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Canadian Banks 2012 Perspectives on the Canadian banking industry www.pwc.com/ca/canadianbanks
www.pwc.com/ca/canadianbanks
Canadian Banks 2012
Perspectives on the Canadian
banking industry
The firms of the PricewaterhouseCoopers
global network (www.pwc.com) provide
industry-focused assurance, tax and advisory
services to build public trust and enhance
value for clients and their stakeholders.
More than 169,000 people in 158 countries
across our network share their thinking,
experience and solutions to develop fresh
perspectives and practical advice.
In Canada, PricewaterhouseCoopers LLP
(www.pwc.com/ca) and its related entities
have more than 5,700 partners and staff in
offices across the country.
2 Canadian Banks 2012
A message from our
CEO and senior partner
Bill McFarland
PwC is pleased to present the 2012 edition of Canadian Banks.
This edition of Canadian Banks reviews the 2011 financial results for the Big Six. We also
take an in-depth look at some of the business impacts of regulatory changes.
Canada’s banks continued to perform well despite the turmoil in Europe over rising
sovereign debt levels and the economic uncertainty in the United States. Canadian banks
posted their third consecutive year of higher earnings following the 2008 global financial
crisis. Many banks reported record profits.
Regulatory reform continues to increase costs and create uncertainty as various new
regulations get finalized. Basel III, Dodd-Frank including the Volcker Rule, and FATCA
will require banks to adapt to a changing regulatory landscape with capital, business
model and resource implications. As you know, Canadian banks are actively reviewing
the implications and taking action in order to meet these new regulatory requirements.
We hope you find this publication helpful and look forward to your feedback.
Bill McFarland
CEO and Canadian Senior Partner
PwC Canada
Perspectives on the Canadian banking industry 3
Contents
06
16
20
26
29
32
35
40
42
57
60
76
78
4 Canadian Banks 2012
Perspectives
Consumer lending survey 2012
2011 economic highlights
Analysis of 2011 results
Continued capital strength
Credit losses
Results by business segment
Market capitalization
Snapshot of the Big Six
Outlook
Appendix
Financial Services publications
Financial Services leadership team
Perspectives on the Canadian banking industry
5
01 Perspectives
Regulatory risk is significant and banks
are devoting considerable resources
towards these new rules.
The occurrence of a financial crisis is nothing new. History has taught us that economies
are prone to sharp market declines, bank runs and loss of consumer confidence. Deflating
speculative bubbles are also not a new concept. The stock market crash of 1929, the dot-com
bubble in 2000, and even Dutch tulip mania of the 1600s all shared similar characteristics.
This all might lead one to wonder why market observers couldn’t have seen and prevented the
recent financial crisis from taking shape.
The Group of Twenty (G20) countries was formed
in 1999 to specifically address financial stability
concerns arising from another financial crisis, in
particular the 1997 Asian financial crisis. The group’s
aim was to “broaden the dialogue on key economic
and financial policy issues among systemically
significant economies and promote cooperation
to achieve stable and sustainable world economic
growth that benefits all.”
Changes in technology, government trade policies,
and the expansion of emerging markets had created
new demands on government policy. Specifically,
there was a growing need to address risks created by
the integration of the global economy and financial
markets. These risks did not diminish over the next
decade and as the 2008 financial crisis demonstrated,
the risk of events happening at one end of the globe
can instantly impact markets thousands of miles away.
After meetings in Washington in November 2008
and in London in April 2009, the G20 agreed to
expand the Financial Stability Forum, which was
created by the G7 in 1999. The mandate of the new
Financial Stability Board (FSB) included, among
other aspects, assessing vulnerabilities in the financial
system, promoting co-ordination between authorities
responsible for financial stability, and advising on
market developments and their implications for
regulatory policy. One clear theme of the mandate
was that regulators could no longer act alone as the
integrated global market required an enhanced,
coordinated approach.
In September 2009, the FSB released its framework
on Improving Financial Regulation. Early in the
report, the FSB called out on G20 leaders to support
international policy development and to “signal their
determination to implement fully and consistently
the reforms at national levels.” The details proposed
changes to the quality and quantity of banks’ capital,
reducing the moral hazard posed by systemically
important institutions, strengthening the over-thecounter (OTC) derivatives market, and improving
global liquidity.
With that began a tsunami of regulatory reform,
being thrust upon the global integrated market
economy. However, despite the importance of global
consistency being stressed, what we are now seeing
a little more than two years later is that protectionist
pressures, driven by differences in legal frameworks,
is having a significant impact on each country’s
ability to implement these reforms. As a result, many
are taking a jurisdictional approach for the actual
implementation, rather than a global approach.
Perspectives on the Canadian banking industry
7
Basel III
One of the cornerstones of the regulatory reform is
the implementation of Basel III, developed by the
Basel Committee on Banking Supervision. Basel III
raises both the quality and quantity of the required
regulatory capital base and enhances the risk coverage
of the Basel II capital framework to capture major
on-and off-balance sheet risks. It also strengthens the
quality, consistency, and transparency of the capital
base by defining and limiting the types of eligible
capital instruments. Furthermore, it introduces
significant new regulatory requirements for bank
liquidity, net stable funding, leverage, counterparty
credit risk, and conservation. Countercyclical
buffers which “dampen” the pro-cyclical effects of
Basel II minimum capital requirements were also
introduced. One of the drawbacks noted of Basel II
was that provisions increased in bad times but fell
in good times. This prevented banks from building
up an appropriate level of protection to prepare for
economic downturns.
Basel III phase-in will
commence in Canada
starting on January 1, 2013.
8 Canadian Banks 2012
Basel III also addresses systemic risk and lack of
transparency within the financial sector, including
strong incentives for banks to move exposures
to central clearing parties. It places higher risk
weights on highly correlated exposures to financial
institutions and adds measures to mitigate reliance on
external credit ratings, and additional loss-absorbing
capacity for systemically important banks.
While the Basel III rules may be global, it is up to
each local regulator to oversee its implementation.
With a January 1, 2013 start date for the phased
in implementation, a lot of work is left to be done.
Global debates are currently ongoing, discussing how
the impacts of Basel III will be felt by each country. In
Canada, the Office of the Superintendent of Financial
Institutions (OSFI) is expected to release draft
regulations in May 2012, with final guidance before
the end of 2012.
Basel III will be challenging to implement, but
Canadian banks are starting from a good position to
adopt the provisions of Basel III compared to other
international banks. The concept of deleveraging to
meet these targets for some banks can lead to reduced
credit availability in that country, hampering attempts
at economic recovery. In Europe, European banks
are purchasing sovereign debt at the request of the
European Central Bank. These purchases will make it
harder for those banks to meet Basel III targets if the
quality of the debt does not improve. It also is counterintuitive with the premise under Basel III of reducing
risk, as additional capital will be required to be set
aside to cover the potential for losses in riskier assets
such as European sovereign debt.
With banks being required to hold higher quality
and greater levels of capital, there will be business
implications. Larger levels of higher quality capital
on the balance sheet of a bank generally produces
lower levels of return. With banks holding greater
levels of this capital, shareholder returns could be
impacted. In terms of the type of capital being issued,
Canadian banks last February responded to an OSFI
release regarding the phase-out of certain nonqualifying capital instruments. These instruments
contained redemption rights which could be triggered
if a regulatory event occurred which changed their
capital treatment. The banks clarified that they would
not be redeeming these instruments during the
Basel III phase-in period. By the time Basel III is fully
implemented, these innovative capital instruments
will no longer be recognized as regulatory capital,
and as a result can no longer be issued by the banks
seeking to increase their regulatory capital levels.
While still in the implementation stage for Basel III
and with many hurdles still to be passed, the global
market appears to be attempting to meet the FSB’s
goal of having consistency at national levels. However,
the same cannot be said for other regulations being
developed on a country-by-country basis.
Regulatory Change
Key existing or emerging areas of regulatory
direction also include the creation of living wills
to ensure an orderly resolution process should a
bank fail to protect the financial system. European
proposed regulations such as the European Markets
Infrastructure Regulation (EMIR) and the Markets in
Financial Instruments Directive (MiFID) II to address
OTC and trading reform have been designed with a
view to strengthen market infrastructure and enhance
transparency and disclosure.
The American Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank), enacted in
July 2010, promises to impact almost every segment
of the US financial services sector. However, it
required significant rulemaking to take place to allow
the implementation of the framework described in
the act to occur. Dodd-Frank impacts not only every
segment of the US financial services industry, but also
impacts financial institutions that deal with banks
with US operations in ways that may not have been
fully anticipated. This can be seen most recently in
discussions relating to one aspect of Dodd-Frank, the
Volcker Rule.
Perspectives on the Canadian banking industry
9
OSFI and the five major Canadian banks delivered
comment letters on the proposed rule to the US
lawmakers expressing a number of concerns that
would impact their banking operations.
Volcker Rule
The Volcker Rule places prohibitions on banking
entities from engaging in proprietary trading and
certain relationships with hedge funds and private
equity funds. Running throughout the Volcker Rule
is the presumption that acting as “principal” is
“speculating,” except where the rule says it is not. As
a result, this could significantly change the economics
of firms’ capital markets and trading businesses.
The comment period for the rule closed in January
2012 with significant feedback being received from
financial institutions globally. OSFI and the five
major Canadian banks delivered comment letters on
the proposed rule to the US lawmakers expressing a
number of concerns that would impact their banking
operations.
OSFI conveyed that the proposal as it currently
stands could potentially “hinder the ability of foreign
financial institutions to efficiently manage their
risks” as a number of the core systems utilized by the
Canadian banks are US-based and therefore would be
impacted by the Volcker Rule. This includes systems
used for clearing and settling US transactions, US
exchanges, and US-owned infrastructure.
10 Canadian Banks 2012
In addition, OSFI noted that the current rule would
only allow proprietary trading by banking entities in
US Treasury, state, and municipal general, limited and
pass-through obligations. Other foreign government
securities currently don’t have an exemption.
The rule sees these types of transactions in the light
of a “principal” relationship or “speculation” as they
are trading for profit while putting their own capital
at risk. However, as the Canadian banks play a key
role in market-making for government securities
in Canada, these transactions are multi-purpose.
Restrictions in this area could impact liquidity and
funding requirements.
The five largest Canadian banks expressed that rules
relating to the definition of a “covered fund” would
restrict the ability for investors, that might reside in
the US, such as “snowbirds”, to continue to invest in
certain Canadian bank-sponsored mutual funds.
FATCA
In an effort to stem increasing cases of income tax
evasion by US persons subject to US tax and the
difficulty of accessing foreign-based information due
to foreign law privacy constraints, the US Government
passed the Hiring Incentives to Restore Employment Act
(HIRE) in 2010. Included in the legislation was the
Foreign Account Tax Compliance Act (FATCA). FATCA’s
objective is identifying US persons who
(i) directly own financial accounts at or investments in
non-US financial institutions to earn income from
the underlying investments, or
(ii) own directly or indirectly non-US entities having
such accounts or investments.
Under this legislation, foreign financial institutions
are broadly defined to include those accepting
deposits, holding financial assets for the account
of others, or engaged primarily in the business of
investing or reinvesting in securities or derivatives.
Such institutions are subject to 30% withholding tax
on the receipt of US source income (e.g., interest and
dividends) and gross proceeds from the sale of US
debt or equity interest (collectively “withholdable
payments”) unless the institution enters into an
agreement with the Internal Revenue Service (IRS)
to identify and report on its existing and new US
accountholders. Upon review of the institution’s
client data and after application of specified due
diligence procedures, those with actual or potential
US indications who do not clarify their status, US
persons refusing to provide privacy waivers, and
other foreign financial institutions not entering
into such agreements with the IRS will be subject
to withholding on payments made to them by the
financial institution. Some limited categories of foreign
financial institutions considered at low risk for use by
US persons for tax evasion will be exempt from FATCA
withholding on payments they receive. An example of
this latter category includes wholly owned government
instrumentalities and certain pension plans.
To combat the use of non-US entities by US persons
to own financial assets, a withholding agent will be
required to withhold 30% on withholdable payments
unless the entity certifies that it has no substantial US
owners or provides the identification of such persons.
Withholding agents will provide the ownership
information to the IRS.
Perspectives on the Canadian banking industry
11
While the legislation is relatively straightforward,
the proposed regulations released on February
8, 2012 still leave many issues unanswered and
contentious areas are deferred for additional
industry consultation. What is clear is that, while the
regulations attempt to take in to account industry
comments to make the application of FATCA more
practical, the drive for transparent government
reporting is gaining momentum internationally. The
FATCA regulations provide financial institutions
with sufficient clarity to move forward to enter into
agreements with the IRS and make the necessary
systems and processes changes for an expected
effective date of July 1, 2013.
Implementing FATCA may result in financial
institutions incurring costs to:
• Change customer on-boarding systems and
processes to include new data and supporting
documentation necessary to classify the customer’s
FATCA status;
• Examine existing client account data to identify US
persons;
• Develop new or expanded withholding and
reporting systems;
• Develop systems to calculate and publish quarterly
information regarding the composition of US and
non-US assets;
• Educate personnel and customers regarding the
new requirements; and
• Update derivative contracts to address FATCA
withholdings and confirm the counterparty’s
FATCA status.
12 Canadian Banks 2012
OTC derivatives
In relation to OTC derivatives, the G20 leaders
agreed in September 2009 that “All standardized OTC
derivative contracts should be traded on exchanges
or electronic trading platforms, where appropriate,
and cleared through central counterparties by end2012 at the latest. OTC derivative contracts should
be reported to trade repositories. Non-centrally
cleared contracts should be subject to higher capital
requirements.”
The aim of these requirements was to “improve
transparency in the derivatives markets, mitigate
systemic risk, and protect against market abuse.”
Each country must take steps to ensure that their
jurisdiction can ensure compliance with the G20
agreement.
Rather than focus on the progress being made by
Canada and other jurisdictions, we will focus on
the potential business and market implications of
the anticipated changes. One such impact is that
for those companies that use derivatives, either to
take exposure or mitigate risk, the cost of doing so
will increase. This could be the result of needing to
post margin with a central counterparty for centrally
cleared transactions or providing collateral to an
individual counterparty for bilateral transactions,
where previously no collateral may have been posted.
As margin or collateral is generally required to be in
a liquid form, for example, cash or liquid highly rated
securities, this will require an ability for derivative
users to turn assets into cash or equivalents to meet
these margin or collateral requirements, potentially
on short notice. While this ability has generally been
required for banks today, expanding this to include
all derivative counterparties will require this ability
to be replicated at non-bank financial institutions and
corporates alike.
