward
While policy makers, economists and banks worldwide have been wary
of the stricter Basel III accord and its potentially detrimental impact on
the wider recovering economy, Canadian banks have had little to worry
about. The conservative approach of the Canadian banks meant that they
were already well capitalized and would not require significant strategic
or operational changes to their business model in order to comply.
Given that global banks, especially SIFIs, will likely continue to
de-risk their balance sheets, it provides Canadian banks the unique
opportunity to utilize their strong balance sheets and actively pursue
growth prospects with fewer competitors. OSFIs early adoption of the
fully phased-in Basel III requirements may potentially hinder Canadian
bank growth as they are now held to a higher standard than their global
competition. But then again, Canadian banks do not have to hold stress
level capital against stringent Comprehensive Capital Analysis and
Review (CCAR) Stress Test requirements like their US1 peers.
The more significant change relevant to Canadian banks that came into
effect as a result of Basel III is the requirement that all non-common
Tier 1 capital instruments (such as preferred shares) and Tier 2 capital
instruments (such as subordinated debt) must have, in their contractual
terms and conditions, a clause requiring a full and permanent
conversion (the Non-Viability Contingent Conversion) into common
shares of the bank upon the occurrence of a trigger event at the point of
non-viability determined by OSFI. Accordingly, all non-qualifying Tier 1
and Tier 2 capital will now have to be phased-out at 10% per year until
2022 and replaced with more expensive NVCC capital.
1. Similar CCAR-like Stress Test requirements are being proposed or formalized in the UK and EU.
26
Canadian Banks 2014
Regardless, Canadian banks will continue to be wary as, beginning
2016, banks that do not meet the required capital ratios and are unable
to demonstrate a remedial plan, will have limitations placed on their
discretionary distributions of earnings.
Figure 10: Summary of capital requirements
Ratio
Common equity Tier 1 (CET1) ratio
*
Jan 1, 2013 * Jan 1, 2014 *
Jan 1, 2016
(Domestic
SIFIs) *
7%
7%
8%
Tier 1 capital ratio
–
8.5%
8.5%
Total capital ratio
–
10.5%
10.5%
All-in methodology includes the fully phased-in capital conservation buffer (2.5%), but retains the phase-out period for
non‑qualifying equity.
02 | Capital management
Figure 11: Tier 1 capital ratio**
Bank
Figure 12: US SIFI CET1 requirements
Oct 31, 2013
(Basel III)
Oct 31, 2012
(Basel II)
Oct 31, 2011
(Basel II)
BMO
11.44%
12.62%
12.01%
BNS
11.07%
13.59%
12.17%
CIBC
11.62%
13.83%
14.74%
NBC
11.43%
12.01%
13.59%
RBC
11.70%
13.10%
13.30%
TD
11.02%
12.60%
13.03%
Base CET1
Additional
Total
BoA
7.00%
1.50%
8.50%
CET1 – Estimated Q3
9.94%
Citigroup
7.00%
2.00%
9.00%
10.50%
BNYM
7.00%
1.00%
8.00%
10.10%
Goldman
7.00%
1.50%
8.50%
9.80%
JP Morgan
7.00%
2.50%
9.50%
9.33%
Morgan Stanley
7.00%
1.50%
8.50%
10.80%
Wells Fargo
7.00%
1.00%
8.00%
9.54%
** Tier 1 capital ratios used due lack of comparatives for CET1 ratio.
Perspectives on the Canadian banking industry 27
03 | Credit losses
The good fortune of the big Canadian banks
has continued with respect to the trends in
credit losses. Despite average household debt
hitting highs of 163.7% of disposable income1,
sustained strength in the housing market and
no significant changes in the unemployment
rate2 have meant that Canadians have been
able to service their debt level.
Figure 13: Big Six average credit losses
0.80%
0.70%
0.60%
2013
2012
2011
0.68% 0.65%
0.59%
0.56%
0.69%
0.59%
0.50%
0.40%
0.30%
0.31% 0.31% 0.33%
0.20%
0.10%
0.00%
1. Source: Statistics Canada
2. 2012: 7.2%; 2013: 7.1%. Source: Statistics Canada, Labour Force Survey, January 2014.
28
Canadian Banks 2014
PCLs
Loans
LLPs
Loans
Gross Impaired Loans
Loans
03 | Credit losses
There have been some movements in credit loss trends for the banks. This
is displayed by the trends seen in Figure 13, which shows average provision
for credit losses (PCL) as a percentage of loans, loan loss provisions (LLP)
as a percentage of loans and the level of gross impaired loans within each
bank’s portfolio for all six banks. Although there’s been a slight uptick in
the latter two measures, it’s relatively small and hasn’t exceeded the levels
seen in 2011. RBC achieved the distinction of being the first Canadian bank
to attain market capitalization of $100 billion.
recoveries (up by CA$107 million or 37%) compared to 2012. This was
attributed to “improved credit quality in the Canadian and US commercial
portfolios” by TD in their annual report.
Looking at the underlying performance of each bank, Scotiabank in
particular saw an increase in PCL of 3.5% from the prior year and a
10.2% increase in their year-end LLP. This has been attributed to higher
commercial provisions required in respect of their portfolios in Colombia
and the Caribbean, although analysts have noted that they expect this to
be a temporary elevation.
The banks are fortunate that the credit environment is relatively benign
currently, but this may not last forever. The question is where deterioration
could potentially come from—will it be in geographies other than Canada,
or will it be in particular lines of business? Secured personal lending, at
least in Canada, appears to be stable relatively speaking. A proportion
of the banks’ portfolios are insured and the loan-to-value ratios (LTVs)
average 65%.3 With respect to the insured portfolios, as we noted in our
publication, The Tide Turns: Canadians, Debt and Retail Lending, significant
restrictions have been placed on the use of government backed insured
mortgage lending. Coupled with the tightened results under OSFI’s B-20
guideline, this may have the impact of increasing risk as fewer mortgages
may qualify for insurance. Vulnerability also remains in the unsecured
lending portfolios, which will be much more sensitive to any deterioration
in the economy, particularly in unemployment rates.
TD also saw an increase in some credit loss measures, and had a 8.0%
increase in LLP. This has partly been attributed to the full year impact of
the acquisition of the MBNA credit card portfolio in 2012, which caused an
increase in the collectively assessed allowance for individually insignificant
impaired loans by CA$48 million. In addition, the other major credit card
portfolio acquisition, Target, was a major cause of the CA$233 million
(or 12%) increase in the collectively assessed allowance for incurred,
but not identified, credit losses. The PCL however benefitted from higher
The following table shows a reduction in PCL and LLP across the remaining
banks (National Bank was the exception that basically remained flat).
Similar themes have emerged from analyst reports on the cause of this
positive trend—good credit quality, low delinquencies and bankruptcies
that remain low and manageable for them.
3. Calculated from the banks’ management discussions and analyses, and supplementary information. TD did not have the
information available in those sources.
Figure 14: Credit losses (CA$ millions)
BMO
BNS
CIBC
NBC
RBC
TD
2013
2012
Change
2013
2012
Change
2013
2012
Change
2013
2012
Change
2013
2012
Change
2013
2012
Change
PCL
589
765
-23.0%
1,296
1,252
3.5%
1,121
1,291
-13.2%
181
180
0.6%
1,239
1,301
-4.8%
1,631
1,795
-9.1%
LLP
1,665
1,706
-2.4%
3,273
2,969
10.2%
1,698
1,860
-8.7%
578
577
0.2%
1,959
1,997
-1.9%
2,855
2,644
8.0%
Perspectives on the Canadian banking industry 29
04 | Snapshot of
the Big Six
When compared to other banks globally, Canadian
banks remain well regarded. For the sixth year in a row
Canada’s banks have been ranked the world’s soundest
by the World Economic Forum1.
Now let’s look a little deeper into their results for 2013.
1. “Canadian banks win top marks from World Economic Forum”. Financial Post. September 6, 2013. http://business.
financialpost.com/2013/09/04/canadian-banks-win-top-marks-from-world-economic-forum/. Retrieved February 10, 2014.
30
Canadian Banks 2014
04 | Snapshot of the Big Six
BMO highlights
BMO’s net income grew 1.4% to CA$4,248 million in 2013 (4.5% to
CA$4,276 million on an adjusted basis). This was due to 0.8% revenue
growth (3.4% on an adjusted basis), particularly from the Wealth
Management segment, controlled expense growth, and a reduction in
provision for credit losses (PCLs) in all segments. Return on equity (ROE)1
slipped from 15.9% (15.5% on an adjusted basis) to 14.9% (15.0% on an
adjusted basis), but still within the medium-term target of 15% to 18%.
Capital positions grew however to a Basel III Tier 1 capital ratio of 11.4%,
up from the 10.5% pro-forma comparative. The nature of adjusted items
was similar to the prior year, including Marshall and Ilsley Corporation’s
(M&I’s) performance, along with integration costs and run-off of
structured credit activities.
Annual dividends were 46% of net income and adjusted net income, or
CA$2.94 per share, up 4.3% from last year. A further additional quarterly
increase of $0.02 to $0.76 per share was announced in December 2013.
Other capital developments in 2013 to enhance shareholder returns
included BMO initiating its common share repurchase program via
normal course issuer bids, buying back 10.7 million common shares for
CA$675.3 million. BMO plans to continue this program in 2014, subject
to regulatory approval. There were also preferred share redemptions of
CA$200 million and US$250 million during the year.
CA$4,248
million
Net
income
grew
ROE
down
from
2012
Dividends 2013
are up...
CA$2.94
per share
2012
compared CA$2.80
to 2012
per share
2013
14.9%
2012
15.9%
1. As reported by the bank in their annual report.
Perspectives on the Canadian banking industry 31
04 | Snapshot of the Big Six
BMO’s largest segment, Canadian Personal and Commercial (P&C)
banking, achieved revenue growth of 2.1% and net income growth of 4.5%
to CA$1,854 million. This was thanks to strong 9.8% average loan growth
and related fees, and a 6.7% reduction in PCLs, which outweighed margin
pressures. Net interest margin was 2.59%, down 20 bps from the prior
year but compression was contained more in the second half of the year
due to mix changes. PCLs improved due to improving credit quality in the
consumer portfolio.
US P&C on the other hand had an adjusted net earnings decline of 1.2%
to US$633 million and a revenue decline of 4.8%. This segment was
negatively impacted by margin pressures and tepid 1.6% average loan
growth and 0.5% average deposits growth. Growth was impacted by
BMO continuing its lower-cost funding strategy in response to the lowrate environment. Similar to Canadian P&C, PCLs were lower as a result
of improving credit quality for the consumer portfolio, with a 20.5%
improvement over the prior year.