The ability to manage collateral effectively will be a
skill required by all companies that use derivatives
and will be an ongoing cost going forward.
Perspectives on the Canadian banking industry
13
As new regulation increases capital costs, the
need to boost returns by reducing expenses
and bolstering revenues will intensify.
15th Annual Global CEO Survey – Banking and Capital Markets sector summary
Operational risk
Under Basel, banks can use one of three approaches
to measure their level of operational risk. One of these
approaches is the Advanced Measurement Approach
(AMA), which many of the Canadian banks are
working towards. The purpose of AMA is to enhance
operational risk measurement and management.
The AMA framework requires effective governance,
risk capture and assessment, and quantification
of operational risk exposure. The benefits of using
AMA include a potential reduction in the operational
risk capital charge as capital will be based on risk
exposures and not income levels, improved risk
culture and understanding of the risks faced by
the institution, and improved reputation amongst
stakeholders through the use of more advanced riskmanagement methodologies.
Given the pace of regulatory change, operational risk
management is at a crucial point in its development.
While institutions are struggling to make AMA
fully effective and embedded into the day-to-day
management of the business, regulatory change may
further increase the operational risk profile for many
institutions.
14 Canadian Banks 2012
However, there could be unsuspected advantages
in the upheaval across the financial world. Under
AMA, operational risk-capital modeling allows for the
understanding of the institution’s level of exposure to
operational risk. One component of the capital model
is the business environment and internal control
factors which provide a more forward-looking view,
recognizing both improvements and deterioration in
operational-risk profiles. As a result, management
actions, such as the investment in internal controls
can be reflected in the operational-risk capital.
While regulatory change is pushing institutions into
a more general overhaul of internal compliance
systems, procedures, and internal controls, it is also a
“cleansing” opportunity to have a more streamlined
regime that focuses on efficient and effective internal
controls. By taking a strategic approach to internal
controls under AMA, many institutions have the
opportunity to benefit by a reduction in operational
risk capital.
The weight of the proposed regulatory changes,
including new capital and liquidity demands,
is going to be a key factor in determining
business plans, changing the cost profile of many
banking products.
15th Annual Global CEO Survey – Banking and Capital Markets sector summary
Summary
The level and pace of regulatory change impacting
Canadian banks is significant. Currently, Canadian
banks are assessing the potential impacts of these
regulations, the emerging rules, and responding in
several ways:
• Undertaking analysis of the potential operating
and strategic implications, for their businesses,
products, customers, and the Canadian financial
system;
• Responding to proposed regulations via comments
to the relevant regulatory bodies to ensure their
views are heard on unintended consequences as
individual banks and on an industry basis;
• Liaising with government bodies such as OSFI
and the Bank of Canada where proposals would
negatively impact the Canadian economy, such as
the Volcker rule, to provide their perspectives and
ask for their engagement on the issue; and
• Preparing for changed processes, systems and
business models based on views formed on the
proposed regulations.
Overall, the banks have demonstrated their ability to
weather the changes in the economic and regulatory
environment to date. This is demonstrated by the
$23.6 billion in profits earned during 2011 by the
largest six Canadian Banks. Their capital levels
remain strong which helps provides stability in
uncertain times. The uncertainty created by the vast
range of regulatory changes and proposals adds
significant layers of complexity to the system. This
can make basic planning decisions difficult for the
banks, let alone dealing with the ever changing
macro-economic environment. However, as the rules
are finalized, additional clarity will be provided. Until
that point is reached we will see banks operating in an
evolving landscape, both in Canada and abroad.
Ryan Leopold
Audit and Assurance Partner
416 869 2594
[email protected]
Jason Boggs
Consulting & Deals Partner
416 941 8311
[email protected]
Michael Bondy
Banking and Capital Markets Tax Leader
416 365 2724
[email protected]
Elisabeth Burke
Consulting & Deals Partner
416 687 8589
[email protected]
Rani Turna
Consulting & Deals Partner
416 869 2911
[email protected]
Perspectives on the Canadian banking industry
15
02 Consumer lending survey 2012
Canadians continue to feel confident about their debt levels. However, this confidence has somewhat
softened in the last year, according to our annual consumer lending survey. They appear to be more
concerned about the level of debt they carry and have indicated that they intend to reduce their debt
level over the next year.
The survey of 1,200 Canadians, which was conducted
by Leger Marketing, finds that 59% of respondents
think their debt level is about right. One-third think
it’s too high while 4% say it’s too low and another 4%
did not answer the question. The results are interesting
considering data from the Bank of Canada indicating
that consumer debt is at an all time high and Statistics
Canada reporting that the debt-to-income ratio of
Canadians has reached a record high of 153% in the
third quarter of 2011. Consumers still seem to be
relatively comfortable despite having a debt-to-income
ratio that’s similar to levels in the United States. This
comfort could be in part due to the economic and
structural differences between the US and Canadian
markets. Furthermore, the trends in other key
indicators such as the debt-to-asset or debt servicing
ratios are more favourable.
Confidence levels vary by demographic: most
concerned are people aged 25 to 55 (41% think it’s too
high). Those who earn more are more confident about
their debt levels. Sixty-four percent of those surveyed
with household incomes above $100,000 say their debt
levels are about right.
Respondents seem to be listening to Bank of Canada
governor Mark Carney, who has warned Canadians
about rising consumer debt levels. The majority of
those surveyed – 63% – want to decrease the amount
of debt they carry over the next year. Nearly onethird intend to maintain their debt levels, while 4%
actually intend to go deeper into debt. The intent to
reduce debt was present regardless of the respondent’s
comfort level with their debt.
Compared to last year, the survey results indicate
a softening of confidence as we observed a three
percentage point increase in the number of Canadians
who believe that their debt level is too high.
Perspectives on the Canadian banking industry
17
Canadians are more willing to cut back
on discretionary spending.
70%
willing to delay
purchase of a
new car
62%
65%
willing to delay
buying a new house
or upgrading
their home
forego buying
new electronics
Similar to the sentiment of concern expressed when
asked about their debt levels, we saw a 4.5 percentage
point increase year over year in the number of
respondents who indicated they wanted to reduce
their level of debt. Those aged between 25 and 55,
have children, and own their own home are more
inclined to reduce their debt. Surprisingly, wealthier
respondents strongly indicated they also want to
reduce their debt. Those surveyed with household
incomes of more than $100,000 indicated a stronger
desire to reduce debt compared to lower-income
respondents (68% vs. 58%).
Canadians are also more willing to cut back on
discretionary spending. In order to reduce their
debt, 70% said they would be willing to delay the
purchase of a new car, 65% would forego buying new
electronics, and 62% would delay buying a new house
or upgrading their home. Compared to last year,
consumers were more willing to postpone purchases
in all categories, but this willingness was most
pronounced in houses and cars.
Canadians continue to be content with their banks.
When asked about the likelihood of switching primary
banks in the next 12 months, 88% indicated that they
are not likely to do so while 10% indicated that they
are likely to switch and 2% did not answer. Compared
to last year where 14% intended to switch, this
indicates an improvement in customer sentiment.
18 Canadian Banks 2012
Interestingly, the majority of respondents feel that
their financial institution should play a role in helping
them manage their level of debt. Eighty-two percent
of respondents say banks should play a role in both
determining the maximum amount of debt someone
can responsibly take on and hold them to that limit.
This was especially true of those with household
incomes of more than $100,000 a year compared to
those making less (85% vs. 71%).
Based on what Canadians have told us, we believe
that banks will experience a slowdown in lending
growth over the next 12 months, which will only
serve to intensify competition for volume. Given
the prolonged low interest rate environment, banks
may not have much pricing leeway to compete for
customers on price so they will have to focus their
attention on customer experience and product
innovation as means of differentiation. Furthermore,
banks need to do so while being more efficient by
managing the cost of delivery.
We will be releasing more detailed results from our
second annual consumer lending survey later in
March 2012. Visit www.pwc.com/ca/banking
for more.
Banks may not have much pricing
leeway to compete for customers on
price so they will have to focus their
attention on customer experience
and product innovation.
John MacKinlay
National Financial Services Consulting & Deals Leader
416 815 5117
[email protected]
Perspectives on the Canadian banking industry
19
03 Economic highlights
While economic activity rebounded
vigorously in the third quarter as these
temporary factors were resolved, the
economy continued to show signs of
deceleration in the latter part of 2011.
Perspectives on the Canadian banking industry
20
The Canadian economy had a strong recovery in 2010, fuelled by considerable monetary and fiscal
stimuli, a robust financial sector, and high commodity prices. Economic activity continued to expand
at a solid rate in the first quarter of 2011, but the combination of global headwinds, lower commodity
prices and a weakening domestic demand slowed the pace of the recovery during the rest of the year.
Looking ahead, external factors will continue to play a crucial role in Canada’s economy as federal and
provincial governments focus on fiscal consolidation and highly indebted households start to slowly
restore their balance sheets.
The recovery is losing traction
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
The global economy is rapidly slowing down, as fears of another
recession in some advanced economies intensify and growth in key
emerging markets appears to be moderating. Moreover, the inability
of European and US policymakers to take decisive actions in the fiscal
front has sparked a renewed bout of uncertainty and volatility in
financial markets around the world.
Among advanced economies, Canada emerged from the global
recession in an enviable position. The economy expanded by a
healthy 3.2% in 2010, thanks to a resilient financial sector, the
deployment of significant monetary and fiscal stimuli, and a
sustained period of high commodity prices.
The economic momentum observed in 2010 continued well into the
first quarter of 2011. However, growth paused in the second quarter,
largely due to supply chain disruptions following the earthquake
in Japan and a considerable decline in energy exports caused
by unexpected wildfires in Alberta. And while economic activity
rebounded vigorously in the third quarter as these temporary factors
were resolved, the economy continued to show signs of deceleration
in the latter part of 2011.
Real GDP growth
Canada continues to outperform its peers
4.0
3.2
2.1
2.7
1.8
1.4
3.0
1.8 1.6
1.5
1.4 1.1
-0.5
-2.8
-4.3
-3.5
-4.9
-6.3
Canada
Australia
Euro
area
2009
United
States
2010
United
Kingdom
Japan
2011
Source: International Monetary Fund WEO, September 2011
Despite growing concerns over the global economy and recent
evidence of a weakening domestic demand, the International
Monetary Fund (IMF) estimates that Canada will grow by 2.1% in
2011, outpacing Australia, the US, the eurozone, the UK and Japan.
Perspectives on the Canadian banking industry
21
Canada was able to exit
the global recession on
firm footing.
Strong global headwinds ahead
Some risks persist at home
As a small open economy, the fate of Canada depends
in large part on the prospects of the global economy.
In the near term, Canada faces several risks to its
external environment, including growing concerns
over the possibility of debt and banking crises in
Europe, uncertainty surrounding economic growth in
the US, and lower-than-expected economic activity in
China and other large emerging markets.
In addition to successful accommodative fiscal and
monetary policies, Canada was able to exit the global
recession on firm footing thanks to strong private
demand. Domestic consumption continued to be the
engine of growth in 2011, albeit at a more moderate
pace than in 2010. The unemployment rate, which
reached a peak in August 2009 of 8.7%, continued
to retreat gradually during the year, but still remains
above pre-crisis levels.
The European sovereign debt crisis continued to
unfold during 2011 and is threatening to spread into
larger economies such as Italy and Spain. Europe’s
inability to contain the crisis could pose a serious
threat to the stability of the world banking system and
global trade.
South of the border, Canada’s largest trading partner
continues to struggle with a sluggish recovery;
US growth in 2011 is estimated at a mere 1.6%.
Moreover, the combination of a fragile labour
market, a depressed housing market and a prolonged
household deleveraging process is likely to hold back
domestic demand well into 2012.
Finally, China and other emerging economies began
to experience more sustainable rates of growth in the
second half of 2011, in part thanks to monetary policy
tightening policies introduced in the early part of the
year. All these developments have also been reflected
in lower demand for commodities and softer prices.
22 Canadian Banks 2012
The financial and corporate sectors retained a strong
position during 2011. Bank profits are now back to
pre-Lehman levels and business credit continues
to grow, as firms take advantage of historically
low funding costs. Additionally, capital ratios have
remained at healthy levels and non-performing loans
are well under control.
Gross public debt and primary balance – shifting towards
fiscal consolidation
Gross debt
Primary balance (right scale)
90
3
2
85
75
1
0
70
-1
65
-2
60
55
-3
50
-5
(f)
(f)
(f)
(f)
(f)
15
20
14
20
13
20
12
20
11
10
20
20
09
20
08
20
07
20
20
06
-4
Primary balance = Primary net lending/borrowing
Source: IMF estmates. International Monetary Fund WEO, September 2011
Going forward, the persistence of subdued household
consumption and a cooling housing market could
dampen domestic demand further, reversing the
downward unemployment trend observed in 2010
and 2011.
Achieving the right policy mix
After deploying an effective and sizable fiscal stimulus
during 2009 and 2010, estimated at 4% of gross
domestic product (GDP), Canada is now shifting its
focus towards fiscal consolidation. The Canadian
government has expressed its intention to bring the
budget back into surplus before 2016, as it plans to
address long-term fiscal challenges.
Conversely, monetary policy is expected to remain
highly accommodative in the medium term in light of
renewed global uncertainties. The Bank of Canada,
which has maintained the overnight interest rate
at 1% since September 2010, is expected to stay
on the sidelines well into 2012, reflecting subdued
inflationary pressures, a relatively strong Canadian
dollar and exceptionally low interest rates in the US.
Target for overnight rate – awaiting further developments
5%
4
3
2
1
11
20
10
20
09
20
08
0
20
% of GDP
80
On the other hand, Canadian households came out of
the recession burdened by high levels of debt and lower
levels of wealth, with household debt to disposable
income reaching 152.98% in the third quarter of
2011. This, coupled with tepid growth in disposable
income and a sharp reduction in commercial credit,
led to lower levels of consumer spending in 2011.
Furthermore, residential construction activity started
to moderate in the second half of the year, as policies to
tighten mortgage lending standards came into effect.
Last observation: December 23, 2011
Source: Bank of Canada
Perspectives on the Canadian banking industry
23
A strong loonie – the new normal
1.2
US$ / CDN $
0.8
2011
2009
2010
1.0
0.6
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Last observation: January 2, 2012
Source: Bank of Canada
The Canadian dollar – down from recent
highs
Slowed recovery in equity markets
2,000
S&P 500
S&P/TSX
15,000
Lehman’s
collapse
12,000
1,500
n1
1
Ja
0
n1
Ja
Ja
n0
7
n0
Ja
Ja
06
Ja
n
n0
Ja
n0
Ja
Source: Yahoo Finance
n0
9
500
8
6,000
5
1,000
4
9,000
The loonie remained above parity for the majority
of the year, before falling in the last quarter of
2011. Higher commodity prices helped support the
Canadian dollar earlier in the year, allowing it to
reach $1.06 against the US greenback in early October
2011. The strength of the Canadian dollar could also
be linked to a generally weak US dollar.