Wealth Management, comprised of wealth management and insurance
platforms, led the way in terms of growth for BMO, particularly in
the second half of the year. Adjusted net income increased 58.0% to
CA$861 million, or 35.8% excluding a security gain of CA$121 million.
Revenue growth was 18.9%. Wealth management growth was driven
by growth in client assets and synergies from previous acquisitions,
particularly the Marshall and Ilsely Corporation acquisition in 2011.
Insurance results improvement was attributable to prior year unfavourable
movements in long-term interest rates, along with continued growth in
creditor and life insurance. Assets under management and administration
grew 13.6% to CA$552.9 billion, driven by market appreciation, growth in
new client assets and the stronger US dollar.
BMO Capital Markets grew net income by 7.1% to CA$1,094 million and
revenues by 4.6%. Despite lower North American M&A activity, growth
was still achieved through increased trading revenues and investment
banking fees and the strong US dollar, offset to some degree by growth
in non-interest expenses to support growth and higher technology and
support costs to manage regulatory changes.
BMO had two acquisitions in the year, Aver Media LP (which specializes
in Canadian-based film and television lending) for CA$260 million and an
Asia-based wealth management business for CA$34 million. While the two
had a neutral earnings impact in 2013, BMO views them as additional growth
opportunities for commercial lending and high net worth service offerings.
Similar to other institutions, BMO expects stronger economic growth
in Canada and the US for 2014, but it also expects challenges due to
the continued low-rate environment, competitive pricing for loans
and deposits and the complex regulatory environment. Improving the
customer experience and customer loyalty through targeted market share
growth and tailored offerings, along with productivity, are central themes
across all segments. Market share growth in US P&C will be focused on
commercial banking in particular. The return of investor confidence in
equity markets in 2013, as well as BMO’s growing presence in Asia, is
expected to continue to benefit Wealth Management.
32
Canadian Banks 2014
04 | Snapshot of the Big Six
Scotiabank highlights
Scotiabank is Canada’s third largest bank by total assets and market
capitalization, and is also Canada’s most internationally diversified bank.
About 48% of its net income comes from business conducted outside of
Canada, with the US, Caribbean, Central and Latin America being the
largest contributors.
Net income increased 3.6% to CA$6,697 million (2012: 21.3%), or 15%
if adjusted to exclude CA$90 million one off items in the current year and
real estate valuation gains of CA$708 million in the prior year. Return on
equity (ROE) remained strong at 16.4%, albeit down compared to prior
year (2012: 19.7%) due to the one off items noted above. Dividends paid
totaled CA$2.39 per share, compared to CA$2.19 in 2012—an increase of
9% (2012: 7%), representing an increase in the dividend payout ratio from
41.2% to 47.1%.
The Canadian Banking business, contributing CA$2,304 million of net
income saw a 19% increase in net income, with a combination of volume
growth and the acquisition of ING Direct Canada being key drivers. Net
interest income, which makes up 78% of total revenue, increased 17% with
the 21% increase in average earning assets more than offsetting slightly
lower margins (2.10% vs 2.16%), with margins on the existing business
being relatively flat year on year and a slightly lower margin on the
acquired ING Direct portfolio. Excluding the ING Direct portfolio, average
earning assets increased 7%. Deposits increased 27% to CA$186.5 billion,
with the ING Direct acquisition being the largest driver. Despite the volume
growth, provisions for credit losses decreased 5.7% to CA$477 million.
Scotiabank drew attention to lower provisions in their commercial
portfolio, but in light of the strong volume growth the improved credit
performance in the retail portfolios is also noteworthy, with the allowance
for credit losses on the retail portfolio also down from CA$462 million to
CA$460 million.
CA$6,697
million
Net
income
grew
ROE
down
from
2012
Dividends 2013
are up...
CA$2.39
per share
2012
compared CA$2.19
to 2012
per share
2013
16.4%
2012
19.6%
Perspectives on the Canadian banking industry 33
04 | Snapshot of the Big Six
Global Wealth and Insurance’s net income increased 12% (2012: -7%) to
CA$1,311 million, driven by strong results in both the Wealth Management
and Insurance businesses. Assets under administration and assets under
management both saw solid growth (up 15% to CA$326 billion and 26%
to CA$145 billion), which along with new fees contributed to a 14%
increase to CA$3,415 million in total revenues for the Wealth Management
business. The Insurance business which contributes about 16% of the
Global Wealth and Insurance business revenues also had solid growth with
revenues up 14%, attributed largely to higher premiums.
Global Banking and Markets’ net income was effectively flat year on year
at CA$1,491 million (2012: CA$1,492 million), with higher revenues—
up 1.8% to CA$3,645 million—offset by operating expenses increasing
5.1% to CA$1,596 million. Scotiabank attributed the expense growth
to increases in salaries and benefits as well as volume related expenses.
Higher revenues from the Fixed Income business was offset by declines in
revenues from other parts of the Global Capital Markets business, while
in the Corporate and Investment Banking business, revenue growth in
the Lending business was offset by lower Investment Banking revenues.
Average earning assets saw strong growth, up 21% to CA$222 billion, with
growth in the Fixed Income business a key driver.
International Banking’s net income increased 12% to CA$1,944 million,
or 6% excluding CA$90 million of non-recurring items. Volume and
acquisition related growth were the primary drivers with average earning
assets up 11% to CA$119 billion, while margins were relatively flat at
4.12% (2012: 4.14%). The increase in the provision for credit losses
(up 27% to CA$781 million) was primarily driven by acquisitions and
volume growth, with acquired portfolios also lowering the average credit
quality slightly with the PCL as a percentage of loans and acceptances
up from 0.75% to 0.86%. Excluding the effect of acquisitions, one-off
items and the effect of foreign currency translation, expense growth of
approximately 3% was broadly in line with inflation in the regions in
which the International Banking business operates.
34
Canadian Banks 2014
Results were impacted by a number of acquisitions, with acquisitions
contributing CA$528 million to net income, or 7.9% of total net income,
and CA$523 million of the CA$1,184 million increase in operating
expenses. Notable acquisitions during the year included:
•
acquisition of ING Direct Canada, contributing CA$28 billion of
assets (3.8% of total) and CA$30 billion of deposits
• acquisition of Crédito Familiar in Mexico
• acquisition of 51% of Colfondos AFP in Columbia and 50% of AFP
Horizonte in Peru, two of the largest pension companies in their
respective countries
Scotiabank expects moderate economic growth in each region it operates
in, to drive growth in 2014. Credit quality is expected to remain strong, and
moderate asset growth is expected to drive higher revenues while margins
are expected to remain relatively stable in what is expected to remain a
challenging interest rate environment.
04 | Snapshot of the Big Six
CIBC highlights
CIBC, Canada’s fifth largest bank by assets and market capitalization,
saw a net income increase of 1.8% to CA$3,400 million (2012: 16.0%).
Return on equity remained strong at 20.9%, albeit down slightly compared
to prior year (2012: 22.0%)2. Dividends paid totaled CA$3.80 per share
compared to CA$3.64 in 2012, up 4.4% (2012: 3.7%), with the dividend
payout ratio relatively stable at 46.1% (2012: 46.3%).
Retail and Business Banking’s net income increased 7.7% to
CA$2,463 million. The drivers were:
a CA$150 million or 13.9% reduction in the provision for
credit losses
• higher fees with non-interest income up CA$57 million or 2.8%
• an improvement in the margin on average interest earning
assets from 2.56% to 2.64%, which was enough to off-set a 0.8%
decrease in average interest earning assets from CA$145.6 billion
to CA$144.4 billion, leaving net interest income up 1.1% to
CA$5,855 million
The increased margin and lower average interest earning assets sets CIBC
apart from its peers, which all had higher volumes and lower margins. This
implies a slightly different strategy in balancing margins against volume
growth on CIBC’s part. CIBC’s deposits also increased as a proportion of
loans, which would have provided a favorable variance in cost of funds.
The 14% reduction in the provision for credit losses was largely driven
by improved credit performance in the credit card and personal lending
portfolios. Non-interest expenses increased 2% to CA$4,147 million, leaving
the efficiency ratio flat at 49.8%. Deposits grew 2% to CA$156.1 billion.
CA$3,400
million
Dividends 2013
are up...
CA$3.80
per share
Net
income
grew
2012
compared CA$3.64
to 2012
per share
•
ROE
down
from
2012
2013
20.9%
2012
22.0%
2. As reported by the bank in their annual report
Perspectives on the Canadian banking industry 35
04 | Snapshot of the Big Six
Wholesale Banking had a strong year with net income up 16.8% to
CA$716 million, with revenues in both the Capital Markets and Corporate
and Investment Banking businesses seeing strong growth, with increases
of 6% to CA$1,268 million and 16% to CA$931 million respectively.
Non-interest expenses increased 18% to CA$1,319 million, resulting in
the efficiency ratio deteriorating from 54.1% to 58.3%, with the increase
in expenses attributed to losses in the structured credit run-off business,
including a settlement payment to the estate of Lehman Brothers and
increased employee compensation.
Wealth Management had a another year of strong growth. Net income
was up 14.5% to CA$388 million, with strong performance within each
line of business. Revenues were up CA$46 million or 4.5% in the Retail
Brokerage business, CA$61 million or 10.9% in Asset Management and
CA$22 million or 22.0% in Private Wealth Management. Assets under
administration and assets under management were both up 8%, to
CA$234 billion and CA$96 billion respectively. Non-interest expenses
increased 5% to CA$1,297 million, with the efficiency ratio improving
from 73.6% to 72.0%.
To understand the overall results, it’s worth noting CIBC’s Corporate
and Other segment had a CA$266 million decrease in net income from
CA$101 million net income in prior year to a CA$167 million loss in 2013.
The segment includes, in addition to various cost centers supporting the
other business units, CIBC’s international banking operations, including
CIBC FirstCaribbean, the CIBC Mellon JV results and the Bermuda based
Butterfield Bank. The result was impacted by lower revenues and increased
credit losses in CIBC FirstCaribbean, and some Alberta flooding related
credit losses which have been reported in this segment.
36
Canadian Banks 2014
In terms of geographic segments, CIBC is largely focused on its Canadian
operations, with 89% of assets based in Canada and 83% of net income
derived in Canada. Canadian operations outperformed international
operations on average, with Canadian derived net income up 2.2% to
CA$2,838 million, compared to no net income growth from international
operations at CA$562 million (2012: $562 million). Performance varied
between regions, with an increase in net income from the US offset by a
decrease in net income from Caribbean operations.
Except for the sale of its Hong Kong and Singapore based wealth
management business, which did not significantly impact CIBC’s
geographic footprint, CIBC did not complete any notable acquisitions or
divestments during the year. It announced plans to acquire Atlantic Trust,
a US-based wealth management firm with roughly US$23 billion in assets
under management, and this transaction was completed in January 2014.
The bank also announced that an agreement had been reached with TD
and Aimia to sell half of its Aerogold credit card portfolio, equating to
roughly CA$3 billion, to TD.
CIBC expects stronger economic growth in 2014, particularly in the US
and Canada, to have a favorable impact on its businesses—especially
in provisions for credit losses, business lending, wholesale banking and
demand in the wealth management business. Lending volume growth in
the retail business is however expected to remain subdued due to existing
high consumer debt levels and the impact of changes in CMHC rules for
mortgage portfolio insurance.
04 | Snapshot of the Big Six
NBC highlights
NBC’s net income excluding specified items grew 6.8% to CA$1,4913 million
(reported net income declined 4.9% or CA$80 million to CA$1,554 million).
Revenues excluding specified items grew 3.0% to CA$5,242 million
(reported revenues fell 2.1% to CA$5,372 million). Growth came from all
segments, particularly Wealth Management. Similar to the prior year, cost
containment and efficiency also contributed to earnings growth, as noninterest expenses excluding specified items only rose 1.8%. There were no
significant specified items in the current year, but prior year results included
the partial year results of Natcan Investment Management Inc before
disposition, as well as the related gain of CA$212 million. These have been
excluded for greater comparability.
Although ROE fell 20.6% from 24.5% (excluding specified items, ROE
fell to 19.7% from 20.7%), earnings growth increased NBC’s Basel III
Tier 1 capital ratio to 11.4% in 2013, up from 10.1% in 2012 (proforma
comparative estimate). Further capital changes in the year included
redeeming CA$285 million in preferred shares, and CA$500 million
in medium-term notes subsequent to year end. Subject to regulatory
approval, NBC has also announced a further CA$104 million in preferred
shares will be redeemed in 2014.
3
CA$1,491
million
Net
income
grew
ROE
down
from
2012
Dividends 2013
are up...
CA$3.40
per share
2012
compared CA$3.08
to 2012
per share
2013
20.6%
2012
24.5%
3. Taken from NBC’s annual report calculated using the variable equivalent basis.
Perspectives on the Canadian banking industry 37
04 | Snapshot of the Big Six
NBC had another strong year of dividends increases, rising from $3.08 per
share to $3.40 per share in 2013, or 10.4%, and were 40% (2012 – 39%)
of net income excluding specified items, within their 40% to 50% target. A
further quarterly increase of 5.8% from $0.87 per share to $0.92 per share
will take effect in February 2014. A two-for-one stock split will also occur
in February 2014. As noted by NBC, they see confidence in their ability for
future growth and capital management to facilitate these increases.
There were no acquisition or dispositions in the year, but NBC’s acquisition
of TD Waterhouse Institutional Services (TDWI) for CA$250 million closed
subsequent to year end. TDWI is expected to further contribute to the
expansion of NBC’s wealth management offerings across the country.
In addition to Wealth Management, NBC’s other operating segments are
Personal and Commercial banking (P&C) and Financial Markets.
P&C net income, excluding specified items, increased by 3.9% to
CA$713 million and related revenues grew 2.7% to CA$2,599 million.
Both personal and commercial divisions contributed to this growth, with
8.8% average loan growth and related volumes, which helped offset the
net interest margin decline to 2.21% in 2013 versus 2.42% in 2012. The
personal division also benefited from 6% revenue growth in insurance and
MasterCard businesses due to higher volumes.
Wealth Management showed the largest growth, with revenue growing
5.8% to CA$1,143 million and net income, excluding specified items,
growing 25.5% to CA$188 million. All categories showed revenue
growth and growth in volumes outside of Quebec and for the Private
Wealth 1859 division, NBC’s service offering to high-net worth clients,
were particular factors. This, combined with the rise in stock markets,
resulted in assets under administration and management rising 11.2%
to CA$258 million. Earnings benefited further from flat non-interest
expenses compared to 2012, thanks to cost containment and synergies
from past recent acquisitions.
For the Financial Markets segment, net income, excluding specified items,
increased by 17.4% to CA$541 million, with related revenues growing
5.8% to CA$1,379 million. Revenues grew in all areas due to higher
trading activity and financing needs, except for financial market fees due
to slowdowns in M&A activity and capital issuances. The segment also
benefited from slight reductions in PCL and operating expenses.
PCL for NBC was comparable to the prior year (CA$181 million versus
CA$180 million), slightly up for consumer loans (up CA$13 million)
and energy sector commercial loans (up CA$5 million), offset by a
CA$17 million decrease for corporate banking loans due to recoveries
in the year.
In 2014, while NBC’s strong presence in Quebec is a primary source
of revenue growth, NBC indicated they’ll also continue to explore
opportunities to grow and diversify outside of Quebec, where they’re less
established. This is a priority for all of its segments. The integration of
TDWI will also be a key priority for 2014.
38
Canadian Banks 2014
04 | Snapshot of the Big Six
RBC highlights
RBC, Canada’s largest bank by assets and market capitalization, achieved record
results in fiscal 2013. Net income of CA$8.3 billion was up 12% over the prior
year, and dividends were increased twice during the year to CA$2.53 per share,
representing dividend growth of 12% in 2013. ROE for the year came in strong at
19.4%4. The stock price responded accordingly and increased 23% from the year
ended October 31, 2012. RBC achieved the distinction of being the first Canadian
bank to attain market capitalization of $100 billion.
Results were consistently strong in RBC’s key business segments, with strong
earnings growth achieved in Personal & Commercial Banking, Wealth
Management, Capital Markets and Investor and Treasury Services. Volume
growth across RBC’s Canadian Banking businesses, partially offset by spread
compression, along with growth in corporate and investment banking business
and higher average fee-based client assets in Wealth Management, contributed
to the growth. RBC also benefited from favourable income tax adjustments
during the year of CA$214 million related to prior years; lower provision for
credit losses reflecting improved credit quality; improved business performance
in Investor Services; and further benefits from ongoing efficiencies. This was
partially offset by lower trading revenue in Capital Markets and a charge in
Insurance resulting from proposed legislation in Canada (Bill C-4) impacting
policyholders’ tax treatment of certain individual life insurance policies.
On February 1, 2013, RBC completed its acquisition of Ally Financial Inc for
CA$3.7 billion. Ally’s business provides financial services directly to auto dealers
and offers financing for consumers through auto dealerships. The acquisition
contributed to the growth in Personal & Commercial operations. While there was
only one acquisition completed in 2013, RBC has maintained its focus on growth
in the US and select international markets.
CA$8.3
billion
Net
income
grew
ROE
down
from
2012
Dividends 2013
are up...
CA$2.53
per share
2012
compared CA$2.28
to 2012
per share
2013
19.4%
2012
21.1%
Personal & Commercial business operations continued to grow, primarily in the
Canadian Banking segment. Growth in earnings of 9% was achieved through
increased volumes (despite spread compression) and reduced provisions
for credit losses of CA$170 million or 7 bps. Average loans and acceptances
increased CA$22 billion or 7%, mainly due to growth in Canadian home equity
products, personal loans and business loans, while average deposits increased
4. As reported by the bank in their annual report.
Perspectives on the Canadian banking industry 39
04 | Snapshot of the Big Six
CA$18 billion or 8%, reflecting solid growth in both business and personal
deposits. By contrast, average loans in the US and Caribbean declined 3% due to
weak economic conditions in the Caribbean while deposits increased 4% due to
improved liquidity in the Caribbean. RBC also launched a co-branded Target RBC
MasterCard in 2013.
Gross impaired loans as a percentage of average net loans and acceptances
(0.55%) and the provision for credit losses on impaired loans as a percentage
of average net loans and acceptances (0.30%) fell to their lowest levels in three
years, reflecting an improvement in overall credit quality. During the year, RBC’s
credit card revenue also increased by 7%, a combination of increased average
credit card balances (5%) and net purchase volumes (8%).
RBC continues to innovate by introducing the first cloud-based mobile payments
service in Canada, allowing clients to more safely and securely pay for purchases
using their mobile devices. Mobile payments is a significant growth area for
financial institutions as smartphones are increasingly becoming an indispensable
tool in daily life and the number of mobile payments continues to increase
sharply. As mobile payments and the adoption of the digital wallet are expected
to surge over the next three years, there’s potential for Canadian banks to gain a
competitive advantage in this area.
Wealth Management business operations produced strong results in 2013.
Net income increased by CA$136 million or 18% from a year ago to CA$899
million. Revenues grew mainly due to higher average fee-based client assets
across all business lines and higher transaction volumes reflecting improved
market conditions. Assets under administration and assets under management
have increased steadily in Canada, the US and globally over the past few years.
Similarly, non-interest expense increased due to higher variable compensation
driven by higher revenue and increased staffing and infrastructure investments
to support the business growth. Provision for credit losses increased by CA$52
million, partially offsetting the growth in revenue, as a result of provisions on
a few accounts. Wealth management is expected to be an area of growth as the
lending market becomes more saturated.
RBC’s Capital Markets focus includes: striving to maintain its leadership position
in Canada, having been ranked the top investment banking advisor on Canadian
M&A deals for the third straight year in 2013, expanding and strengthening
client relationships in the US, building on core strengths and capabilities in
Europe and Asia and optimizing capital used to earn high risk-adjusted returns
40
Canadian Banks 2014
on assets and equity. Capital Markets revenues represent 21% of earnings
in 2013 with net income increasing by $129 million over 2012. Results were
driven by strong growth in Corporate and Investment Banking business driven
by higher lending, loan syndication and debt origination mainly in the US
and increased volumes from cash equities business across most geographies
combined with lower variable compensation and continued benefits from
efficiency management initiatives. These factors were partially offset by lower
fixed income trading businesses largely in Europe, higher provisions for credit
losses and non-interest expenses such as higher litigation provisions and higher
infrastructure support costs.
The Insurance segment’s net income decreased by CA$117 million or 16%,
mainly due to a CA$118 million after tax charge resulting from proposed
legislation in Canada. Excluding this charge, net income was relatively flat over
prior year as favourable actuarial adjustments and continued improvements in
efficiency offset higher net claims costs.