However, the Canadian dollar plummeted below
par after the Bank of Canada revealed its decision to
hold interest rates steady at 1% in October 2011. A
weaker loonie makes exports more appealing to trade
partners such as the US, but continued European
sovereign debt turmoil may discourage demand
for Canada’s raw materials and disrupt Canadian
financial markets.
Financial Markets – A volatile year
After a remarkable turnaround in 2009 and continued
strength through to the first half of 2011, the equity
market dropped off in the second half of the year.
Nevertheless, financial markets have remained well
above the depths of the recent global financial crisis.
While overall financial and lending conditions
remained strong in 2011, equity indices are losing grip
and closed the year only slightly above levels seen
during the collapse of Lehman Brothers in 2008. In
the Canadian market, the S&P/TSX composite index
finished the year 51% higher than its low in 2009, but
10% lower than the start of 2011. Similarly in the US,
the S&P 500 finished the year 71% higher than its
2009 trough, but 1% lower than the start of 2011.
Canada has the right tools in place to weather these
economic challenges, anchored by well-managed
inflationary expectations and a highly accommodative
monetary policy.
24 Canadian Banks 2012
Outlook for the Canadian economy
3-month overnight index swap
6%
5
4
3
2
1
8
r0
8
Ju
l0
8
Oc
t0
8
Ja
n0
9
Ap
r0
9
Ju
l0
9
Oc
t0
9
Ja
n1
0
Ap
r1
0
Ju
l1
0
Oc
t1
Ja 0
n1
1
Ap
r1
1
Ju
l1
1
n0
Ap
Ja
7
l0
t0
Oc
Ju
7
0
3-month overnight index swap
3-month Canadian dollar offering rate
5 year debt swaped into 3 month floating rate debt
Notes: The 3-month CDOR is the average bid-side rate for Canadian bankers’
acceptances determined daily from a survey of market makers and can be
used as a proxy for the cost of 3-month bank funding. Five-year debt swapped
into 3-month floating rate debt is an indicator of the rate for senior deposit
notes, and provides an indication of the longer-term cost of bank funding. The
3-month OIS rate represents the expected overnight interest rate over the
3-month period and can be used as a point of reference to compare the two
measures of the cost of wholesale bank funding.
Source: Bank of Canada
Weekly effective interest rates
8%
7
As a result of weakening external demand and
moderating household spending, the outlook for the
Canadian economy has darkened compared to the
prospects faced in early 2011. Continued risks from
financial markets turmoil, linked to the European
debt crisis, along with high levels of household
indebtedness and fiscal consolidation are likely to
hamper consumer and business confidence in the
near term. Moreover, the persistent strength of the
Canadian dollar, coupled with a very fragile recovery
in the US and moderating growth in key emerging
economies could restrain export performance in 2012,
further tempering the speed of economic growth.
However, Canada has the right tools in place to
weather these economic challenges, anchored by
well-managed inflationary expectations and a highly
accommodative monetary policy. The Bank of Canada
is calling for growth of 2.0% in 2012 followed by 2.8%
in 2013. Canadian banks are expected to remain well
capitalized in 2012, with high levels of liquidity and
easily accessible funding at relatively low rates by
global standards.
Household effective interest rate
Business effective interest rate
1 Bank of Canada Monetary Policy Report, January 2012
6
5
4
Ja
n
Ap 07
r0
Ju 7
l
Oc 07
t0
Ja 7
n
Ap 08
r0
Ju 8
l
Oc 08
t0
Ja 8
n
Ap 09
r
Ju 09
l
Oc 09
t0
Ja 9
n
Ap 10
r1
Ju 0
l
Oc 10
t
Ja 10
n
Ap 11
r
Ju 11
l
Oc 11
t1
1
3
Notes: The effective interest rate for households is a weighted-average of
various mortgage and consumer credit interest rates. The weights are derived
from residential mortgage and consumer credit data, adjusted for additional
information provided by financial institutions. The effective interest rate for
businesses is a weighted-average borrowing rate for new lending to nonfinancial businesses, estimated as a function of bank and market interest rates.
The weights are derived from business credit data.
Contributing economists:
Diego Mesa Puyo
Economics and Statistics Practice, Vancouver
604 806 7119
[email protected]
Jessica Yu
Economics and Statistics Practice, Vancouver
604 806 7521
[email protected]
Source: Bank of Canada
Perspectives on the Canadian banking industry
25
04 Analysis of 2011 results
2011 at-a-glance
Comparison across key criteria
BMO
BNS
CIBC
NBC
• Net income up 16.2%
year-over-year
• Net income up 22.1%
year-over-year
• Net income up 25.6%
year-over-year
• Net income up 17.3%
year-over-year
• Net income down
7.1% year-over-year
• Net income up 26.8%
year-over-year
• Improved results in
all major segments
with contribution to
increased net income
from acquisition of
Marshall & Ilsley
Corporation
• Record results in 2011
with volume growth in
Canadian banking with
contributions from
acquisitions.
• Noted improvement
in interest and noninterest income but
offset by lower trading
income.
• Improved results in all
major segments with
noted performance in
wealth management
segment.
• If removing the
discontinued
operations of US
regional retail banking,
continuing operations
experienced 16%
increase in net
income.
• Net income increase
was due to higher
earnings in all retail
segments and a lower
net loss in
Provisions for
Credit Losses (PCL)
• $857 million
(down 18.3%)
• $1,046 million
(down 15.6%)
• $841 million
(down 19.6%)
• $119 million
(down 17.4%)
• $975 million
(down 21.4%)
• $1,465 million
(down 9.8%)
Total regulatory
Capital
• Up 20.9% year-overyear
• Up 9.9% year-overyear
• Up 7.0% year-overyear
• Down 2.3% year-overyear
• Up 9.0% year-overyear
• Up 12.6% year-overyear
Canadian
banking
results
• Improvement in net
income driven by
volume growth with
offsets from lower
net interest margin
from both low interest
rate environment and
competition.
• Had record net income
from solid growth
and lower PCL;
offset by pressure
from low interest rate
environment and
increase in noninterest expense.
• High volume growth
from Canadian
banking operations
and acquisition of Citi
mastercard portfolio
made it the largest
Visa and Mastercard
dual card issuer.
• Improvement yearover-year primarily
driven by loan and
deposit volume
growth, mainly due
to secured credit like
mortgages and home
equity lines of credit.
• Overall improvement
due to volume growth
and lower PCL; offset
is noted in higher staff
costs and pricing
competition.
• Experienced record
net income as a result
of strong volume
growth and lower
PCL; noted offset in
competitive pricing.
Efficiency ratio
changes
• Increase of 0.5%
to 62.7%
• Increase of 2.6%
to 54.4%
• Increase of 1.9%
to 60.0%
• Increase of 0.1%
to 60.6%
• Increase of 1.1%
to 52.7%
• Decrease of 1.6%
to 60.6%
Key factors
impacting
earnings
RBC
TD
• Corporate segment,
but offset by
deterioration in
earnings of Wholesale
Banking.
Perspectives on the Canadian banking industry 27
2011 key metrics
Total revenue1 ($ billions)
Total capital ratio (%)
13.72
4.47
11.41
14.9%
13.9%
17.29
20.13
18.4%
16.9%
15.3%
16.0%
23.10
With the exception of CIBC and RBC, all banks reported higher revenues
when compared to prior year.
Most banks recorded an increase in Tier 1 capital ratio except BMO and NBC.
Total revenue is defined as net interest income plus other income.
1
Earnings per share (EPS) ($)
Net income ($ billions)
3.27
BMO
BNS
CIBC
NBC
RBC
TD
1.21
5.18
3.08
4.85
5.89
BMO
BNS
CIBC
NBC
RBC
TD
Net income for all banks increased from prior year except RBC.
7
8
BMO
BNS
CIBC
NBC
RBC
TD
2.92
7.35
3.5
8.61
9.56
13.08
14.45
Return on equity (ROE) (%)
4.0
14.0%
BMO
BNS
CIBC
NBC
RBC
TD
12.9%
13.9%
19.1%
21.3%
17.7%
With the exception of RBC and BMO, all banks experienced
an increase in ROE.
28 Canadian Banks 2012
7.32
6.93
3.21
6.45
Dividends declared ($ per share)
All banks reported higher expenditures than prior year.
3.0
5.28
CIBC and RBC had noted decreases to their EPS;
all other banks recorded increases.
Non-interest expense (NIE) ($ billions)
6
4.62
BMO
BNS
CIBC
NBC
RBC
TD
2.80
2.05
2.08
2.74
2.61
BMO is the only bank to remain unchanged;
all other banks increased their dividend declared.
3.51
Continued capital strength
All the banks continue to show strong capital positions, with Tier 1 capital ratios ranging from
12% to 14.7% and a combined average of 12.9% (2010 – 12.8%). Total capital ratios ranged from
13.9% to 18.4% or a combined average of 15.4% (2010 – 15.3%). All of the ratios were well above the
minimum required levels by OSFI of 7% and 10%, respectively, and represent slight improvements
from 2010. All of the banks showed improvements in their ratios, except for BMO and National Bank
of Canada (NBC), which had increased Tier 1 capital deductions for goodwill and intangible assets
as a result of acquisitions in the year.
Ratios were maintained at strong levels in
anticipation of pending regulatory capital
changes under Basel III and the adoption of
International Financial Reporting Standards
(IFRS). Internal capital generation through
strong earnings was the primary driver behind
continued capital strength. The only significant
common share issuances were by BMO ($4.3
billion) and Bank of Nova Scotia (Scotiabank)
($1.8 billion) in support of acquisitions.
Dividend payouts meeting internal
bank targets
The desire to maintain strong capital levels was
balanced with the desire to maintain or increase
dividend levels. Other than BMO, all the banks
increased their dividends in 2011. NBC and
TD led the way with year-over-year dividend
increases of 10.5% (as a result of the increase
at the end of FY2010) and 7%, respectively.
Although BMO did not raise its dividend in 2011,
Less emphasis was placed on Tier 2 capital,
it continues to have the highest dividend payout
with only BMO and Royal Bank of Canada
target ratio (45% to 55%). Scotiabank, CIBC,
(RBC) increasing Tier 2 capital levels, both
NBC
and RBC continue to have targets of 40%
from subordinated debt increases. This is not
to
50%
while TD has a target of 35% to 45%.
surprising given the Basel III changes and the
All
of
the
banks met their payout ratio targets,
non-viability contingent capital (NVCC) rules.
other than NBC (39.5%, just below its target)
On February 9, 2012, Scotiabank completed
and RBC (64.8%), which exceeded its target as
its issuance of $1.66 billion in common shares.
a result of the loss incurred on the announced
If this capital were included in the October
sale of its US regional retail banking operations
31, 2011 results, it would have increased
to PNC Financial Services Group. The payout
Scotiabank’s Tier 1 capital ratio to approximately
ratio on a continuing operations basis was 47%,
12.9%.
which is within its target.
Tier 1 capital ratios
2011
2010
BMO
12.0%
13.5%
Scotiabank
12.2%
11.8%
CIBC
14.7%
13.9%
NBC
13.6%
14.0%
RBC
13.3%
13.0%
TD
13.0%
12.2%
Dividend payout ratios
Target
2011
2010
BMO
45% to 55%
53.0%
58.6%
Scotiabank
40% to 50%
44.4%
50.1%
CIBC
40% to 50%
48.0%
59.1%
NBC
40% to 50%
39.5%
41.4%
RBC
40% to 50%
64.8%
57.3%
TD
35% to 45%
47.6%
69.9%
Perspectives on the Canadian banking industry
29
30 Canadian Banks 2012
Transition to IFRS will reduce capital levels
Basel III
All of the banks presented preliminary opening IFRS
reconciliations as of November 1, 2010, their opening
balance sheet date. Decreases in shareholder’s equity
ranging from 3.5% (Scotiabank) to 9.1% (RBC) are
expected on the transition to IFRS. Increases in assetsto-capital multiples are also anticipated. However, the
impact to regulatory capital and the multiples are
cushioned by OSFI’s transitional guidance, permitting
the banks to phase in the impact of IFRS on Tier 1
capital over a five-quarter period beginning in Q1
2012. OSFI’s transitional relief to exclude residential
mortgages from Canada Mortgage and Housing
Corporation (CMHC) securitizations prior to March
31, 2010, recognized back on balance sheet under
IFRS, will also reduce the impact to assets-to-capital
multiples.
Although full Basel III implementation is not until
January 1, 2019, the transitional arrangements
commence January 1, 2013. OSFI is expected to
release updated guidance in Spring 2012. The banks
continue to prepare for these enhanced capital
requirements both in terms of quality of capital and
quantity of capital, but they are well positioned for
the Basel III requirements thanks to their strong
capital positions and historical profitability.
OSFI issued guidance in August 2011, outlining NVCC
requirements for instruments issued by Canadian
banks. All instruments issued after December 31,
2012 must meet these NVCC requirements to qualify
as regulatory capital. Existing instruments need to
be assessed or amended to meet NVCC criteria. Only
CIBC ($881 million of its non-cumulative preferred
shares) and TD (certain instruments issued by its
US subsidiaries) have indicated that some of its
instruments will be treated as NVCC under Basel III.
Non-common share capital that does not meet Basel
III requirements will be subject to grandfathering
provisions, with recognition as regulatory capital
phased out over a 10-year period beginning January
1, 2013. This is expected to apply to all of the
banks. CIBC and TD are the only ones that have
indicated they expect to exercise a regulatory event
redemption right only in FY2022 for non-common
capital instruments that will not qualify and have not
matured by that date.
Other Basel II changes
Before Basel III is effective, institutions will also
be affected by revisions to Basel II. Effective as of
January 1, 2012, banks are required to implement
market risk guidelines to include stressed value-atrisk and an incremental risk charge in market risk
capital. These changes will result in increases to riskweighted assets.
Also effective at the beginning of 2012, insurance
subsidiaries held prior to January 1, 2007 will be
deducted 50% from Tier 1 capital and 50% from
Tier 2 capital, as opposed to deducting 100% from
Tier 2 capital. The impact of this change will result in
reductions to Tier 1 capital but not to total capital.