RBC’s Investor and Treasury Services segment experienced growth as a result
of the acquisition of the remaining 50% ownership in RBC Dexia in the prior
year. Excluding a prior year loss of CA$224 million due to this acquisition,
net income increased by 15% mainly due to improved business performance
in Investor Services partially offset by lower funding and liquidity revenue
and a CA$44 million restructuring charge mostly related to the integration
of Investor Services in Europe. The prior year was unfavourably impacted by
an impairment charge and other acquisition costs of $188 million and a loss
representing RBC’s proportionate share of the securities exchange and trading
loss recorded by RBC Dexia.
RBC has identified the regulatory environment, high levels of Canadian
household debt and cybersecurity as key and emerging risks. These risks will
have broad implications for all financial institutions, beyond simply raising
capital levels and slowing retail growth.
Kathleen Taylor was appointed Chair of the Board of Directors on
January 1, 2014, replacing David O’Brien who served as Chair for 10 years.
President and Chief Executive Officer, Gordon Nixon, announced his
intention to retire effective August 1, 2014, after 13 years in this role. Dave
McKay, group head for Personal & Commercial Banking will be appointed
as President at the annual meeting on February 26, 2014 and President and
Chief Executive Officer effective August 1, 2014.
04 | Snapshot of the Big Six
TD highlights
TD continues to see solid growth in top line and bottom line results. Net
income increased by 3% or CA$191 million over 2012 to CA$6.7 billion, or
a 1% increase in net income on an adjusted basis to CA$7.2 billion. Higher
earnings resulted from better performance in the Canadian Personal and
Commercial Banking and US Personal and Commercial Banking segments,
partially offset by lower earnings in the Wealth and Insurance and Wholesale
Banking segments.
Adjusted ROE was down slightly from 2012 16.3% to 15.0%5 in 2013.
Earnings per share (EPS) grew by 2% to CA$6.93 in 2013 but remained flat
at CA$7.45 on an adjusted basis. Cash dividends declared and paid in 2013 of
CA$3.24 per common share was up 12% from CA$2.89 in 2012. During the
year, the share price increased 17.7% from CA$81.23 at October 31, 2012 to
CA$95.64 at October 31, 2013 and the bank repurchased nine million shares
under its normal course issuer bid.
TD has been relatively active in terms of acquisitions and disposals this year
compared to its Canadian Banking counterparts. Some of the most significant
transactions are identified below:
• Acquisition of Target Corporation’s US Credit Card Portfolio: On March
13, 2013, TD acquired substantially all of Target Corporation’s existing
US Visa and private label credit card portfolios with a gross outstanding
balance of CA$5.8 billion. Results of the acquisition are recorded in the US
Personal and Commercial Banking segment.
CA$6.7
billion
Net
income
grew
ROE
down
from
2012
Dividends 2013
are up...
CA$3.24
per share
2012
compared CA$2.89
to 2012
per share
2013
15.0%
2012
16.3%
5. As reported by the bank in their annual report.
Perspectives on the Canadian banking industry 41
04 | Snapshot of the Big Six
• Acquisition of Epoch Investment Partners Inc: On March 27, 2013,
the bank acquired 100% of the outstanding equity of Epoch Holding
Corporation and its wholly-owned subsidiary, a New York-based asset
management firm. The acquisition was made for cash consideration
of CA$674 million. The results of the acquisition are recorded in the
Wealth and Insurance segment. For the year ended October 31, 2013, the
acquisition contributed CA$96 million to revenue and CA$2 million to net
income.
• Agreement with Aimia Inc and acquisition of certain CIBC Aeroplan
credit card accounts: On August 12, 2013, TD and Aimia announced
that the bank will become the primary credit card issuer for Aeroplan,
a loyalty program owned by Aimia, starting on January 1, 2014. TD
has an agreement to acquire approximately 50% of CIBC’s existing
Aeroplan credit card portfolio. It expects to acquire approximately
550,000 cardholder accounts representing approximately CA$3 billion
in card balances and CA$20 billion in annual retail spend. TD will pay a
purchase price of par plus CA$50 million for the CIBC Aeroplan accounts
with an additional CA$112.5 million plus HST payable over three years.
Further payments may be made or received depending on the migration
of the accounts over the next five years. In addition, TD will make a
CA$100 million upfront payment to Aimia and will undertake a joint
marketing spend of approximately CA$140 million in the first four years of
the program. The CIBC portfolio acquisition is expected to close in the first
quarter of fiscal 2014.
• Sale of TD Waterhouse Institutional Services: On November 12, 2013,
TD completed the sale of its institutional services business to a subsidiary
of National Bank of Canada for a price of CA$250 million. The sale will
be recorded in fiscal 2014.
These acquisitions have supported TD’s US growth strategy and a growth
in credit card spending which may make up for the anticipated slowdown
in real estate lending.
42
Canadian Banks 2014
The Canadian Personal and Commercial Banking segment reported a
record net income of CA$3.7 billion for the year, an increase of 11% over the
prior year. Growth was driven by volume, lower credit losses and effective
expense management. Compared to the prior year, personal lending volume
growth slowed during the year due to lower growth in the housing market,
moderation in household borrowing and regulatory changes in Canada
which tightened mortgage eligibility criteria, while business lending growth
was strong and market share increased. Average real estate secured lending
volume increased by 4%, auto lending increased by 2% and other personal
lending volumes remained flat. Business loans and acceptances average
volumes increased by 13%. Personal deposit volumes increased by 4% and
business deposit volumes increased by 8%.
Provisions for credit losses declined 19% compared with the prior year.
The decrease was primarily experienced in personal banking where
better credit performance, enhanced collection strategies and lower
bankruptcies occurred.
Wealth and Insurance net income for the year was CA$1.2 billion, a
decrease of 16% compared with the prior year. This reflects lower earnings
in the Insurance business, partially offset by higher earnings in Wealth
and TD Ameritrade. Insurance continues to be negatively impacted by
unfavourable prior years’ claims development related to the Ontario auto
insurance market and higher claims from weather-related events. Wealth
revenues increased mainly from higher fee-based revenue from asset
growth and TD Ameritrade’s net income was up 18% to CA$246 million
in the year, including revenue growth from the addition of Epoch. Assets
under administration grew 14% to CA$293 billion and assets under
management grew 24% to CA$257 billion during the year.
04 | Snapshot of the Big Six
The US Personal and Commercial Banking segment earned CA$1.5 billion
in 2013, an increase of 35% from the prior year. This segment includes the
results of activity related to the credit card program agreement with Target
Corporation subsequent to the acquisition of the CA$6 billion portfolio of
credit card receivables. Results reflect strong loan and deposit volume, higher
fee-based revenue and increased gains on securities and debt securities
classified as loans, partially offset by higher expenses to support growth and
lower margins. Excluding Target, average loans increased by 13% (personal
19%; business 8%) and average deposits, excluding Ameritrade, increased
by 7% compared to the prior year. Provisions for credit losses decreased by
2% overall, comprised of an increase of 63% in personal banking primarily
due to the Target acquisition and increased provisions in auto loans and a
decrease of 52% in business banking which reflects improved credit quality in
commercial loans.
During 2013, CEO Ed Clark announced his retirement. Bharat Masrani,
the head of US retail operations was appointed to Chief Operating Officer
on July 1, 2013 and will be appointed CEO on November 1, 2014 upon Ed
Clark’s retirement. Bharat Masrani has announced that he doesn’t expect any
major change in what TD stands for. He steered TD’s successful expansion
into the US over the past seven years and was previously the bank’s chief risk
officer. Having worked in almost every part of the bank over many years, he
also brings a breadth of experience as well as diversity, being the first visible
minority to reach the top of a major Canadian bank.
Wholesale Banking net income for the year fell 26% to CA$648 million due
to lower revenue and a higher effective tax rate, partially offset by lower
non-interest expenses. Revenues fell 9% due to lower security gains in the
investment portfolio, lower trading-related revenue and lower M&A and
advisory fees, partially offset by higher underwriting and loan fees. Provision
for credit losses fell CA$21 million or 45%. Non-interest expenses fell 2% due
to lower variable compensation, in line with revenue.
TD has identified top and emerging risks as:
•
•
•
•
general business and economic conditions
technology and information security risk
evolution of fraud
business infrastructure and third party service providers.
While economic conditions can impact the bank’s financial results, the risk of
information security, fraud and reliance on third party service providers can
cause both financial and reputational risk.
Perspectives on the Canadian banking industry 43
44
Canadian Banks 2014
Appendices
46
Shareholder value summary
48
Regulatory capital
50
Balance sheet highlights
52
Income statement highlights
54
Credit risk summary
Perspectives on the Canadian banking industry 45
Appendix 1: Shareholder value summary
in millions of Canadian dollars
BMO
BNS
CIBC
2013
Change
2012
IFRS
CGAAP
2011
2013
Change
2012
IFRS
CGAAP
2011
2013
Change
2012
IFRS
CGAAP
72.62
23.0%
59.02
58.89
63.39
16.8%
54.25
52.53
88.70
12.9%
78.56
75.10
IFRS
IFRS
IFRS
2011
Stock performance
Common share price as at October 31
Book value of outstanding common shares
43.70
8.6%
40.23
39.53
33.56
12.7%
29.77
26.06
41.47
10.5%
37.52
36.41
Trading premium above book value
28.92
53.9%
18.79
19.36
29.83
21.9%
24.48
26.47
47.23
15.1%
41.04
38.69
1.47
1.49
1.89
1.82
2.02
2.14
2.09
2.06
2,902
Market price to book value
1.66
Earnings
4,183
1.7%
4,115
3,122
6,205
3.0%
6,023
4,959
3,304
4.1%
3,173
Basic earnings per share as reported
Net income attributable to common shareholders
6.27
1.5%
6.18
5.28
5.19
-2.3%
5.31
4.62
8.24
4.8%
7.86
7.32
Price / earnings ratio
11.8
23.0%
9.6
11.2
11.9
16.8%
10.2
11.4
11.3
13.0%
10.0
10.3
Returns
15.4%
16.6%
14.0%
16.4%
19.6%
19.1%
20.8%
22.4%
21.3%
Return on assets
0.8%
0.8%
0.7%
0.8%
0.9%
0.9%
0.8%
0.8%
0.8%
Return on risk-weighted assets2
1.9%
2.0%
1.5%
2.2%
2.4%
2.1%
2.4%
2.8%
2.6%
28.0%
5.0%
2.4%
21.3%
7.4%
-0.2%
17.7%
9.5%
0.5%
Return on basic equity 1
Total market return3
Dividends
Dividend paid
2.94
4.3%
2.80
2.80
2.39
9.1%
2.19
2.05
3.80
4.4%
3.64
3.51
Dividend yield4
4.0%
-14.9%
4.7%
4.8%
3.8%
-6.6%
4.0%
3.9%
4.3%
-7.5%
4.6%
4.7%
Dividend payout ratio5
48%
6.6%
45%
53%
45%
9.1%
41%
44%
48%
4.4%
46%
48%
Shares outstanding at end of year (millions)
644
-1.1%
651
639
1,209
2.1%
1,184
1,089
399
-1.2%
404
401
Market capitalization at October 31 (billions)
46.8
21.7%
38.4
37.6
76.6
19.2%
64.3
57.2
35.4
11.3%
31.8
30.1
13.68
12.69
9.71
10.39
10.06
11.26
12.37
11.64
Total assets per dollar of market capitalization
11.49
Notes
1.
2.
3.
4.
5.
Return on equity has been calculated as net income attributable to common shareholders divided by average common shareholders’ capital. For 2011 the average common shareholders’ capital is calculated under CGAAP.
Return on risk weighted assets has been calculated as net income attributable to common shareholders divided by risk weighted assets.
Total market return has been calculated as [change in share price + dividends paid] divided by opening share price and does not include the assumed rate of return on the investment of dividends.
Dividend yield has been calculated as dividends paid divided by the common share price at the fiscal year end.
Dividend payout ratio has been calculated as dividends paid divided by earnings per share
46
Canadian Banks 2014
Appendix 1: Shareholder value summary
in millions of Canadian dollars
NBC
2013
IFRS
Change
RBC
2012
IFRS
2011
CGAAP
2013
IFRS
Change
TD
2012
IFRS
2011
CGAAP
2013
Change
IFRS
2012
IFRS
2011
CGAAP
Stock performance
Common share price as at October 31
90.48
18.0%
76.66
71.14
70.02
23.0%
56.94
48.62
95.64
17.7%
81.23
75.23
Book value of outstanding common shares
45.80
14.2%
40.11
40.97
30.49
11.7%
27.30
24.26
51.10
6.1%
48.18
48.16
Trading premium above book value
44.68
22.2%
36.55
30.17
39.53
33.4%
29.64
24.36
44.54
34.7%
33.05
27.07
1.91
1.74
2.30
2.09
2.00
1.87
1.69
1.56
-5.2%
1,518
1,126
8,331
7,442
6,343
6,372
6,171
5,709
8.87
-5.6%
9.40
6.93
5.6
12.4%
4.98
3.21
6.93
1.8%
6.81
6.45
9.6
18.0%
8.2
10.3
14.1
23.0%
11.4
15.1
14.0
17.7%
11.9
11.7
20.7%
24.9%
17.7%
21.0%
21.1%
12.9%
14.0%
14.8%
13.9%
Return on assets
0.9%
0.9%
0.7%
1.0%
0.9%
0.6%
0.7%
0.8%
0.8%
Return on risk-weighted assets2
2.7%
2.7%
2.2%
2.6%
2.7%
1.7%
2.2%
2.5%
2.6%
12.1%
12.17%
10.1%
27.4%
21.8%
-6.8%
21.7%
11.8%
5.7%
Market price to book value
1.98
Earnings
Net income attributable to common shareholders
Basic earnings per share as reported
Price / earnings ratio
1,439
11.9%
3.3%
Returns
Return on basic equity 1
Total market return3
Dividends
Dividend paid
3.40
10.4%
3.08
2.74
2.53
11.0%
2.28
2.08
3.24
12.1%
2.89
2.61
Dividend yield4
3.8%
-6.5%
4.0%
3.9%
3.6%
-9.8%
4.0%
4.3%
3.4%
-4.8%
3.6%
3.5%
36.2%
10.4%
32.8%
39.5%
50.8%
11.0%
45.8%
64.8%
47.6%
12.1%
42.4%
40.5%
Dividend payout ratio5
Shares outstanding at end of year (millions)
163
1.2%
161
160
1,441
-0.3%
1,445
1,438
921
0.6%
916
902
Market capitalization at October 31 (billions)
12.5
0.0%
12.5
11.4
100.9
22.6%
82.3
69.9
88.1
18.4%
74.4
67.9
14.23
13.69
8.53
10.03
10.75
9.79
10.90
10.11
Total assets per dollar of market capitalization
15.06
Notes
1.
2.
3.
4.
5.
Return on equity has been calculated as net income attributable to common shareholders divided by average common shareholders’ capital. For 2011, the average common shareholders’ capital is calculated under CGAAP.
Return on risk weighted assets has been calculated as net income attributable to common shareholders divided by risk weighted assets.
Total market return has been calculated as [change in share price + dividends paid] divided by opening share price and does not include the assumed rate of return on the investment of dividends.
Dividend yield has been calculated as dividends paid divided by the common share price at the fiscal year end.
Dividend payout ratio has been calculated as dividends paid divided by earnings per share.
Perspectives on the Canadian banking industry 47
Appendix 2: Regulatory capital1
in millions of Canadian dollars
BMO
BNS
CIBC
2013
Change
2012
2011
2013
Change
2012
2011
2013
Change
2012
2011
24,599
-5.0%
25,896
25,071
31,914
-7.3%
34,436
28,489
15,888
-0.3%
15,940
16,208
Tier 1 capital
Total Tier 1 capital
Tier 2 capital
Total Tier 2 capital
Total regulatory capital
4,901
2.7%
4,773
5,921
6,927
-10.7%
7,757
4,044
4,073
2.2%
3,984
4,079
29,500
-3.8%
30,669
30,992
38,841
-7.9%
42,193
32,533
19,961
0.2%
19,924
20,287
Risk-weighted capital ratio
Tier 1
11.4%
12.6%
12.0%
11.1%
13.6%
12.2%
11.6%
13.8%
14.7%
Total capital ratio
13.7%
14.9%
14.9%
13.5%
16.7%
13.9%
14.6%
17.3%
18.4%
179,289
171,955
179,092
240,900
210,000
200,800
115,101
93,360
90,110
9,154
7,598
4,971
15,400
13,800
5,900
3,460
3,033
1,646
Risk-weighted assets
Credit risk
Market risk
Operational risk
Total risk-weighted assets
Assets to capital multiple
Tangible common equity to risk-weighted assets
Total assets to risk-weighted assets
Total general allowance as a percentage of risk adjusted assets
Total general allowance
25,677
24,609
31,900
29,500
27,300
18,186
18,836
18,212
215,094
26,651
4.8%
205,230
208,672
288,200
13.8%
253,300
234,000
136,747
18.7%
115,229
109,968
15.6
2.7%
15.2
13.7
17.1
14.0%
15.0
16.6
18.0
3.4%
17.4
16.0
11.4%
4.3%
10.9%
10.0%
10.7%
-9.3%
11.8%
10.1%
11.9%
3.9%
11.4%
12.0%
249.8%
-2.4%
256.0%
228.8%
258.1%
-2.1%
263.7%
245.8%
291.3%
-14.7%
341.4%
318.3%
0.69%
0.71%
0.63%
0.94%
0.99%
0.58%
1.05%
1.25%
0.93%
1,485
1,460
1,318
2,712
2,508
1,352
1,438
1,441
1,018
Notes
1. Regulatory capital and risk weighted assets are calculated under Basel III guidelines for 2013 and Basel II guidelines for 2012 and 2011. There were no restatement of 2011 comparatives as a result of transition to IFRS.
48
Canadian Banks 2014
Appendix 2: Regulatory capital1 continued
in millions of Canadian dollars
NBC
RBC
TD
2013
Change
2012
2011
2013
Change
2012
2011
2013
Change
2012
2011
7,002
4.4%
6,710
6,854
37,196
1.1%
36,807
35,713
31,546
1.8%
30,989
28,503
Tier 1 capital
Total Tier 1 capital
Tier 2 capital
Total Tier 2 capital
2,184
1.7%
2,148
1,645
7,520
35.7%
5,540
5,308
9,144
20.2%
7,606
6,475
Total regulatory capital
9,186
3.7%
8,858
8,499
44,716
5.6%
42,347
41,021
40,690
5.4%
38,595
34,978
Risk-weighted capital ratio
Tier 1
11.4%
12.0%
13.6%
11.7%
13.1%
13.3%
11.0%
12.6%
13.0%
Total capital ratio
15.0%
15.9%
16.9%
14.0%
15.1%
15.3%
14.2%
15.7%
16.0%
Credit risk
49,451
45,181
40,277
232,641
209,559
206,151
239,552
201,280
183,405
Market risk
3,382
2,631
2,478
42,184
30,109
21,346
11,734
12,033
5,083
Risk-weighted assets
Operational risk
Total risk-weighted assets
Assets to capital multiple
Tangible common equity to risk-weighted assets
Total assets to risk-weighted assets
Total general allowance as a percentage of risk adjusted assets
Total general allowance
8,057
7,665
44,156
40,941
40,283
35,069
32,562
30,291
61,251
8,418
9.6%
55,869
50,420
318,981
13.7%
280,609
267,780
286,355
16.5%
245,875
218,779
18.4
0.5%
18.3
17.1
16.6
-0.6%
16.7
16.1
18.2
1.1%
18.0
17.2
11.8%
24.5%
9.5%
10.8%
12.9%
15.9%
11.1%
11.5%
9.0%
-21.7%
11.5%
13.0%
307.3%
-3.5%
318.4%
310.0%
269.9%
-8.2%
294.0%
280.7%
301.2%
-8.7%
329.9%
313.7%
0.63%
0.70%
0.63%
0.57%
0.64%
0.49%
0.88%
0.92%
0.75%
388
390
318
1,810
1,790
1,312
2,507
2,260
1,643
Notes
1. Regulatory capital and risk weighted assets are calculated under Basel III guidelines for 2013 and Basel II guidelines for 2012 and 2011. There were no restatement of 2011 comparatives as a result of transition to IFRS.