Dodd-Frank’s capital implications
However, Dodd-Frank also has potential implications
to capital requirements. On December 20, 2011, the
US Federal Reserve proposed steps to strengthen
regulation and supervision of banks with more
than US$50 billion in assets. The proposal, with
comments requested by March 31, 2012, includes
a wide range of measures such as capital, liquidity,
credit exposure, stress testing, risk management, and
early remediation requirements. Sound similar to
Basel III? Many of the proposed requirements have
a phased-in approach with the intention to converge
with Basel III, but the Federal Reserve also indicated
that it’s carefully considering what changes to the
standards it may recommend to Basel III based on the
results of this observation. Canadian banks will need
to be mindful of the potential implications of these
standards on their US subsidiaries.
While the Dodd–Frank Wall Street Reform and
Consumer Protection Act was enacted in the US in July
2010, many of its provisions have not been written
yet. The banks have been closely monitoring and
commenting on the potential implications to date,
such as the limits on interchange fees, regulation
of over-the-counter derivatives markets, and the
restrictions on proprietary trading and sponsorship of
private investment funds (the much debated Volcker
Rule).
Effective as of January 1, 2012, banks are required to
implement market risk guidelines to include stressed
value-at-risk and an incremental risk charge in market
risk capital.
Perspectives on the Canadian banking industry
31
Credit losses
The major banks again benefited from a year-over-year improvement in provisions
for credit losses (PCLs) hitting their P&L, with total PCLs down $1.0 billion or 16.4%
year over year ($5.3 billion in 2011 down from $6.3 billion in 2010). PCLs decreased
year over year by 12 bps to 0.40% from 0.52%, and loan loss provisions (LLPs) on the
balance sheet dropped to 0.68% from 0.76% as a percentage of loans with each bank
seeing year-over- year improvements in these metrics.
Gross impaired assets also decreased, dropping 25.6%
to $13.6 billion as of October 31, 2011 from $18.3
billion as of October 31, 2010. Some banks did see
an increase in gross impaired assets and impaired
loan formation from Q3 to Q4, although this did
not consistently occur in the same portfolios when
comparing different banks. Across the banks, total
provisions for credit losses decreased 2.2% year over
year to $11.1 billion from $11.4 billion, although
the trend wasn’t consistent between all banks, with
Scotiabank and TD bucking the trend with 1.1% and
0.2% increases in their respective provisions. NBC
recorded the largest proportional decline at 13.5%.
This was the second year banks’ profits have benefited
from decreases in their PCLs after peaking during the
financial crisis in 2008. This industry-wide decrease
was achieved despite an $88 billion (or 7%) increase
in gross loan balances and was driven by continuing
year-over-year improvements in the credit quality of
the banks’ lending portfolios.
As expected, despite being the largest single lending
portfolio for each of the Canadian banks, credit losses
and associated provisions for Canadian residential
mortgages remain immaterial to the results of the
banks, generally being below 5% of total PCLs. This
historically low level of losses reflects the more
conservative underwriting standards of Canadian
32 Canadian Banks 2012
Credit losses
0.76%
0.68%
0.52%
0.40%
PCLs / Loans
LLPs / Loans
2011
2010
banks compared to their US peers, the fact that many
are insured through programs such as CMHC, and
the full recourse nature of Canadian mortgages,
which impacts customer behaviour.
US lending portfolios continue to experience a higher
rate of credit losses than Canadian portfolios. This
affects TD’s and BMO’s results compared to their
peers given their proportionally larger US portfolios,
with disclosed US credit risk concentrations of 27%
and 29% for TD and BMO, respectively. Other major
banks are all at 10% or less. As a consequence, US
credit losses are generally also relatively immaterial
in the context of each bank’s results, with the
exception of TD and BMO. TD reported continuing
improvement in the performance of its US portfolio,
offset by portfolio growth with the net effect being
that its provision related to its US book remained flat.
BMO reported an $86 million increase in its PCLs,
with this largely driven by its acquisition of Marshall
& Ilsley and the resultant increase in its portfolio size.
The bulk of retail banking credit losses relate to
the unsecured credit card and personal lending
portfolios. In general, the banks saw year-over-year
improvements in the credit quality of these portfolios.
However, there is some indication that this trend
stopped in Q4, with arrears rates either stabilizing or
deteriorating slightly compared to Q3.
The other large driver of credit losses is commercial
lending. Most banks reported a year-over-year
improvement in commercial lending credit losses.
Having said that, as with unsecured personal lending,
there was some divergence in trends between
banks from Q3 to Q4. Some banks continued to see
improvements in certain portfolios while others saw
slight declines in credit quality.
The divergence in trends from Q3 to Q4 in PCL ratios
at a consolidated level are detailed below:
BMO
Canada
International*
BNS
The majority of the banks don’t publish credit-related
information segmented by province and territory,
but mortgage arrears information collated by the
Canadian Bankers Association shows that the yearover-year improvement in mortgage arrears has been
consistent in all provinces and territories. Having said
that, it is interesting to note that as of September 2011,
the percentage of mortgages over 30 days in arrears
in Alberta remains substantially higher at 0.75%,
compared to British Columbia at 0.47%, Quebec at
0.34%, and Ontario at 0.29%. Other provinces and
territories account for a relatively small proportion of
lending balances, but their mortgage arrears rates are
similarly also lower than those seen in Alberta.
In relation to Europe, the Canadian banks have
generally made an effort to reduce their exposure
to peripheral Europe (Portugal, Italy, Ireland,
Greece and Spain). They have also made voluntary
disclosures to the market in relation to their European
holdings, generally segmented by region and nature
of exposure. In short, direct credit losses have been
very limited to date and it appears that the banks are
closely managing the exposures that they do have.
The impact the European debt crisis is having on
credit losses is less direct. The prolonged period of
uncertainty has had a negative impact on business
and consumer confidence globally, impacting levels
of business and consumer spending. The Canadian
and US economies are still forecast to grow in 2012,
but not as quickly as may have been the case in the
absence of this uncertainty.
CIBC
NBC
RBC
TD
Stable
Improved
Improved
Deteriorated
Improved
Deteriorated
Improved
Deteriorated
Deteriorated
n/a
Improved
Improved
* In the case of TD and BMO, this primarily represents their US businesses.
Perspectives on the Canadian banking industry
33
The indirect impact on credit quality is that we’re
seeing indications that arrears rates are bottoming
out at a level higher than may otherwise have been
the case. The credit card delinquency rate (90 days
and over) stood at 1.05% in July 2011, slightly above
the average from 2004 to 2007 of 0.82%. A similar
trend holds for the percentage of mortgages in arrears
by more than 30 days (0.39% as at September 2011 vs.
a 0.26% average for 2004-2007). Still, it is interesting
to note that the rate is already below the average
since 1990 of 0.42%.
There is some divergence in views about what
will happen to credit losses in 2012, although this
divergence is likely just a matter of timing. Canada’s
economic fundamentals remain sound and there
has been some positive data coming out of the
US. Unfortunately, the uncertainty surrounding
Europe continues to dampen business and consumer
confidence, which is having a real impact on spending
and investment decisions.
This year also marked the banks’ final year of
reporting under pre-IFRS Canadian GAAP. As noted in
our previous publication, both IFRS and GAAP require
the use of an incurred loss provisioning model. The
banks have largely refined their provisioning models
to comply with IFRS and none have indicated that
they expect any significant adjustments. Credit loss
metrics will be impacted where securitized loans
are brought back onto the balance sheet under IFRS.
But given that the level of insurance on mortgages
securitized under the CMHC’s securitization
programs typically results in very low losses being
suffered by lenders in the event of default, there
will, however, be a change in presentation and
classification with IFRS requiring provisions for credit
losses to be presented based on whether they have
been assessed collectively or individually.
34 Canadian Banks 2012
Results by business segments
Personal and commercial banking
This segment includes a range of banking and
investing services relating to the banks’ network of
branches, automated banking machines, internet as
well as mobile, and telephone banking. This segment
also includes the main businesses of retail and small
business banking, and commercial banking.
All six banks showed solid financial results in the area
of personal and commercial banking. Net income rose
at all six banks, with the increase ranging from 9% to
close to 20%. The strength in this area is attributed
to strong volume growth related to loan products
especially secured lending, which includes real
estate, auto lending, and business loans. While the
volume displayed a healthy growth, the benefits were
Year-over-year change in net income by segments1
Percent increase or decrease from 2010 to 2011
BMO
BNS
CIBC
% change
% change
% change
NBC
RBC
TD
% change
% change
% change
Personal and commercial
banking2
10.9%
14.3%
15.3%
9.0%
15.8%
19.6%
Wealth management
12.6%
49.3%
24.0%
42.0%
20.9%
21.1%
Wholesale banking and
capital markets
12.7%
-12.3%
65.2%
5.6%
-4.4%
-17.6%
1 The bank’s operations are grouped in three categories for this analysis. Corporate and other segment is
excluded for each bank.
2 International banking incomes for TD, RBC, BNS, and BMO are included in personal and commercial banking;
NBC derives little income from non-Canadian sources. RBC’s insurance earnings are also included in personal
and commercial banking. CIBC’s international banking income is excluded from the above table because it is
embedded in corporate and other.
partially offset by the narrowing net interest margin.
Banks experienced difficulty in this area due to the
low-interest rate environment and very competitive
pricing on loans such as mortgages. Average deposits
were also higher in fiscal 2011 than the previous
year. In general, banks had an increase in costs in
this segment due to a rise in payroll-related expenses,
including salary, pensions, and performance-based
compensation costs. Also, the full-year impact of the
Harmonized Sales Tax (HST) was noted by numerous
banks as contributing to an increase in non-interest
expenses.
Wealth management
The banks reported a strong performance in the
wealth management segment. Part of the reason was
due to acquisitions; those transactions completed
in late 2010 or early 2011 had an overall positive
impact on the banks’ wealth management segment
results. Most banks showed an increase in assets
under management and assets under administration;
however, this is frequently offset by market declines.
In terms of financial results, all six banks experienced
double-digit increases in net income, with increases
ranging from 13% to 49%. Higher transaction
revenue due to an increase in transaction volume and
higher average revenue per transaction contributed
to the rise. Fee-based revenue also increased due to
better stock market performance and thus greater
capital appreciation for part of the year. Non-interest
expenses increased year-over-year for all banks due
to higher variable compensation costs and strategic
initiatives supporting business growth.
Perspectives on the Canadian banking industry
35
Wholesale banking and capital markets
This segment – which includes investment banking,
corporate banking, capital markets, and other
services – slowed down from the 2010 highs. The first
six months of the year displayed stronger results and
higher investor confidence. However, in the last six
months of the year, market uncertainty contributed
to a low-confidence environment that is expected to
continue due to unresolved complications relating
to Europe’s debt crisis. While analysts’ expectations
were low for this segment’s results, the banks
pleasantly surprised the market with better-thanexpected results.
NBC and BMO came out ahead with 6% and 13%
year-over-year increases, respectively. CIBC displayed
a significant 65% increase from 2010 due to higher
equity sales and new issuances. The banks with
positive growth in net income benefited from an
increase in corporate and investment banking and
lower provisions for credit losses. However, the
below-trend performance of the market is still evident
in some banks’ financial results. Three of the six
36 Canadian Banks 2012
banks (RBC, TD, and Scotiabank) saw a moderate
decrease to net income ranging from 4% to 18% in
the wholesale banking and capital markets segment.
Banks felt the pressure of the global economic
situation. All six banks experienced declines in the
global fixed-income business, especially related to the
US and Europe.
Results by geographic segments
The large Canadian banks ended the 2011 fiscal year
on a very positive note. All banks presented solid
results with the majority of them performing above
analysts’ expectations; some banks experienced
record or close to record income for the year. The
benefit is mainly due to an increase in Canadian retail
banking and growth in loan portfolios. However, 2012
began with a tone of great domestic competition; the
first spark starting with BMO offering a record low
rate on mortgages, which caused quick responses
from the other banks. This is a sign of intense
competition for new customers and to compensate for
tight margins by expanding loan volumes.
The large Canadian banks
ended the 2011 fiscal year
on a very positive note.
While all the Canadian banks have a significant
focus in Canada, for some, their foreign operations
also form an integral part of their business model,
some more significantly than others. The banks
have varying degrees of foreign involvement and
differ markedly in their approach to international
operations. Certain banks actively focus on enhancing
their international presence by way of acquisition,
expanding their existing foreign operations, and
entering emerging markets. Some banks decided to
pull out of certain markets and focus their efforts in
another area. Other banks focused on the domestic
market with limited foreign operations.
However, the recent global economic situation has
many of the banks skeptical about the future. The
banks acknowledge that growth will be challenging
given uncertainty over the resolution of Europe’s debt
issues. However, some have said that the turmoil may
produce new business opportunities as their foreign
competitors are forced to give up market share to the
more financially sound Canadian banks. Nevertheless,
international developments will cause difficulties for
Canadian banks on the international front. Recent
US legislative changes, such as Dodd-Frank, will
ultimately affect all financial institutions operating
in the US; many Canadian banks have subsidiaries
and other significant operations there. The US is not
alone in making changes. The European Commission
is reviewing the Markets in Financial Instruments
Directive (MiFID). Also, Basel III is expected to be
enacted in the near future. The laws are expected
to increase compliance costs, add to legal risks, and
restrict the banks’ ability to earn income the way
they previously had. While the banks had a strong
performance in 2011 and seem relatively shielded
from the circumstances around them, Canadian
banks are not unaffected by the recent reforms.
Perspectives on the Canadian banking industry
37
Scotiabank is Canada’s most international bank,
operating in more than 55 countries worldwide and
currently generates the largest share of net income
outside of Canada, deriving more than 35% of its net
income from foreign sources for 2011. It concentrates
in high-growth emerging markets, positioning itself in
Mexico, the Caribbean, Asia, and Central, Latin and
South America. A number of significant transactions
occurred in 2011 in Asian and South American
markets: announcing the purchases of a 19.99%
interest in China’s Bank of Guangzhou and a 51%
stake in Colombia’s Banco Colpatria as well as the
completion of the acquisition of Dresdner Bank in
Brazil and Nuevo Banco Comercial S.A. in Uruguay.
Due to the recent reforms in Cuba, Canadian banks are
considering what opportunities are available. Among
the first to act is Scotiabank, applying to the Central
Bank of Cuba for a representative office licence in
December 2011. Its medium-term goal is to generate
an equal amount of net income from its Canadian and
foreign operations.
In 2011, RBC pulled back on its US operations and is
currently working to sell its US regional retail banking
arm to PNC Financial Services Group. However,
RBC’s global presence remained strong, focusing on
corporate, institutional and high net worth clients in
its capital markets and wealth management segments.