Perspectives on the Canadian banking industry 49
Appendix 3: Balance sheet highlights
in millions of Canadian dollars
BMO
BNS
CIBC
2013
Change
2012
IFRS
IFRS restated
2011
2013
Change
2012
IFRS
IFRS restated
2011
2013
Change
2012
IFRS
IFRS restated
26,282
25,656
62,218
-7.4%
67,191
54,471
6,379
34.9%
4,727
5,142
IFRS
IFRS
IFRS
2011
Assets
Cash resources (including deposits with banks)
Securities
Available-for-sale (including loan substitutes)
32,601
24.0%
53,067
-5.9%
56,382
51,426
34,303
2.8%
33,361
30,176
27,627
11.9%
24,700
27,118
Held-for-trading
Other
75,159
6,755
7.2%
268.5%
70,109
1,833
69,925
764
96,489
106
10.2%
-46.2%
87,596
197
75,799
375
44,068
3,704
9.3%
2.5%
40,330
3,615
32,713
2,302
Total cash resources and securities
Securities purchased under resale agreements
Loans
Residential mortgages
167,582
39,799
8.4%
-10.0%
154,606
44,238
147,771
37,970
193,116
82,533
2.5%
74.3%
188,345
47,354
160,821
34,582
81,778
25,311
11.5%
0.6%
73,372
25,163
67,275
25,641
99,328
13.0%
87,870
81,075
209,865
19.5%
175,630
161,685
150,938
0.6%
150,056
150,509
Personal and credit card loans
Business and government loans
Allowance for credit losses
71,510
101,450
-1,665
3.3%
8.9%
-2.4%
69,250
93,175
-1,706
67,483
84,883
-1,783
76,008
119,550
-3,273
11.3%
-3.5%
10.2%
68,277
123,828
-2,969
63,317
105,260
-2,689
49,213
48,201
-1,698
-2.5%
10.5%
-8.7%
50,476
43,624
-1,860
50,586
39,663
-1,803
Total loans
Customers' liability under acceptances
Derivatives
Other assets
270,623
8,472
30,259
20,564
8.9%
5.6%
-37.1%
-6.2%
248,589
8,019
48,071
21,926
231,658
7,227
55,113
20,836
402,150
10,556
24,503
30,930
10.2%
18.2%
-19.2%
327,573
8,172
37,322
25,953
246,654
9,720
19,947
14,979
1.8%
-6.9%
-26.2%
-0.7%
242,296
10,436
27,039
15,079
238,955
9,454
28,270
14,163
Total assets
Liabilities
Deposits
Individuals
537,299
2.3%
525,449
500,575
743,788
9.2%
11.3%
364,766
8,932
30,327
28,320
668,044
594,423
398,389
1.3%
393,385
383,758
125,432
3.5%
121,230
122,287
171,048
23.9%
138,051
133,025
125,034
5.8%
118,153
116,592
Business and government
Banks
220,798
20,591
19.2%
19.1%
185,182
17,290
159,209
20,877
312,487
33,019
5.7%
10.2%
295,588
29,970
266,965
21,345
133,100
5,592
6.4%
18.4%
125,055
4,723
117,143
4,177
Total deposits
Other
Acceptances
366,821
13.3%
323,702
302,373
516,554
11.4%
463,609
421,335
263,726
6.4%
247,931
237,912
Securities – short sales
Securities – repos
Derivatives
Other liabilities (including non-controlling interests)
Subordinated debt
Preferred share liability
Trust securities
Total liabilities and debt
Shareholder’s equity
Preferred share capital
Common share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total equity
Total liabilities and shareholders' equity
50
Canadian Banks 2014
8,472
5.6%
8,019
7,227
10,556
18.2%
8,932
8,172
9,721
-7.3%
10,481
9,489
22,446
28,884
31,974
43,834
3,996
-4.2%
-27.3%
-34.4%
-9.8%
-2.4%
23,439
39,737
48,736
48,606
4,093
20,207
32,078
50,934
55,234
5,348
24,977
77,508
29,255
34,444
5,841
34.1%
36.1%
-17.1%
-1.2%
-42.4%
18,622
56,949
35,299
34,854
10,143
15,450
38,216
40,236
33,351
6,923
13,327
4,887
19,724
62,886
2.2%
-26.3%
-27.2%
-3.0%
-12.3%
13,035
6,631
27,091
64,849
4,823
10,316
8,564
28,792
66,026
5,138
–
463
0.2%
–
462
–
821
474,222
–
–
563,683
–
1,594
496,794
–
–
628,408
–
1,678
2.0%
–
–
11.3%
–
-2.4%
506,890
–
–
699,135
1.0%
376,519
367,831
4,228
–
1,638
380,137
2,265
-8.1%
2,465
2,861
4,084
-6.8%
4,384
4,384
1,706
0.0%
1,706
2,756
12,003
315
15,224
602
0.4%
47.9%
12.4%
25.4%
11,957
213
13,540
480
11,332
113
11,381
666
14,516
10.5%
13,139
8,336
–
25,508
545
–
15.2%
-1,858.1%
–
22,144
-31
–
18,517
-497
7,753
82
8,402
309
-0.2%
-3.5%
19.3%
17.0%
7,769
85
7,042
264
7,376
93
5,457
245
30,409
537,299
6.1%
2.3%
28,655
525,449
26,353
500,575
44,653
743,788
12.7%
11.3%
39,636
668,044
30,740
594,423
18,252
398,389
8.2%
1.3%
16,866
393,385
15,927
383,758
Appendix 3: Balance sheet highlights
in millions of Canadian dollars
NBC
Held-for-trading
Other
TD
2013
Change
2012
IFRS
IFRS restated
2011
2013
Change
2012
IFRS
IFRS restated
2011
2013
Change
2012
IFRS
IFRS restated
3,596
10.7%
3,249
2,851
24,931
9.0%
22,872
18,888
32,436
29.1%
25,128
24,112
IFRS
Assets
Cash resources (including deposits with banks)
Securities
Available-for-sale (including loan substitutes)
RBC
IFRS
IFRS
2011
9,744
-6.1%
10,374
9,142
38,695
-5.2%
40,828
38,894
79,541
-19.3%
98,576
93,520
44,000
-1.2%
44,524
47,450
19.2%
120,783
128,128
–
57,340
21,449
–
-1.4%
38.1%
–
58,147
15,529
–
59,443
12,507
144,023
513
0.0%
12.6%
4.7%
383
184,866
112,257
–
185,910
84,947
101,928
36,493
7.8%
491.2%
94,531
6,173
73,353
4,236
250,398
64,283
11.6%
-7.1%
224,408
69,198
195,221
56,981
Total cash resources and securities
Securities purchased under resale agreements
Loans
Residential mortgages
36,573
9.0%
33,538
28,921
209,238
5.5%
198,324
188,406
185,820
7.9%
172,172
155,471
Personal and credit card loans
Business and government loans
Allowance for credit losses
27,989
24,400
-578
5.5%
5.3%
0.2%
26,529
23,182
-577
24,274
20,777
-608
108,453
92,934
-1,959
8.1%
13.9%
-1.9%
100,358
81,559
-1,997
93,858
67,233
-1,967
141,414
120,543
-2,855
6.1%
13.7%
8.0%
133,285
106,035
-2,644
124,375
99,655
-2,314
Total loans
Customers' liability under acceptances
Derivatives
Other assets
88,384
8,954
5,904
6,173
6.9%
8.5%
-11.8%
-6.6%
82,672
8,250
6,696
6,609
73,364
7,394
8,224
5,922
408,666
9,953
74,822
41,699
8.0%
6.1%
-18.0%
-15.0%
378,244
9,385
91,293
49,055
347,530
7,689
99,650
68,107
444,922
6,399
49,461
47,069
8.8%
-11.4%
-18.8%
16.2%
408,848
7,223
60,919
40,510
377,187
7,815
59,845
38,444
188,204
5.8%
177,903
166,854
860,819
4.3%
825,100
793,833
862,532
6.3%
811,106
735,493
Total assets
Liabilities
Deposits
Individuals
Business and government
Banks
Total deposits
Other
Acceptances
Securities – short sales
Securities – repos
Derivatives
Other liabilities (including non-controlling interests)
Subordinated debt
Preferred share liability
Trust securities
Total liabilities and debt
Shareholder’s equity
Preferred share capital
Common share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total equity
Total liabilities and shareholders' equity
208,162
117,517
42,652
-2.9%
43,905
40,433
194,297
8.2%
179,502
166,030
319,749
9.6%
291,759
268,703
56,878
2,356
23.1%
-24.5%
46,223
3,121
40,524
4,605
350,640
13,543
12.1%
-14.5%
312,882
15,835
297,511
15,561
203,204
20,523
12.2%
37.2%
181,038
14,957
169,066
11,659
101,886
9.3%
93,249
85,562
558,480
9.9%
508,219
479,102
543,476
11.4%
487,754
449,428
8,954
8.5%
8,250
7,394
9,953
6.1%
9,385
7,689
6,399
-11.4%
7,223
7,815
18,909
19,746
4,858
23,282
2,426
4.3%
1.1%
-13.3%
-0.7%
-1.8%
18,124
19,539
5,600
23,451
2,470
18,146
20,268
7,470
19,533
2,000
47,128
60,416
76,745
51,214
7,443
15.6%
-5.6%
-20.7%
-3.7%
-2.3%
40,756
64,032
96,761
53,165
7,615
44,284
42,735
100,522
70,156
8,749
–
–
180,061
–
–
5.5%
–
–
170,683
–
–
160,373
–
900
–
0.0%
–
900
–
894
41,829
34,414
49,471
126,729
7,982
27
1,740
25.1%
-11.3%
-23.9%
7.6%
-29.5%
3.8%
-21.8%
33,435
38,816
64,997
117,790
11,318
26
2,224
23,617
25,991
61,715
110,602
11,543
32
2,229
812,279
4.0%
780,833
754,131
812,067
6.3%
763,583
692,972
677
-11.2%
762
762
4,601
-4.4%
4,814
4,813
3,393
0.0%
3,394
3,395
2,160
58
5,034
214
5.2%
0.0%
23.1%
-16.1%
2,054
58
4,091
255
1,970
46
3,366
337
14,418
0.5%
14,353
14,018
–
28,314
1,207
–
16.7%
45.4%
–
24,270
830
–
20,381
490
19,171
170
24,565
3,166
3.5%
-13.3%
12.9%
-13.1%
18,525
196
21,763
3,645
17,375
212
18,213
3,326
8,143
188,204
12.8%
5.8%
7,220
177,903
6,481
166,854
48,540
860,819
9.7%
4.3%
44,267
825,100
39,702
793,833
50,465
862,532
6.2%
6.3%
47,523
811,106
42,521
735,493
Perspectives on the Canadian banking industry 51
Appendix 4: Income statement highlights
in millions of Canadian dollars
BMO
Securities
Deposits with banks
Total interest income
Interest expense
Deposits
CIBC
2013
Change
2012
IFRS
IFRS
restated
2011
2013
Change
2012
IFRS
IFRS
restated
2011
2013
Change
2012
IFRS
IFRS
restated
10,746
-3.5%
11,141
10,203
17,358
11.2%
15,608
14,376
9,795
-2.2%
10,020
10,184
2,143
244
-5.4%
2.1%
2,265
239
2,176
145
1,185
279
-6.0%
-2.1%
1,261
285
1,206
273
1,978
38
-1.7%
-9.5%
2,013
42
1,786
63
13,133
-3.8%
13,645
12,524
18,822
9.7%
17,154
15,855
11,811
-2.2%
12,075
12,033
IFRS
Interest and dividend income
Loans
BNS
IFRS
IFRS
2011
2,633
2.1%
2,578
2,693
6,282
5.6%
5,947
5,589
3,541
-2.5%
3,630
3,843
Subordinated debt
Other1
145
1,810
-12.1%
-13.6%
165
2,094
157
2,200
339
835
-11.0%
1.5%
381
823
369
883
193
622
-7.2%
-16.3%
208
743
215
913
Total interest expense
Net interest income
Provision for credit losses
4,588
8,545
589
-5.1%
-3.0%
-23.0%
4,837
8,808
765
5,050
7,474
1,212
7,456
11,366
1,296
4.3%
13.6%
3.5%
7,151
10,003
1,252
6,841
9,014
1,076
4,356
7,455
1,121
-4.9%
-0.5%
-13.2%
4,581
7,494
1,291
4,971
7,062
1,144
Net interest income after provision for credit losses
Other income
Capital market fees
7,956
-1.1%
8,043
6,262
10,070
15.1%
8,751
7,938
6,334
2.1%
6,203
5,918
1,670
5.2%
1,588
1,727
503
2.0%
493
492
801
-4.6%
840
1,010
724
172
445
726
285
715
799
2.3%
689
130
283
496
189
593
633
816
6.3%
768
608
404
448
365
375
943
1,280
10.7%
15.5%
12.7%
102.7%
5.1%
13.8%
365
388
324
185
897
1,125
349
294
295
285
856
940
599
44
358
474
212
462
1,014
-3.2%
12.4%
32.8%
0.1%
87.5%
11.5%
23.5%
708
153
335
725
152
641
647
-51.6%
6.9%
11.8%
-8.6%
10.5%
15.2%
619
91
335
424
232
418
880
609
204
320
411
390
379
849
916
849
417
-1.4%
-17.2%
-0.5%
929
1,025
419
–
834
549
346
1,122
1,300
2,421
3.6%
-1.2%
-12.1%
–
1,083
1,316
2,754
–
973
830
2,374
824
33
507
6.3%
-128.7%
-8.8%
–
775
-115
556
–
756
44
401
Total other income
Non-interest expenses
Employee compensation and benefits
7,718
5.4%
7,322
6,469
9,977
2.9%
9,698
8,296
5,328
5.4%
5,055
5,373
5,827
3.5%
5,628
4,827
6,313
9.8%
5,749
5,358
4,253
5.2%
4,044
4,052
Premises and equipment costs
Other expenses
1,877
2,593
-2.0%
-3.7%
1,916
2,694
1,578
2,336
1,815
12.9%
1,607
1,446
8,741
3,990
876
73
1,580
223
7,215
4,043
704
8
7,486
3,805
927
11
–
4,183
–
1.7%
–
4,115
–
3,041
11.6%
23.3%
–
2.9%
7,614
4,048
648
-3
5.5%
0.1%
1,763
275
2,677
9,481
6,753
1,423
149
1,656
1,778
10,238
5,127
938
74
3,047
10,403
8,046
1,719
1,452
0.6%
4.9%
20.4%
-12.2%
13.5%
11.4%
5.1%
1.9%
10.8%
10,297
5,377
1,129
65
3,459
11,587
8,460
1,752
1,609
–
1.7%
–
4,115
–
3,041
–
5,181
216
–
3,403
99
–
2.2%
–
4,183
–
6,243
220
–
3,331
158
–
2,867
177
3.0%
6,023
4,965
3,304
4.1%
3,173
2,690
Card service fees
Foreign exchange other than trading
Insurance income (net)
Investment management fees
AFS/investment securities gains (losses)
Lending fees
Mutual fund revenues
Securitization revenues
Service charges
Trading income (loss)
Other revenues
Total other expenses
Income (loss) before income taxes and non-controlling interest in subsidiaries
Provision for (recovery of) income taxes
Non-controlling interest
Discontinued operations
Net income (loss)
Less: Preferred dividends
Net income (loss) attributable to common shareholders
Notes
1. Includes interest on preferred share liabilities, trust securities and other liabilities.
52
Canadian Banks 2014
–
6,422
217
6,205
-8.0%
-137.5%
Appendix 4: Income statement highlights continued
in millions of Canadian dollars
NBC
RBC
2013
Change
2012
IFRS
IFRS
restated
2011
2013
Interest and dividend income
Loans
3,247
6.9%
3,037
2,917
Securities
Deposits with banks
1,143
20
6.5%
17.6%
1,073
17
1,037
15
Total interest income
Interest expense
Deposits
4,410
6.9%
4,127
1,003
24.6%
102
856
17.2%
-4.6%
Total interest expense
Net interest income
Provision for credit losses
1,961
2,449
181
Net interest income after provision for credit losses
Other income
Capital market fees
TD
Change
2012
IFRS
IFRS
restated
2011
2013
Change
2012
IFRS
IFRS
restated
16,357
2.4%
15,972
15,236
4,720
73
-2.1%
19.7%
4,819
61
5,486
91
18,514
3.1%
17,951
17,010
4,013
89
-4.4%
1.1%
4,199
88
3,530
369
3,969
21,150
1.4%
20,852
20,813
22,616
1.7%
22,238
20,909
805
627
5,642
-6.2%
87
897
92
920
336
1,921
-6.7%
-2.8%
6,017
6,334
4,310
-7.7%
4,670
4,466
360
1,977
399
2,723
447
1,781
-27.0%
-7.7%
612
1,930
663
2,119
9.6%
4.7%
0.6%
1,789
2,338
180
1,639
2,330
184
7,899
13,251
1,239
-5.4%
6.0%
-4.8%
8,354
12,498
1,301
9,456
11,357
1,133
6,538
16,078
1,631
-9.3%
7.0%
-9.1%
7,212
15,026
1,795
7,248
13,661
1,490
2,268
5.1%
2,158
2,146
12,012
7.3%
11,197
10,224
14,447
9.2%
13,231
12,171
636
-3.8%
661
121
90
118
7.1%
-4.3%
6.3%
113
94
111
635
2,906
9.8%
2,647
2,816
1,364
-1.4%
1,383
1,468
116
105
111
967
5.1%
920
882
29.5%
–
105
335
426
748
1,127
2,514
188
1,092
2,557
14.2%
-11.7%
21.2%
56.7%
28.8%
22.5%
684
1,116
1,999
104
707
1,975
18.7%
-39.1%
35.3%
-18.5%
5.4%
14.4%
1,039
187
1,113
241
373
745
997
959
166
1,167
215
393
671
941
–
229
233
562
–
228
-25
300
1,437
867
429
4.4%
-33.2%
21.9%
655
1,276
2,074
120
848
2,088
-1
1,376
1,298
352
1,345
222
678
326
304
785
1,141
82
391
533
-33.3%
6.0%
11.0%
–
123
369
480
235
186
322
2.6%
-20.2%
-42.7%
–
1,323
655
662
1,863
(281
653
5.0%
585.4%
26.1%
–
1,775
-41
518
1,602
-127
792
Total other income
Non-interest expenses
Employee compensation and benefits
2,714
-8.8%
2,975
2,336
14,832
8.6%
13,653
12,923
8,400
0.8%
8,330
8,247
Premises and equipment costs
Other expenses
1,858
-4.9%
1,953
1,729
10,190
9.7%
9,287
8,661
7,622
5.3%
7,241
6,729
237
1,070
15.6%
5.4%
205
1,015
190
992
2,381
8.7%
2,190
2,036
2,911
1,571
275
72
4.2%
1.0%
2,100
97
15,042
7,805
1,143
105
7.5%
3.2%
2,188
98
3,470
14,167
8,980
2,010
101
2,086
4,232
3,173
1,960
326
73
3,683
15,160
9,690
2,199
4,558
-0.3%
-7.3%
-19.3%
2.7%
-0.7%
7.0%
9.6%
4.7%
12.3%
3,165
1,817
263
75
3,656
16,227
10,617
2,303
5,117
Total other expenses
Income (loss) before income taxes and non-controlling interest in subsidiaries
Provision for (recovery of) income taxes
Non-controlling interest
Discontinued operations
13,998
7,563
1,092
104
13,047
7,371
1,326
104
Net income (loss)
Less: Preferred dividends
–
1,479
40
–
-5.3%
–
1,561
43
–
1,224
87
–
8,331
–
11.9%
-51
7,442
–
-526
6,343
–
6,557
185
3.0%
6,367
196
5,941
180
Net income (loss) attributable to common shareholders
1,439
-5.2%
1,518
1,137
8,331
11.9%
7,442
6,343
6,372
3.3%
6,171
5,761
IFRS
Subordinated debt
Other1
Card service fees
Foreign exchange other than trading
Insurance income (net)
Investment management fees
AFS/investment securities gains (losses)
Lending fees
Mutual fund revenues
Securitization revenues
Service charges
Trading income (loss)