38 Canadian Banks 2012
RBC strengthened its ties with Asia, launching a new
trading floor in Hong Kong in late 2010 and appointed
a new head of Asia capital markets in mid-2011. The
European and Caribbean arms of RBC, however,
faced challenges. The European fixed-income trading
business is experiencing difficulties due to the
European debt crisis. Its Caribbean banking business
faces pressure due to a slowdown in the tourism
industry and the local economy. Its joint venture with
Dexia, RBC Dexia Investor Services with clients in 15
countries, faces stress due to the stability of its joint
venture partner. Despite all this, RBC’s international
banking arm still managed a CAD$81 million increase
in net income after discontinued operations due to
higher earnings at RBC Dexia. Future developments
for RBC may include Cuba, where RBC is in the early
stages of considering this market.
TD operates a large network of branches in the US
with more than 1,200 “stores”. It has the largest US
retail arm of all the Canadian banks. TD also owns
about 45% of online brokerage TD Ameritrade. Its
recent acquisition of 100% of Chrysler Financial,
renamed TD Auto Finance US, further increased TD’s
operations in the US. The integration of the recently
acquired South Financial Group also occurred in 2011.
The US retail banking sector is a highly competitive
environment. Combined with the changes in
regulations, TD will have to focus on product
evolution where products are in compliance with new
regulations while delivering value to customers. On
the international front, TD Waterhouse International
operates in the UK and Europe.
In 2011, BMO completed the acquisition of Marshall
& Ilsley (M&I) in July. This new acquisition will
contribute mainly to BMO’s US personal and
commercial banking, private client and corporate
service segments. M&I was combined with BMO’s
existing US-based Harris Bank to form BMO Harris
Bank, which more than doubles the US branch
network to 679 branches in 2011 from 312 in 2010.
This acquisition gives BMO a significant market
presence in eight US states, mostly in the Midwest.
CIBC is more focused on domestic operations.
However, in 2011, it completed another transaction in
a series of strategic investment over the last two years,
purchasing a 41% equity interest in American Century
Investments, a US asset management company.
CIBC also opened a new wholesale banking office in
London, England and a new corporate credit products
office in Houston, Texas. CIBC’s international banking
operations are comprised of CIBC FirstCaribbean,
joint venture CIBC Mellon and the Bank of N.T.
Butterfield & Son Ltd. In 2011, CIBC’s international
banking operations performed relatively worse than
the prior year due to low gains on the sale of securities
and a strong Canadian dollar.
NBC’s operations are primarily focused in the
province of Quebec where it earns 70% of its revenue.
NBC is leveraging its distribution network to grow
its presence outside of Quebec into the rest of
Canada, which currently represents 27% of revenue
earned. Internationally, NBC’s activities are limited
in comparison to its other large Canadian bank peers
at only 3%. NBC operates under Natbank in Florida
and owns Putnam Lovell NBF, a US-based investment
bank acquired in 2002. While Scotiabank and RBC are
considering or acting on opportunities in Cuba, NBC
has already been operating in the country for more
than 15 years.
Some have said that the turmoil may produce new
business opportunities as their foreign competitors are
forced to give up market share to the more financially
sound Canadian banks.
Perspectives on the Canadian banking industry
39
Market capitalization
The last two years have seen some variability in the
market capitalization, tangible common equity (TCE)
ratios, and stock prices of Canada’s Big Six.
As of October 31, 2011, RBC continued to register as
Canada’s largest bank with a market capitalization of
$69.9 billion. However, this is a decline of 9.8% from
October 31, 2011 and a 9.7% decline from October 31,
2009, making RBC the only one of the Big Six that has
seen a decrease compared to both the 2010 and 2009
comparatives. TD stood a close second, registering a
market capitalization of $67.9 billion, an increase of
5.1% over the prior year. Scotiabank followed with a
modest 0.4% rise and a market value of $57.2 billion
and BMO with an increase of 10.4% and a market
capitalization of $37.6 billion. CIBC ranked fifth at
$30.1 billion, and although this was a decrease of
2.1% from the prior year, it was a 26.3% rise over
the two-year period. NBC, the smallest of the Big
Six, was valued at $11.4 billion, an increase of 4.1%
from the prior year. The total market capitalization
as of October 31, 2011 for the six banks in Canada
was $274.1 billion, overall holding very steady from
$274.8 billion in the prior year. Subsequent activity
in market capitalization saw TD edge ahead of RBC
on November 9, 2011, showing how close the race is
for the top spot. This was a short lived move; RBC has
since regained and maintained top spot.
40 Canadian Banks 2012
Four of the Big Six banks realized a drop in the value
of their common share price compared to the year-ago
period. The most significant decline of 16.6% was
recognized by RBC to $48.62 from $54.39, followed
by CIBC with a 4% drop to $75.10, Scotiabank with
a 3.9% decrease to $52.53, and BMO with a drop
of 2.2% and ending value of $58.89. Increases were
posted by NBC of 6% to $71.14 and TD of 2.3% to
$75.23. While the price of Scotiabank and BMO
shares fell, the market cap of both banks rose because
both issued stock, offsetting the decline.
TCE ratios ranged from 19.6% for TD at the high end
to 11.7% for BMO at the low end as of October 31,
2011. Overall, ratios stayed relatively consistent with
the prior year, which had a TCE ratio range of 19.0%
for TD to 10.8% for Scotiabank. It’s important to note
that this ratio compares tangible common equity to
risk-weighted assets as opposed to total assets, which
some analysts point out would remove the judgment
required in determining the likelihood of the assets
going bad and result in significantly lower ratios.
Potential earnings are inhibited by the fact that the
industry is currently seeing smaller margins on loans
and with a ceiling on consumer lending in Canada,
the banks are not able to simply increase portfolios to
maintain profits. Furthermore, the continual global
economic uncertainty is projected by some analysts to
have an impact on growth in Canada, which is likely
one of the factors that led two of the banks to lay off
a significant amount of employees during the quarter
the Canadian banks’ assets are in housing portfolios,
resulting in lower reliance on international markets.
Although Canadian banking regulations are more
stringent than most other countries, many of the
banks maintain capital in excess of regulatory
requirements, continuing to show capital strength.
However, investors in Canada are aware that if the
debt crisis deepens in Europe and spreads to the
global economy, the effects could be felt by Canadians.
Should we be impacted through job losses and other
economic hardships, there will be a knock-on impact
on the Canadian banks through defaults on lending
portfolios.
Investors in Canada are aware that if
the debt crisis deepens in Europe and
spreads to the global economy, the
effects could be felt by Canadians.
ending October 31, 2011. RBC had 585 fewer full-time
positions and BMO had 435 fewer full-time positions
as compared to the end of fiscal Q3.
Despite challenges faced by the Canadian banks,
there are reasons to be optimistic. The quarter ending
October 31, 2011 saw record earnings of $6.5 billion
for the big six banks.
When compared to their counterparts in the United
States, the performance of Canada’s Big Six looks
much better than the Big Four (Bank of America,
Citigroup, JPMorgan Chase, and Wells Fargo).
Stock performance declined across the board as of
October 31, 2011 compared to the prior year for the
four largest US banks. The most significant drops
in value were at Bank of America, which declined
40.3% to US$6.83, and Citigroup, which fell 30.6% to
$28.92. The declines were more modest at JPMorgan
Chase, which was down 7.6% to $34.76, and Wells
Fargo, falling just 0.6% to $25.91. Beyond difficulties
in the domestic US markets, the US banking industry
is also impacted by a stronger interrelation to
European markets than that of the Canadian banks.
One figure from JPMorgan Chase estimates that US
banks (in total) have approximately $170 billion in
loans to countries in the eurozone as of October 25,
2011, which is estimated to equate to 12.5% of their
capital.
Looking at past performance, the value of the banks
has been stable. Government funding has not been
required in difficult times and the largest portions of
Perspectives on the Canadian banking industry
41
Snapshot of the Big Six
The global economy is fragile and major changes to
the regulatory environment for financial institutions
create a difficult atmosphere for Canadian banks to
operate in.
Last year was one of turbulence and uncertainty. The
first half of 2011 saw improvement in global capital
markets showing increased investor confidence but
was overshadowed by civil unrest in the Middle East
and a natural disaster in Japan. The latter half of the
year brought additional uncertainty over a weakening
global economy, Standard & Poor’s downgrade of the
United States’ credit rating, and the added stress of the
continual deterioration of European sovereign debt.
The low-interest rate environment throughout the year
increased consumer lending demand but also resulted
in spread compression. The global economy is fragile
and major changes to the regulatory environment for
financial institutions create a difficult atmosphere for
Canadian banks to operate in.
42 Canadian Banks 2012
BMO highlights
BMO had another strong fiscal year ending October
31, 2011. That was despite challenging economic
conditions due to growing concerns about a US
recession, European sovereign debt and economic
difficulties, and a decrease in investors’ risk tolerance.
For the fourth consecutive year, BMO had solid
growth in net interest income and non-interest
revenue, and in 2011 both increased 9.5% and 11.1%,
respectively. Adjusted return on equity was 15.3%
in 2011 (15% in 2010) and the dividend remained
steady at $2.80 per share. The strong results overall
can be attributed to an increase in earnings across all
of BMO’s groups.
The personal and commercial (P&C) banking
operating group is the largest at BMO. The Canadian
P&C business generated higher revenues and net
income in 2011, driven by volume growth in most
products. However, revenue growth was partially
offset by lower deposit spreads due to the low-interest
rate environment in Canada, competitive pricing
pressure on personal mortgages, and lower volumes
on retail cards. Looking ahead, the expectation is that
consumer credit will remain soft throughout 2012
and 2013, and the demand for real estate mortgages
will slow moderately from its strong pace in early
2011. The demand for commercial loans will continue
to grow as businesses upgrade equipment, expand
space, and build inventories.
The US P&C business generated increases in net
income, revenues, and net interest margin. The
increases were driven by improved loan spreads,
higher deposit balances, and securities gains.
However, the most significant event impacting the
US P&C business was its acquisition of Marshall &
Ilsley (M&I) for about US$4 billion. As a result of
this significant acquisition, the US P&C business
more than doubled its branch count to 688, it added
one million more customers and increased its assets
under management and administration to more than
CAD$530 billion. The acquisition of M&I substantially
increased BMO’s US Midwest presence. The US P&C
business expects commercial loan demand to slowly
improve in 2012 as credit availability increases and
demand for consumer products gradually improves.
Consumer spending will continue to be sluggish as
households focus on reducing their debts. Demand for
home equity loans and mortgages will remain weak
due to the soft real estate market.
Bank of Montreal’s net
income for 2011 was
$3.3 billion, up from
$2.8 billion in 2010.
The private client group (PCG) generated growth
in all of its businesses and net income was up $58
million or 13% in 2011 compared to 2010. Revenue
growth was particularly strong in the brokerage and
mutual fund business. Assets under management
and administration grew by $158 billion compared
to 2010, with this increase being primarily attributed
to the acquisition of M&I. Insurance net income was
down $32 million from 2010, which was attributed
to the increase in reinsurance claims from the
Japanese and New Zealand earthquakes as well as
the unfavourable impact of long-term interest rate
movements on policyholder liabilities. The PCG group
expects that the North American wealth management
industry will continue to grow over the long term due
to changing demographics in the retirement, mass
affluent, and high net worth sectors.
Perspectives on the Canadian banking industry
43
Provision for credit losses improved over the past two
years, however, global economic uncertainty remains,
and certain sectors remain challenged. The majority
of BMO’s provisions continue to relate to the US
portfolio. Of particular concern to BMO is the US real
estate sector, as the largest portion of new impaired
loans is derived from the commercial real estate and
commercial mortgage sectors.
In 2011, while BMO was not the most active bank in
the merger and acquisition space, it did complete one
of the largest among the Big Six. Its key corporate
events were:
BMO Capital Markets’ net income increased 13% to
$104 million. Non-interest revenues increased 13%
due to increased equity trading and higher investment
banking fees, particularly from merger and
acquisition activity and debt underwriting. Lending
fees were down due to decreased volume. Net interest
income decreased $186 million or 13% relative to
2010 due to a weaker market environment and lower
corporate banking revenues. Looking ahead, modest
growth, if any, is expected in 2012 as there remains
uncertainty due to lingering economic difficulties.
Growth will depend on the performance of the
commodity and financial markets, economic activity,
and business confidence.
44 Canadian Banks 2012
•
The closing of the acquisition of M&I for nearly
US$4 billion, its largest-ever acquisition
•
The purchase of Hong Kong-based portfolio
manager Lloyd George Management
BMO’s business outlook for 2012 and beyond includes
two significant areas of change to its operations.
Firstly, BMO anticipates increased regulatory
compliance costs due to increasing complexity and
breadth of change from new legislation such as
Dodd-Frank and the Volcker Rule, and secondly BMO
expects a gradual recovery of the global economy
with modest growth in 2012. Similar to its Canadian
peers, the European debt crisis hasn’t had a significant
impact on BMO as direct exposure to PIIGS (Portugal,
Italy, Ireland, Greece, and Spain) countries is modest
at $203 million.
BNS highlights
Scotiabank had a record-breaking year, reporting
net income of $5.3 billion, a $929 million increase
compared to 2010. Led by its international banking
and global wealth management divisions, Scotiabank
increased its return on equity by 0.5 percentage
points to 18.8%. Despite the record profitability, the
appreciation of the Canadian dollar against the US
and Peruvian dollars had adverse affects on the total
profitability in fiscal 2011. Scotiabank increased its
quarterly dividend during its first fiscal quarter in
2011 by 6.1% to $0.52.
The Canadian banking business line, Scotiabank’s
largest segment, had another strong year as net
income increased 5.2% to $1.86 billion in 2011. Net
interest income fell $30 million to $4.89 billion as
interest spreads declined by 16 basis points to 2.33%
in 2011. The decline was offset by higher transactionbased revenue, mainly from Visa credit cards as
well as growth in the retail and small business
banking segments which were offset by a decline
in commercial banking. The overall growth in the
Canadian banking business is consistent with the
other Canadian banks’ results for the fiscal year.
The international banking business rebounded in
2011 as net income jumped 28% to $1.5 billion,
largely driven by strategic acquisitions including the
prior-year acquisition of R-G Premier Bank of Puerto
Rico. Strong retail growth in Peru and Chile as well
as strong commercial growth in Asia helped offset
the appreciation of the Canadian dollar. Scotiabank
continues to benefit from its global diversification
strategy as Canada’s most international bank.
Perspectives on the Canadian banking industry
45
Scotiabank’s net income for
2011 was $5.2 billion, up
from $4.2 billion in 2010.
Global wealth management had a strong year in
2011, aided by the completion of the acquisition of
DundeeWealth. Net income increased by $402 million
to $1.2 billion in 2011. Assets under management
increased to $103 billion from $54 billion with the
completion of the acquisition. Scotiabank continued
to expand its insurance offerings in Canada and
internationally, with expanded life and health
offering products. Total revenue for the insurance
segment grew 12% to $491 million in fiscal 2011.
Scotiabank will continue to look for organic growth
in global wealth management through expansion and
acquisitions, both locally and internationally in 2012.
Scotia Capital continued to be impacted by
challenging market conditions with net income
declining $166 million to $1.2 billion in 2011.
Similar to other financial institutions, Scotia Capital
experienced significant declines in global capital
markets, specifically in the fixed-income business,
which has been impacted more heavily than other
areas of the business. Recovery and growth in 2012
for Scotia Capital will depend upon the market
recovery and its ability to effectively expand its sales
and trading business into the Latin American markets.
Provision for credit losses continued to improve
for Scotiabank, with the total provision declining
16% to $1 billion. The Canadian banking business
experienced the largest drop, with the provision for
credit losses decreasing $115 million to $590 million
based off of lower retail and commercial provisions.
For international banking, lower commercial
provisions in the Caribbean helped drive the overall
provision for credit losses as a percentage of loans and
acceptances to 0.72% in 2011 from 1.0% in 2010. In
2012, Scotiabank expects provision for credit losses to
increase with the overall expansion of the portfolio.
In 2011, Scotiabank continued to be the most active
bank in terms of acquisitions and expansion including
the following key corporate events:
• Completion of the acquisition of DundeeWealth,
making Scotiabank the second-largest mutual fund
provider in Canada
• Expanded presence in China through a 19.99%
purchase in the Bank of Guangzhou, the 29th
largest bank in mainland China
• Completion of a number of South American
acquisitions including a 51% interest in Banco
Colpatria, Colombia’s fifth-largest financing group
and Pronto!, Uruguay’s third-largest consumer
finance company
46 Canadian Banks 2012
Scotiabank updated its exposure to the European
PIIGS in its most recent financial results. Given its
international focus, Scotiabank faces higher direct
exposure at $2.2 billion with nearly half of its
concentration in Italy.
In fiscal 2012, Scotiabank’s business outlook will face
uncertain market conditions, regulatory changes, and
sustained competition for market share both locally
and internationally. According to the management
discussion and analysis included in the annual
report, the following are the strategic priorities for
Scotiabank in 2012:
•
Align Canadian banking and global wealth
management to help drive revenue growth in
mutual funds
•
Growth in international banking through both
organic growth and selective acquisitions
•
Continue to capitalize on the acquisition of
DundeeWealth and the growth of the global
wealth management division
Perspectives on the Canadian banking industry
47
CIBC’s net income for 2011 was $3.1 billion,
up from $2.5 billion in 2010.
CIBC highlights
CIBC generated strong earnings for the year ended
October 31, 2011, with net income of $3.1 billion
compared to $2.5 billion in 2010 and return on equity
(ROE) of 21.3% compared to 19.4% in 2010. CIBC
maintained its quarterly dividend at $0.87 throughout
the first three quarters and increased the dividend
by $0.03 in the fourth quarter for total dividends per
share of $3.51 in 2011 ($3.48 in 2010).
CIBC reorganized its structure in 2011 into three
strategic business units (SBUs): retail and business
banking, wealth management, and wholesale
banking. The primary change is that wealth
management and international banking (including
FirstCaribbean) have been reported separately from
CIBC Retail Markets and included in the wealth
management SBU, corporate and other.
The retail and business banking SBU is the largest
with average assets of $255 billion, which represents
approximately 70% of total average assets. Net
income was $2.13 billion, a $282 million increase
from 2010. Revenues were $7.97 billion, which
increased $392 million from 2010 as a result of
volume growth across most lines of business as well as
higher treasury allocations and fees. Personal banking
revenue was $6.47 billion up $203 million from 2010
primarily due to the impact of the 2010 Mastercard
portfolio acquisition from Citigroup and volume
growth. Business banking revenues were $1.4 billion,
up $33 million due to higher commercial banking fees
and volume growth in lending and deposits. In both
personal and business banking, increases in volume
were partially offset by narrower interest spreads,
consistent with its Canadian peers.
48 Canadian Banks 2012
The wealth management SBU generated higher
net income of $279 million in 2011, up $54 million
from 2010 and higher revenues of $1.64 billion, up
$157 million from 2010. The increase was due to
higher fee revenue from the retail brokerage and
asset management divisions. However, the increase
would have been more if not for higher non-interest
expenses. Retail brokerage revenues were $1.1
billion, up $95 million due to wider spreads, higher
fees, and higher commissions on new issuances.
Private wealth management revenues of $98
million were comparable to 2010 ($100 million).
Asset management revenue was $456 million, up
$64 million, primarily due to higher assets under
management. Assets under administration were
$202.9 billion, up $4 billion from 2010. The increase
was primarily related to high net sales of long-term
mutual funds and higher average balances in client
assets. In Q4 of 2011, CIBC completed its acquisition
of a 41% minority interest in American Century
Investments (ACI), an asset management firm. The
results of ACI have been included in the wealth
management SBU.
The wholesale banking SBU generated significantly
higher net income of $565 million in 2011, up $223
million from 2010. The increase can be attributed
to higher revenue from corporate and investment
banking, a lower provision for credit losses, and a
lower effective tax rate. Capital markets revenue of
$1.1 billion was up $60 million, which is due to higher
equity sales and new issuances as well as higher taxexempt revenue. Corporate and investment banking
revenue was $952 million, up $234 million, which is
primarily due to higher merchant banking gains and
higher revenue from corporate credit and advisory.
The increase in net income was partially offset by
higher non-interest expenses. The structured credit
run-off business continues to generate net losses,
however, at a decreasing rate. The net loss for 2011
was $122 million, down from a loss of $161 million
in 2010 and $684 million loss in 2009. The loss for
2011 was primarily due to a decrease in the value of
receivables net of the credit valuation adjustment
(CVA) related to protection purchased from financial
guarantors.
Provision for credit losses have decreased over the
past two years and were $841 million, down $205
million in 2011 compared to 2010. The specific
provision in consumer portfolios of $762 million
decreased $181 million, which is mainly due to
lower write-offs across most products as well as a
favourable impact from the higher amount of credit
card securitizations in 2011. The specific provision for
credit losses in the business and government lending
portfolios was $163 million, down $95 million from
2010 due to an improvement in credit quality in
the Canadian portfolio as well as the US real estate
finance business. The decreases were partially offset
by higher provisions related to CIBC’s FirstCaribbean
subsidiary, which continued to be affected by global
economic stresses that have had a negative impact on
tourism and real estate development in the Caribbean.
The specific provision also increased due to the exited
leveraged finance business in Europe. The change
in the general provision was unfavourable by $71
million from 2010 due to a slow improvement in the
Visa cards portfolio compared to the prior year.
In 2011, there was one key corporate event for CIBC
in terms of expansion:
•
The bank announced and completed its acquisition
of a 41% stake in ACI for US$848 million, which it
purchased from JPMorgan Chase
CIBC’s outlook for 2012 is similar to its peers. The
primary concern is that economic growth will be
slow on both sides of the border, with the potential
risk of a European sovereign debt crisis spill over
into the global economy. CIBC expects the European
sovereign debt crisis to be contained which would
prevent a larger eurozone banking crisis and a deeper
global recession. Similar to its Canadian peers, CIBC
doesn’t have significant exposure to the European
PIIGS, which have experienced credit concerns. The
bank has immaterial exposure net of any collateral
held. Net exposure as at October 31, 2011 was
approximately $40 million compared to $345 million
in 2010.
Perspectives on the Canadian banking industry
49
National Bank of Canada’s net
income for 2011 was $1.2 billion,
up from $1.0 billion in 2010.
NBC highlights
NBC continued its trend of reporting strong results
over the last few years with net income increasing
$179 million to $1.2 billion in fiscal 2011. Personal
and commercial banking (P&C), which represents
nearly half of NBC’s operations, continued to drive
the higher results as personal and mortgage loan
volumes. And values continued to grow, reducing the
effect of narrowing interest spreads where interest
margin narrowed to 2.36% in 2011 from 2.48% in
2010. NBC continued to expand insurance activities
during the year, achieving growth of 6%. NBC
continues to be a market leader in dividend increases.
The quarterly dividend was increased twice in fiscal
2011, first by 6.5% to $0.66 in Q1 and then by 9.1% to
$0.71 in Q3.
NBC’s wealth management segment had its strongest
fiscal year in recent years with net income increasing
$47 million to $159 million, an increase of 42% from
the previous year. A combination of higher interest
50 Canadian Banks 2012
rates, acquisitions and high organic growth through
a higher volume of transactions contributed to the
strong results. As a result, assets under management
have increased 7% to $56 billion. With five
acquisitions completed in the past four years, NBC
continues to look for opportunities for expansion
nationally for its wealth management segment.
The financial markets segment’s net income increased
6% to $492 million with total revenues of $1.4
billion. The increase in net income was largely driven
by banking services revenues including treasury
operations and subsidiary activity. Overall trading
activity revenues were down $49 million to $478
million, which can be mainly attributed to lower
revenues on fixed-income securities. The decrease in
trading activity is relatively consistent with the other
banks. For 2012, the financial markets segment will
concentrate resources in all targeted sectors for midmarket companies as well as continuing to expand in
the structured products market.
In 2011, NBC had the following key corporate events
aligned with its strategic priorities:
• Acquisition of Wellington West Holdings
(Wellington West) for $279 million
• Agreement with HSBC Bank of Canada to acquire
the full service investment advisory business
HSBC Securities (Canada)
Provisions for credit losses have continued to
decline, falling to $134 million in 2011 compared to
$144 million in 2010. That’s despite the continued
economic uncertainty and growth in the personal and
commercial portfolios. The majority of the provisions
relate to the P&C segment where provisions have
decreased on personal and credit card loans and
increased on commercial credit. A one-time $5 million
recovery, compared to $2 million provision in 2010,
in the financial markets segment helped reduce the
overall provisions for credit losses in the fiscal year.
NBC, unlike the other major banks is predominantly
regionally focused in Quebec with limited
international operations. This high-potential
niche focus provides opportunity for the bank to
continue with its strategic focus of its one client,
one bank initiative. NBC expanded that strategy in
Ontario, Western Canada and Atlantic Canada by
pursuing opportunities outside of Quebec. In 2011,
it completed the acquisition of three residential
mortgage portfolios, in which 80% of the clients were
outside of the province of Quebec.
Given its limited operations internationally, NBC is
not affected at the same level as the other banks with
regards to regulatory changes. However, similar to
the other Canadian banks, NBC is exposed to the
European debt crisis. Net exposure is $736 million
with $183 million to the European PIIGS, with the
majority of the direct exposure to Spain.
According to NBC’s 2011 management discussion and
analysis, NBC’s strategic priorities are largely driven
around business or geographic expansion nationally
including:
• Annual net income growth of 5%-10%, achieved
through client service quality
• Generate sustained higher growth in P&C
in Quebec, while expanding geographic
diversification to help with long-term growth
• Fully integrate Wellington West to help expand
Canadian presence in wealth management and
financial markets, specifically in Ontario and
British Columbia where 70% of the business is
based
Perspectives on the Canadian banking industry
51
RBC highlights
RBC had another strong year despite the macro
economic challenges in 2011. Overall net income
from continuing operations grew to $6.7 billion, a
$918 million increase, led by strong business growth
in the wealth management and Canadian banking
and insurance operations as well as lower provisions
for credit losses. RBC announced its first quarterly
dividend increase in nearly four years during the
second quarter, with an increase of 8.0% to $0.54.
The Canadian banking operations, consisting of the
domestic and personal business operations, are the
largest operating group of RBC in terms of revenue.
Led by the personal financial group — which focuses
on individual clients for financing and investor
product services, personal lending, and deposit
accounts — the Canadian banking operations saw
non-interest and net interest revenues grow to
$11.2 billion in 2011 from $10.6 billion in 2010. The
growth is mainly attributed to home equity products,
personal loans and personal deposits as well as higher
overall mutual fund distribution fees.
RBC’s domestic wealth management division
increased revenue by $222 million to $1.7 billion,
largely driven by higher transaction volumes and an
increase in assets under administration. Higher feebased client assets largely in the US helped increase
the international wealth management group’s
revenue by 5% over the prior year. However, this
increase was offset by a stronger Canadian dollar
and spread compression, resulting in a decline of $4
million to $1.95 billion compared to the prior year.
52 Canadian Banks 2012
RBC’s insurance group, although continuing to be
impacted by the overall low interest rate environment,
was able to increase net income to $601 million in
2011 from $491 million in 2010. The growth was
driven both domestically and internationally in all
businesses as well as the result of lower claims in
reinsurance, auto, and disability sectors.
RBC’s international banking group underwent
significant changes during the year with the sale of
the US retail banking business. For the purpose of
the annual report, results of the US banking business
were reported as part of discontinued operations. As
reported, international banking, now comprised of
banking operations in the Caribbean and the RBC
Dexia Investor Services joint venture, saw net income
grow to $173 million from $92 million. This was
largely attributed to improved spreads on client cash
deposits, higher transaction volumes, and higher
assets under administration.
RBC’s capital markets group continued to be impacted
by the challenging market conditions as well as the
unfavourable impact of a stronger Canadian dollar.
Net income decreased for the second consecutive year,
decreasing $72 million to $1.58 billion. The decline
was largely driven by the global markets business
line, which saw revenue decrease $354 million to
$3.45 billion, mainly attributed to lower fixed-income
trading revenue in the US and Europe.
Provisions for credit losses have continued to improve
over the past two years. In 2011, total provisions for
credit losses decreased $265 million to $975 million.
That was largely driven by lower write-offs in the
credit card portfolio as well as lower provisions in
business and personal lending.
In 2011, RBC had the following key corporate events:
•
Completed the acquisition of BlueBay Asset
Management for $1.5 billion
•
Announced the sale of its US regional retail
banking operations to PNC Financial Services
Group for an estimated $3.6 billion
•
Completed the divestiture of Liberty Life
Insurance Company to Athene Holdings Ltd. for
US$628 million
RBC’s 2012 business outlook and beyond, includes
ongoing concerns of European sovereign debt as well
international regulatory changes. RBC had direct
exposure to Europe of $43.2 billion, concentrated
predominantly with France, Germany and the UK.
RBC has an overall exposure to the European PIIGS
of $1.4 billion, with the majority of the exposure
concentrated in Spain and Ireland. RBC continues
to consider and address regulatory developments
including Basel III but will need to be cognizant of
the changing environment with new legislation such
as Dodd-Frank as well as the Foreign Account Tax
Compliance Act (FACTA).