Other revenues
IFRS
IFRS
4.7%
1.0%
2011
Notes
1. Includes interest on preferred share liabilities, trust securities and other liabilities.
Perspectives on the Canadian banking industry 53
Appendix 5: Credit risk summary
in millions of Canadian dollars
BMO
BNS1,2
CIBC2
2013
Change
2012
IFRS
IFRS restated
2011
2013
Change
2012
IFRS
IFRS restated
2011
2013
Change
2012
IFRS
IFRS restated
Residential mortgages
99,328
13.0%
87,870
81,075
209,865
19.5%
175,630
161,685
150,938
0.6%
150,056
150,509
Personal loans
63,640
3.6%
61,436
59,445
76,008
36.4%
55,736
52,291
34,441
-2.5%
35,323
34,842
7,870
0.7%
7,814
8,038
12,541
11,076
14,772
-2.5%
15,153
15,744
101,450
8.9%
93,175
84,883
123,828
105,260
48,201
10.5%
43,624
39,663
IFRS
IFRS
IFRS
2011
Balance sheet credit risk
Consumer loans
Credit cards1
Corporate loans
Business and government loans
Customers' liability under acceptances
Securities purchased under resale agreement
Total loans
119,550
-3.5%
8,472
5.6%
8,019
7,227
10,556
18.2%
8,932
8,172
9,720
-6.9%
10,436
9,454
39,799
-10.0%
44,238
37,970
82,533
74.3%
47,354
34,582
25,311
0.6%
25,163
25,641
320,559
6.0%
302,552
278,638
498,512
17.6%
424,021
373,066
283,383
1.3%
279,755
275,853
Allowance for credit losses
Specific provision
Collective provision
485
1.9%
476
559
561
21.7%
461
484
320
-32.6%
475
366
1,485
1.7%
1,460
1,452
2,712
8.1%
2,508
2,205
1,438
-0.2%
1,441
1,485
1.8%
10.2%
-8.2%
Total allowance for losses
1,970
1,936
2,011
3,273
2,969
2,689
1,758
1,916
1,851
Gross impaired loans
2,544
2,976
2,685
3,701
3,582
3,355
1,547
1,867
1,917
Impaired loans net of specific allowance
2,059
2,500
2,126
3,140
3,121
2,871
1,227
1,392
1,551
0.6%
0.6%
0.7%
0.7%
0.7%
0.7%
0.6%
0.7%
0.7%
82.9%
80.1%
113.6%
0.84%
0.90%
0.55%
Credit related ratios
Allowance for loan losses as a percentage of:
Total loans
Gross impaired loans
77.4%
Gross impaired loans as a percentage of total loans
0.79%
-19.3%
65.1%
74.9%
88.4%
0.98%
0.96%
0.74%
-12.1%
102.6%
96.6%
0.67%
0.69%
-18.2%
Notes
1. BNS did not disclose credit card balances in 2013 and NBC included credit card balances in personal loans in 2011, 2012, and 2013.
2. General allowance includes amount recorded in other liabilities (BMO: $305 in 2013; $230 in 2012 and $228 in 2011 (IFRS); BNS: $8 in 2011 (CGAAP); CIBC: $60 in 2013; $56 in 2012; $48 in 2011 (IFRS) and $56 in 2011 (CGAAP); RBC: $91 in 2013; $91 in 2012 and $91 in 2011 (IFRS)).
54
Canadian Banks 2014
Appendix 5: Credit risk summary continued
in millions of Canadian dollars
NBC1
RBC2
TD
2013
Change
2012
IFRS
IFRS restated
2011
2013
Change
2012
IFRS
IFRS restated
2011
2013
Change
2012
IFRS
IFRS restated
Residential mortgages
36,573
9.0%
33,538
28,921
209,238
5.5%
198,324
188,406
185,820
7.9%
172,172
155,471
Personal loans
27,989
5.5%
26,529
24,274
94,311
8.8%
86,697
80,921
119,192
1.1%
117,927
115,389
–
–
–
–
14,142
3.5%
13,661
12,937
22,222
44.7%
15,358
8,986
24,400
5.3%
23,182
20,777
92,934
13.9%
81,559
67,233
120,543
13.7%
106,035
99,655
IFRS
IFRS
IFRS
2011
Balance sheet credit risk
Consumer loans
Credit cards1
Corporate loans
Business and government loans
Customers' liability under acceptances
Securities purchased under resale agreement
Total loans
8,954
8.5%
8,250
7,394
9,953
6.1%
9,385
7,689
6,399
-11.4%
7,223
7,815
21,449
38.1%
15,529
12,507
117,517
4.7%
112,257
84,947
64,283
-7.1%
69,198
56,981
119,365
11.5%
107,028
93,873
538,095
7.2%
501,883
442,133
518,459
6.3%
487,913
444,297
Allowance for credit losses
Specific provision
190
1.6%
187
215
240
-19.5%
298
252
348
-9.4%
384
395
Collective provision
388
-0.5%
390
393
1,810
1.1%
1,790
1,806
2,507
10.9%
2,260
1,919
Total allowance for losses
578
0.2%
577
608
2,050
-1.8%
2,088
2,058
2,855
8.0%
2,644
2,314
Gross impaired loans
395
387
407
2,201
2,250
2,327
2,692
2,518
2,493
Impaired loans net of specific allowance
205
200
192
1,961
1,952
2,075
2,344
2,134
2,098
0.5%
0.5%
0.6%
0.4%
0.4%
0.5%
0.6%
0.5%
0.5%
149.1%
149.4%
93.1%
92.8%
88.4%
106.1%
0.36%
0.43%
0.41%
0.45%
0.53%
0.52%
Credit related ratios
Allowance for loan losses as a percentage of:
Total loans
Gross impaired loans
Gross impaired loans as a percentage of total loans
146.3%
0.33%
-8.5%
-8.8%
0.6%
105.0%
92.8%
0.52%
0.56%
Notes
1. BNS included credit card balances in personal loans in 2013 and NBC included credit card balances in personal loans in 2011, 2012, and 2013.
2. General allowance includes amount recorded in other liabilities (BMO: $305 in 2013; $230 in 2012 and $228 in 2011 (IFRS); BNS: $8 in 2011 (CGAAP); CIBC: $60 in 2013; $56 in 2012; $48 in 2011 (IFRS) and $56 in 2011 (CGAAP); RBC: $91 in 2013; $91 in 2012 and $91 in 2011 (IFRS)).
Perspectives on the Canadian banking industry 55
56
Canadian Banks 2014
Perspectives on the Canadian banking industry 57
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Canadian Banks 2014
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cloud—is pressuring financial institutions
to rethink the way that they do business and
how fast they can respond to business needs.
For Canadian companies in the financial
services sector, the differences fell into
the four key areas of: challenges, support,
priorities and investment.
Before they can succeed in gaining a
competitive edge in today’s dynamic,
digital global marketplace, financial
institutions need to evolve into datacentric organizations.
fs viewpoint
www.pwc.com/fsi
02
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15
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Point of view 
Competitive
intelligence 
A framework
for response 
How PwC can help 
Appendix 
Significant others:
How financial institutions can
effectively manage the risks of
third-party relationships
Forward
Significant others:
How financial institutions can
effectively manage the risks of
third-party relationships
Are third parties more trouble than
they’re worth? In today’s environment,
it would be nearly impossible to find a
financial institution that doesn’t contract
with a third party. But the convenience
and flexibility of outsourcing to third
parties comes with significant risks,
including the potential for regulatory
penalties related to third-party incidents:
penalties that have soared in recent years.
In our view, stratification, a risk-based
methodology for analyzing the third-party
population and identifying those services
that present the greatest risk, helps
financial institutions quickly prioritize
their efforts to address initial and ongoing
effectiveness and efficiencies.
Let’s make a difference:
Managing compliance and operational
risk in the new environment
Compliance has been around since
the first loan application was signed.
But compliance expectations are on a
collision course with banks’ capabilities.
Banks are facing expanding compliance
expectations that are pushing compliance
programs to the brink. The scope and
nature of compliance have evolved and
are no longer limited to rules-based
banking regulations. Operational and
compliance risks have become more
complex and entwined, increasing the
potential for failed processes that cause
customer confusion and compliance
control breakdowns. Without a new
approach to compliance and operational
risk management, many banks will
continue to face high costs and losses
in the form of escalating litigation,
penalties, and staffing needs.
Global Private Banking and Wealth
Management Survey
This survey gathered insights and
perspectives on critical aspects of the
challenges confronting participants, with
a host of different operating models and
businesses across all segments of global
wealth management.
In our analysis, trusted adviser status has
not been fully restored and culture and
ethics have now come to the forefront
of the trust agenda. Existing challenges
round operations, technology and next
generation wealth transfer need to be
addressed, but in our view, achieving
excellence in client experience and
executing effective transformational
change now need to be the priority areas
of focus for the industry.
banking review
Mobile payments:
Is trust the key to consumer uptake?
Our Banking Review shares a Canadian
perspective on the challenges and
opportunities facing the banking and
capital markets sector. This edition
features the rise of mobile payments,
and the vital role of Canadian banks in
keeping consumer data secure – a key
concern for many. It also discusses the
CBA’s mobile guidelines development, how
the US is dealing with the issue of mobile
security, an outline of the North American
Trust Services Principles, and the part
merchants play in adoption.
Perspectives on the Canadian banking industry 59
Financial Services leadership team
PwC Canada
Financial Services
Banking and Capital Markets
Diane Kazarian
416 365 8228
[email protected]
Banking and Capital Markets
Global and National Assurance
Rahoul Chowdry
416 815 5059
[email protected]
60
Consulting & Deals
John MacKinlay
416 815 5117
[email protected]
Tax Services
Emma Purdy
416 941 8433
[email protected]
Asset Management
Montréal
Raj Kothari
416 869 8678
[email protected]
Alain Dugal
514 205 5091
[email protected]
Insurance
Calgary
Chris Couture
416 687 8232
[email protected]
Michael Godwin
403 509 7322
[email protected]
Private Equity
Vancouver
Dominic Ricketts
416 687 8408
[email protected]
Paul Challinor
604 806 7218
[email protected]
Canadian Banks 2014
Editor
Sarah Mitchell
Contributors
Michael Black, Anand Borawake,
Sheena Bunbury, Ryan Grey,
Rebecca Hoang, Tamara Jones,
Bryan Lee, Ryan Leopold, Jill Lising,
Naveli Thomas, Yair Weisblum.
Publication design
Wendy Strandt
If you would like to
receive additional copies of this
publication, please email
[email protected]
This publication can be viewed on
our website at
www.pwc.com/ca/canadianbanks
Transforming or growing your organization? Cultivating
innovation? Navigating risk and regulatory complexity?
Getting to grips with technical or behavioural concerns?
No matter where you are or when you need it, our Financial
Services team is here to help.
We’re focused on building deeper relationships. So we’ll
start by getting to know your issues in more detail. What you
tell us will shape how we use our 500 dedicated Canadian
Financial Services professionals backed by their 36,500
global counterparts—and their connections, contacts and
expertise—to help create the value you’re looking for.
Basis of preparation
The data, charts and figures included in this publication are based on the banks’ 2013 annual reports and supplementary financial information, including press releases, which are available on the banks’ websites. Certain statistics or ratios included in this publication may differ
from those disclosed by the banks, as banks may apply other computational formulas, sources of input or calculate ratios differently. If specific data was not readily available in the banks’ annual reports or supplementary information, assumptions have been made to provide
reasonable comparative numbers. To ensure that the findings in this analysis are as objective as possible, and that meaningful, relevant and reasonable comparisons have been made, all items have been calculated consistently for each of the banks.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty
(express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty
of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2014 PricewaterhouseCoopers LLP. All rights reserved. “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. 3854-03 0214
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