Royal Bank of Canada’s net income
from continuing operations for
2011 was $6.7 billion, up from $5.7
billion in 2010.
Perspectives on the Canadian banking industry
53
TD highlights
TD had another successful year in 2011 generating
adjusted net income of $6.25 billion, up 20% from
2010 and adjusted revenue of $21.4 billion, up 9%
from 2010. Cash dividends declared and paid in 2011
totalled $2.61 per share (2010 -$2.44). At October
31, 2011, the quarterly dividend was $0.68 per share
which is consistent with the bank’s current target
payout range of 35% to 45% of adjusted earnings.
The bank’s operations and activities are organized
into the following business segments: Canadian
personal and commercial banking (Canadian P&C),
US personal and commercial banking (US P&C),
wealth management, and wholesale banking.
The Canadian P&C business generated record net
income of $3.6 billion compared to $3.1 billion in
2010. Revenues increased $439 million to $10.8
billion, which was mainly due to volume growth
and strong insurance revenue. However, margin on
average earning assets decreased 15 basis points
to 2.77% compared to the prior year. The decrease
Toronto-Dominion Bank’s net
income for 2011 was $5.9 billion,
up from $4.6 billion in 2010.
54 Canadian Banks 2012
in margin was primarily attributable to the lowrate environment and competitive pricing. Similar
challenges were experienced by the other Canadian
banks. Provisions for credit losses (PCLs) in 2011
were $820 million, a decrease of $226 million, mainly
due to improved credit portfolio performance and
better collection strategies. Non-interest expenses
for the year increased 2% to $5.05 billion due to
continued investment in the business segment. The
business outlook for 2012 is that the business will
generate moderate earnings due to the impact of
lower margins and slower underlying personal
banking growth, consistent with the other major
banks in Canada.
Wealth management net income for 2011 was $776
million, an increase of $135 million from 2010.
Revenue for the year rose $322 million to $2.8 billion.
Asset management revenue increased primarily due
to growth in average client assets, which drove higher
fee-based revenue. Direct investing revenue rose due
to higher net interest income, higher client deposits,
margin loans, and higher transaction volume. Noninterest expenses increased to $1.99 billion, an
increase of $176 million compared with 2010, which
was primarily driven by higher variable costs in the
advice-based and asset management business. The
business outlook for 2012 remains positive due to
strong business fundamentals. Growth is expected,
however, challenges such as economic uncertainty,
operating in a low interest rate environment, and
sustained pressure on margins will be present
throughout 2012.
Net income in the US P&C business increased $283
million to a record of $1.33 billion (in US dollar terms,
net income increased $337 million from 2010). The
increase was primarily due to higher core fee-based
revenue, increased volume of loans and deposits,
and lower PCLs. The increase was partially offset by
higher expenses and the impact of Regulation E with
respect to overdraft fees. Revenue for the year was
US$5.8 billion, which was 26% higher than the prior
year. The increase was driven by loan and deposit
volume, higher fee-based revenue and the impact of
acquisitions. Furthermore, the margin on average
earning assets increased by 14 basis points. PCLs
for the year increased 9% to US$677 million. The
increase is primarily due to the impact of the acquired
loan portfolios. Excluding the impact of acquisitions,
PCLs for loans decreased by 32 basis points due to
the continuing improvement in credit quality. The
business outlook for 2012 is that revenue growth will
be muted due to the impact of the Durbin amendment,
the competitive banking environment, and the lowinterest rate environment. This outlook is aligned
with other US banks and Canadian banks with USbased subsidiaries.
Wholesale banking experienced a challenging
year in 2011 due to a tough trading environment.
Government issuers struggled with low growth as
well as large debt and deficit burdens. This created
market uncertainty over the resolution of these
issues, which negatively affected investors’ confidence
and further depressed markets. With continued
uncertainty expected in the short term, TD expects
lower levels of activity and further volatility in asset
values. Net income for wholesale banking was $813
million, down $174 million compared to the prior
year. The decrease was primarily attributed to lower
client volumes, particularly in fixed-income trading in
Europe and in the US. Declines were partially offset
by stronger equity underwriting fees and increased
security gains. Revenue for the year was $2.5 billion,
a decrease of $372 million from the prior year. Capital
markets revenue decreased due to lower revenue in
fixed-income and credit trading. Despite the lower net
income and revenue results, the return on invested
capital for the year remained strong at 24.4%.
However, this was lower than the 30.7% generated in
2010.
TD was one of the most active of the Canadian banks
and its two key corporate events in 2011 were:
•
The $7.8 billion purchase of MBNA Canada’s credit
card business
•
The $6.4 billion acquisition of Chrysler Financial
The acquisition of substantially all of MBNA Canada’s
credit card portfolio was completed on December
1, 2011, as well as certain other assets and liabilities.
At closing, the bank paid a premium of $75 million
on the portfolio with the total acquisition costing
approximately $7.8 billion. MBNA Canada was the
largest MasterCard issuer in Canada and the fourthlargest credit card issuer in the country. With the
acquisition of MBNA, the bank has significantly
increased its credit card business and may position
the bank to become the largest credit card issuer
amongst its peers. The results of the MBNA Canada
acquisition will be reflected in TD’s fiscal 2012
financial statements.
The other acquisition was for Chrysler Financial in
Canada and the US. The acquisition closed in April
2011 for total cash consideration of approximately
$6.4 billion. The results of Chrysler Financial for
Canada and the US will be reported separately in the
Canadian and US P&C segment, respectively. As of
October 31, 2011, Chrysler Financial contributed $9.5
billion of loans and other assets and $3.1 billion of
liabilities.
TD has a significant US presence primarily through
its P&C operations, therefore, the developments in
US legislation, specifically the enactment of DoddFrank, will have a significant impact on the bank. It
continues to monitor the development of Dodd-Frank
closely and other legislative developments. The
bank will analyze the impact of such regulatory and
legislative changes on its businesses. Similar to its
Canadian peers, TD has limited exposure to European
countries, specifically the PIIGS. TD’s total exposure
as at October 31, 2011 was $1.04 billion (2010 –
$1.83 billion).
Perspectives on the Canadian banking industry
55
56 Canadian Banks 2012
Outlook
Canada’s own economic fundamentals remain sound, but growth
forecasts have generally been revised downwards to take into account
the impacts of continuing uncertainty in relation to the European
debt crisis and decreased demand in Europe, which is having a global
impact.
There has been some positive data coming out of the
United States, but growth will also be impacted by the
uncertainty surrounding Europe. As a consequence,
most banks’ economists are forecasting gross
domestic product (GDP) growth of around 2% for
Canada and a similar number for the US, although
the Federal Reserve is a little more positive about the
United States’ prospects, predicting GDP growth in
the 2.5% to 2.9% range.
Combine this with a decrease in the forecast for
housing starts and the increases in property values
that have pushed consumer debt-to-disposable
income levels up to a record high for the Canadian
market and the general expectation in the banking
industry is that the rate of retail lending growth will
be lower in 2012 than in 2011, albeit still positive in
the mid-single digit range.
The above industry expectations also correspond
to findings of PwC’s recently completed survey of
consumers with regards to their credit expectations.
The survey results indicate there has been a
slight year-over-year increase in the proportion
of consumers who responded that they wish to
reduce their debt levels in the coming 12 months.
Interestingly though, despite concerns voiced in
the media about consumer debt levels, 78% of
respondents indicated that they still had the capacity
to service more debt, a figure which was unchanged
from last year’s result.
The industry is expecting that commercial lending
will pick up and become the more significant driver
of balance sheet and profit growth. Uncertainty
has definitely impacted confidence and business
investment decisions, but the major banks seem to
agree that they should see an increase in demand for
credit from businesses in the coming year.
The increased demand for credit from businesses
is largely expected to result from an increase in
business investment. Obviously there is some risk
that the level of uncertainty may result in businesses
continuing to postpone investment. Having said that,
with European banks under pressure to shore up their
capital positions, they may have limited appetite to
increase the size of their balance sheets or they may
seek to reduce the size of their balance sheets. This
will present some opportunities to the Canadian
banks, which all remain well capitalized.
Perspectives on the Canadian banking industry
57
In relation to potential opportunities presented by the
pressure on European banks, the general impression
left by comments made at the January 2011 RBC
Capital Markets Canadian Bank CEO conference was
that the Canadian banks are only really interested in
opportunities that arise in the markets in which they
are already operating and familiar with. In terms of
the nature of opportunities, the European banks aren’t
seen as big players in the syndicated loan market so
while there is some benefit to be derived there, it is
limited. In terms of asset portfolios, and in particular
residential mortgage portfolios, the majority of the
Canadian banks appear to have limited appetite for
picking up such portfolios from the European banks.
NBC is the one exception, indicating that it does
like portfolio acquisitions given their relatively low
integration risk.
Deposit balances are expected to continue to grow,
with the rate of growth benefiting from the continuing
volatility in the equity and bond markets and resultant
reluctance to invest in such securities. Obviously if
markets stabilize and confidence returns, there would
be some drag on deposit growth, but it would take
a very brave person to predict a resolution of the
European debt crisis in the near term.
Margins are expected to continue to be compressed
due to continued competitive pressures and the
expectation that interest rates will remain flat.
Increased funding costs remain a reality for the global
banking industry. Having said that, it is definitely
of relatively less concern for the Canadian banks
compared to international peers, with a comparison
by Scotiabank indicating that the Canadian banks
were, in January, paying around 160bps for five-year
notes. That compares to 200bps for JPMorgan Chase,
Wells Fargo and Australia’s Big Four banks; 400bps for
US banks such as Citigroup and Morgan Stanley, and
500bps for European banks such as RBS and Lloyds.
58 Canadian Banks 2012
Margins are expected to continue to be
compressed due to continued competitive
pressures and the expectation that interest
rates will remain flat.
It promises to be another interesting year.
With balance sheet growth expected to be somewhat
more modest and pressure on margins, the banks will
seek to reduce the rate of expense growth – in other
words, they will continue to invest in key priorities.
But lower-priority projects would likely be put on hold
if they haven’t already and banks will likely seek to
cut costs in some targeted areas.
Wholesale funding spreads (basis points)
500
Basis points
400
300
200
100
0
Canadian
“AA-”
rated
US
“A”
rated
Australian
“AA-”
rated
US
“A-”
rated
UK
“A-”
rated
Ratings: S&P ratings
Source: Bank of Nova Scotia and SNL
As mentioned earlier in this publication, there are
different views about what will happen to credit
losses. Some analysts are expecting that there
remains some incremental benefit from releases
of provisions, but there are also senior executives
expressing the view that credit losses have stabilized
and some are cautioning that they may start to
increase. There certainly remains room for arrears
rates to improve, but this is dependent on favourable
economic outcomes. Given the consensus view is that
unemployment is expected to remain relatively flat
around 7.5% and interest rates are forecast to remain
stable, stabilizing arrears trends and credit losses
appear to be the more likely outcome in the absence
of a major financial shock.
Capital markets businesses will continue to find
growth challenging while markets remain nervous
about Europe, which has in the past year particularly
impacted the fixed-income business, and this is
expected to continue. Generally, most of the banks
themselves and analysts are generally expecting
trading and investment banking growth to decline.
The banks’ wealth management businesses will
continue to find the operating environment
challenging, again because of uncertainty and the
knock on impacts associated with the European debt
crisis. The banks generally appear resigned to the
first half of 2012 being more of the same as 2011, but
there is certainly a hint of optimism that the second
half may see more favourable results. RBC and TD,
which both also have sizeable insurance businesses,
both expect these businesses to grow in 2012.
The banks show an interesting diversity in strategy.
The biggest and smallest of the group, RBC and NBC,
are both focused on exceeding market growth in
personal and commercial banking. CIBC, meanwhile,
is trying to shift from a product-centric approach to
a customer-centric approach – a strategy that ought
to have a positive impact on the trend in its margins
compared to peers but will no doubt come at the
expense of some market share.
CIBC continues to maintain its focus on Canada
and RBC has, in the past year, abandoned the US
personal and commercial banking market, while
the US market remains a priority for TD and BMO.
Meanwhile, Scotiabank aims to generate more than
half of its income from Central and Latin America,
the Caribbean and Asia. NBC is focused on growth in
Quebec but also extending its presence through the
rest of Canada.
Wealth management is also a priority for almost all
the banks, although a very competitive Canadian
market means many are looking overseas for
opportunities for growth. Nonetheless, CIBC intends
to increase the proportion of capital allocated to its
primarily Canadian wealth business and NBC is also
aiming to grow its wealth business within Canada as
a whole. On the other hand, RBC, Scotiabank, BMO
and TD all have international wealth businesses,
with BMO poised to further grow its US business
and RBC aiming to grow its already large, globally
diversified business in almost every market in which
it operates. Interestingly, BNS has also indicated that
it aims to increase the proportion of its total income
generated by its wealth business compared to its other
businesses.
In short, it promises to be another interesting year.
Perspectives on the Canadian banking industry
59
Appendix
62
64
66
68
70
72
74
60 Canadian Banks 2012
Shareholder value summary
Regulatory capital
Balance sheet highlights
Income statement highlights
Derivatives
Credit risk summary
Top 25 Canadian Banks
Perspectives on the Canadian banking industry 61
Shareholder value summary
(in millions of Canadian dollars)
BMO
BNS
CIBC
2011
Change
2010
2009
2011
Change
2010
2009
2011
Change
2010
2009
Stock performance
Common share price as at October 31
Book value of outstanding common shares
Trading premium above book value
Market price to book value
58.89
39.53
19.36
1.49
-2.2%
15.9%
-25.9%
60.23
34.11
26.12
1.77
50.06
31.93
18.13
1.57
52.53
26.06
26.47
2.02
-3.9%
14.8%
-17.2%
54.67
22.70
31.97
2.41
45.25
20.57
24.68
2.20
75.10
36.41
38.69
2.06
-4.0%
13.2%
-16.0%
78.23
32.17
46.06
2.43
62.00
28.96
33.04
2.14
Earnings
Net income attributable to common shareholders
Basic earnings per share as reported
Price / earnings ratio
3,122
5.28
11.2
16.8%
10.5%
-11.5%
2,674
4.78
12.6
1,667
3.09
16.2
4,959
4.62
11.4
22.8%
18.2%
-18.7%
4,038
3.91
14.0
3,361
3.32
13.6
2,902
7.32
10.3
-27.1%
-24.3%
-22.8%
2,283
5.89
13.3
1,012
2.65
23.4
14.0%
14.5%
9.9%
19.1%
18.1%
18.8%
21.3%
19.2%
9.1%
Return on assets
Return on risk-weighted assets2
Total market return3
0.7%
1.5%
2.0%
0.6%
1.7%
25.9%
0.4%
1.0%
22.9%
0.0%
2.1%
0.0%
0.8%
1.9%
25.1%
0.7%
1.5%
17.5%
0.8%
2.6%
0.0%
0.6%
2.1%
31.8%
0.3%
0.9%
19.8%
Dividends
Dividend paid
Dividend yield4
Dividend payout ratio5
2.80
4.8%
53%
0.0%
2.3%
-9.5%
2.80
4.6%
59%
2.80
5.6%
91%
2.05
3.9%
44%
4.6%
8.9%
-11.5%
1.96
3.6%
50%
1.96
4.3%
59%
3.51
4.7%
48%
0.9%
5.1%
-18.8%
3.48
4.4%
59.1%
3.48
5.6%
131.3%
Shares outstanding at end of year (millions)
639
12.9%
566
552
1,089
4.5%
1,042
1,024
401
2.0%
393
384
Market capitalization at October 31 (billions)
37.6
10.4%
34.1
27.6
57.2
0.4%
57.0
46.3
30.1
-2.1%
30.7
23.8
Total assets per dollar of market capitalization
12.7
12.1
14.1
10.1
9.2
10.7
11.6
11.5
14.1
Returns
Return on basic equity1
62 Canadian Banks 2012
NBC
RBC
TD
2011
Change
2010
2009
2011
Change
2010
2009
2011
Change
2010
71.14
40.97
30.17
1.74
6.0%
9.1%
2.0%
67.13
37.5
29.6
1.80
56.39
33.5
22.9
1.70
48.62
25.65
22.97
1.90
-10.6%
7.1%
-24.5%
54.39
23.96
30.43
2.27
54.80
22.63
32.17
2.42
75.23
48.16
27.07
1.56
2.4%
8.9%
-7.4%
73.45
44.23
29.22
1.66
1,126
6.93
10.3
16.0%
15.7%
-8.4%
971
5.99
11.2
795
4.96
11.4
4,594
3.21
15.1
-7.5%
-8.0%
-2.8%
4,965
3.49
15.6
3,625
2.59
21.2
5,709
6.45
11.7
28.3%
25.7%
-18.5%
4,450
5.13
14.3
2009
61.68
41.09
20.59
1.50
2,953
3.49
17.7
17.7%
16.9%
15.7%
12.9%
15.0%
12.1%
13.9%
12.0%
9.1%
0.7%
2.2%
10.0%
0.7%
1.9%
23.0%
0.6%
1.4%
30.0%
0.6%
1.7%
-7.0%
0.7%
1.9%
2.9%
0.6%
1.5%
21.3%
0.8%
2.6%
6.0%
0.7%
2.2%
23.0%
0.5%
1.6%
12.6%
2.74
3.9%
40.0%
10.5%
4.3%
-4.5%
2.48
3.7%
41.4%
2.48
4.4%
50.0%
2.08
4.3%
64.8%
4.0%
16.3%
13.1%
2.00
3.7%
57.3%
2.00
3.6%
77.2%
2.61
3.5%
40.5%
7.0%
4.4%
-14.9%
2.44
3.3%
47.6%
2.44
4.0%
69.9%
160
-1.5%
163
161
1,438
0.9%
1,425
1,418
902
2.6%
880
860
11.4
4.3%
10.9
9.1
69.9
-9.8%
77.5
77.7
67.9
5.1%
64.6
53.0
13.3
14.6
10.8
9.4
8.4
10.1
9.6
10.5
13.7
Notes
1. Return on equity has been
calculated as net income attributable
to common shareholders divided
by average common shareholders’
capital
2. Return on risk weighted assets
has been calculated as net income
attributable to common shareholders
divided by risk weighted
assets.
3. 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.
4. Dividend yield has been calculated
as dividends paid divided by the
common share price at the fiscal
year end.
5. Dividend payout ratio has been
calculated as dividends paid divided
by earnings per share.
Perspectives on the Canadian banking industry
63
Regulatory capital1
(in millions of Canadian dollars)
BMO
2011
Change
BNS
2010
2009
2011
Change
CIBC
2010
2009
2011
Change
2010
2009
9.1%
12,995
(575)
3,156
1,599
168
(1,913)
(579)
14,851
11,489
(495)
3,756
1,599
174
(1,997)
(372)
14,154
5,022
–
–
–
(349)
4,673
Tier 1 capital
Common shareholders' equity
OCI – accumulated foreign currency translation losses
Non-cumulative preferred shares
Innovative Tier 1 capital
Non-controlling interests
Less: Goodwill and excess intangible assets
Adjustments to Tier 1 capital
Total Tier 1 capital
24,455
18,753
17,132
27,932
23,199
20,945
2,861
2,156
38
(3,585)
(854)
25,071
15.7%
2,571
2,542
23
(1,619)
(592)
21,678
2,571
2,907
26
(1,569)
(605)
20,462
4,384
2,900
640
(4,377)
(2,990)
28,489
12.5%
3,975
3,400
579
(3,050)
(2,769)
25,334
3,710
3,400
554
(2,908)
(2,051)
23,650
15,071
(650)
2,756
1,600
164
(1,894)
(839)
16,208
Tier 2 capital
Subordinated debt
Trust subordinated notes
Accumulated unrealized gain from AFS securities
Eligible general allowance for credit losses
Other adjustments to capital 2
Total Tier 2 capital
5,896
800
7
309
(1,091)
5,921
4,236
800
49.6%
3,776
800
10
292
(919)
3,959
296
(935)
4,397
5,723
1,000
152
353
(3,184)
4,044
-5.2%
5,790
1,000
176
574
(3,275)
4,265
5,833
1,000
6
570
(2,471)
4,938
4,975
–
5
108
(1,009)
4,079
-0.9%
4,674
–
4
126
(689)
4,115
Total regulatory capital
30,992
20.9%
25,637
24,859
32,533
9.9%
29,599
28,588
20,287
7.0%
18,966
18,827
Risk weighted capital ratio
Tier 1
Total capital ratio
12.0%
14.9%
13.5%
15.9%
12.2%
14.9%
12.2%
13.9%
11.8%
13.8%
10.7%
12.9%
14.7%
18.4%
13.9%
17.8%
12.1%
16.1%
179,092
4,971
24,609
208,672
29.5%
136,290
5,217
19,658
161,165
143,098
6,578
17,525
167,201
200,800
5,900
27,300
234,000
8.8%
180,500
10,500
24,000
215,000
187,800
11,400
22,400
221,600
90,110
1,646
18,212
109,968
3.1%
86,782
1,625
18,256
106,663
97,190
1,321
18,787
117,298
13.7
-5.5%
14.5
14.1
16.6
-2.4%
17.0
16.6
16.0
-5.9%
17.0
16.3
11.7%
0.7%
11.6%
10.2%
11.9%
10.6%
10.8%
9.5%
13.7%
12.5%
12.2%
9.8%
228.8%
-10.4%
255.4%
232.3%
245.8%
0.4%
245.0%
224.1%
318.3%
-3.6%
330.0%
286.4%
0.63%
0.80%
0.78%
0.58%
0.66%
0.65%
0.93%
1.08%
1.04%
1,318
1,297
1,306
1,352
1,410
1,450
1,018
1,153
1,225
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
64 Canadian Banks 2012
NBC3
2011
RBC
Change
2010
2009
2011
2010
2009
2011
-1.7%
5,934
(133)
1,089
975
25
(744)
(176)
6,970
5,282
(100)
1,089
971
19
(781)
(215)
6,265
38,471
36,229
33,790
4,810
2,582
30
(7,703)
(2,477)
35,713
5.1%
4,810
3,327
351
(8,064)
(2,681)
33,972
4,811
3,991
353
(8,368)
(2,803)
31,774
42,921
(3,199)
3,395
3,705
–
(14,376)
(3,943)
28,503
–
48
(286)
1,645
-4.7%
1,894
–
13
79
(259)
1,727
1,897
–
–
456
(219)
2,134
7,669
1,027
–
430
(3,818)
5,308
45.3%
6,641
1,023
–
517
(4,528)
3,653
6,461
1,017
–
575
(4,946)
3,107
11,253
–
35
940
(5,753)
6,475
8,499
-2.3%
8,697
8,399
41,021
9.0%
37,625
34,881
34,978
13.6%
16.9%
14.0%
17.5%
10.7%
14.3%
13.3%
15.3%
13.0%
14.4%
13.0%
14.2%
40,277
2,478
7,665
50,420
1.2%
39,811
3,226
6,794
49,831
48,589
3,894
6,124
58,607
206,151
21,346
40,283
267,780
2.8%
197,195
24,828
38,433
260,456
17.1
7.5%
15.9
15.4
16.1
-2.4%
12.8%
7.1%
11.9%
9.0%
14.4%
310.0%
6.3%
291.6%
225.5%
280.7%
0.63%
0.86%
0.78%
318
429
456
6,432
(130)
762
975
28
(1,001)
(212)
6,854
1,883
Change
TD
Change
2010
2009
16.9%
37,903
(2,901)
3,944
3,844
–
(14,460)
(3,944)
24,386
34,310
(1,539)
3,945
4,588
31
(15,015)
(4,913)
21,407
11,812
11,948
-3.1%
66
915
(6,109)
6,684
42
877
(5,936)
6,931
12.6%
31,070
28,338
13.0%
16.0%
12.2%
15.5%
11.3%
14.9%
185,051
23,321
36,465
244,837
183,405
5,083
30,291
218,779
9.4%
167,297
4,474
28,139
199,910
160,465
3,735
25,385
189,585
16.5
16.3
17.2
-1.7%
17.5
17.1
3.3%
13.9%
13.8%
19.6%
3.5%
19.0%
18.1%
0.7%
278.8%
267.5%
313.7%
1.2%
309.9%
293.9%
0.49%
0.51%
0.83%
0.75%
0.82%
0.95%
1,312
1,317
2,023
1,643
1,632
1,810
Notes
1. Regulatory capital and risk weighted
assets are calculated under Basel II
guidelines.
2. Includes requirements for insurance
entities, non-consolidated
subsidiaries, substantial
investments, securitization-related
deduction, expected loss in excess
of allowance, and other deductions.
3. For NBC, off-balance sheet assets
have been included with market risk. Perspectives on the Canadian banking industry
65
Balance sheet highlights
(in millions of Canadian dollars)
BMO
BNS
CIBC
2011
Change
2010
2009
2011
Change
2010
2009
2011
Change
2010
2009
23,594
14.8%
20,554
13,295
54,471
18.3%
46,027
43,278
6,297
-47.8%
12,052
7,007
58,684
71,579
1,083
154,940
16.1%
-0.2%
-5.5%
7.6%
50,543
71,710
1,146
143,953
50,257
59,071
1,485
124,108
52,055
63,327
4,491
174,344
10.2%
-2.1%
-3.4%
7.2%
47,228
64,684
4,651
162,590
55,699
58,067
3,528
160,572
29,212
32,797
20,064
88,370
9.7%
14.8%
-10.5%
-1.4%
26,621
28,557
22,430
89,660
40,160
15,110
22,306
84,583
37,970
35.1%
28,102
36,006
34,582
23.9%
27,920
17,773
27,840
-25.4%
37,342
32,751
Loans
Residential mortgages
Personal and credit card loans
Business and government loans
Allowance for credit losses
Total loans
54,454
61,696
84,953
(1,832)
199,271
11.8%
13.3%
24.3%
-2.4%
17.5%
48,715
54,467
68,338
(1,878)
169,642
45,524
48,398
68,169
(1,902)
160,189
123,082
62,764
115,673
(2,817)
298,702
2.2%
0.3%
11.2%
1.1%
5.1%
120,482
62,548
103,981
(2,787)
284,224
101,604
61,048
106,520
(2,870)
266,302
99,603
45,250
41,812
(1,647)
185,018
6.4%
-2.6%
8.4%
-4.2%
4.6%
93,568
46,462
38,582
(1,720)
176,892
86,152
45,677
37,343
(1,960)
167,212
Customers’ liability under acceptances
Unrealized gains on trading derivatives
Assets from Discontinued Operations
Other assets
Total assets
7,227
55,677
–
22,338
477,423
3.2%
11.9%
–
69.4%
16.0%
7,001
49,759
–
13,183
411,640
7,640
47,898
–
12,617
388,458
8,172
34,623
–
24,833
575,256
7.3%
39.7%
–
27.2%
9.2%
7,616
24,778
–
19,529
526,657
9,583
23,570
–
18,716
496,516
9,361
24,562
–
14,851
350,002
21.8%
11.5%
–
-19.4%
-0.6%
7,684
22,034
–
18,428
352,040
8,397
21,300
–
21,701
335,944
Liabilities
Deposits
Individuals
Business and government
Banks
Total deposits
122,287
159,746
20,899
302,932
23.5%
22.2%
7.5%
21.5%
99,043
130,773
19,435
249,251
99,445
113,738
22,973
236,156
133,025
242,006
21,345
396,376
3.2%
14.9%
-3.5%
9.6%
128,850
210,687
22,113
361,650
123,762
203,594
23,063
350,419
116,592
134,636
4,181
255,409
2.9%
5.4%
-25.6%
3.5%
113,294
127,759
5,618
246,671
108,324
107,209
7,584
223,117
7,227
21,099
39,163
51,400
3.2%
28.4%
-16.9%
7.2%
7,001
16,438
47,110
47,970
7,640
12,064
46,312
44,139
8,172
15,450
46,062
38,156
7.3%
-28.2%
14.3%
34.9%
7,616
21,519
40,286
28,293
9,583
14,688
36,568
24,342
9,396
10,316
14,306
25,904
22.3%
6.6%
-49.3%
13.6%
7,684
9,673
28,220
22,809
8,397
5,916
37,453
23,175
21,731
24.8%
17,414
16,564
32,357
-2.6%
33,223
29,700
12,193
-25.7%
16,420
17,854
5,348
–
400
449,300
41.6%
–
-50.0%
15.3%
3,776
–
800
389,760
4,236
–
1,150
368,261
5,923
–
–
542,496
-0.3%
–
-100.0%
8.7%
5,939
–
500
499,026
5,944
–
500
471,744
5,138
–
–
332,662
7.6%
–
–
-1.1%
4,773
–
–
336,250
5,157
600
–
321,669
2,861
11,190
113
14,275
(316)
28,123
11.3%
61.5%
22.8%
11.1%
-43.4%
28.5%
2,571
6,927
92
12,848
(558)
21,880
2,571
6,198
79
11,748
(399)
20,197
4,384
8,432
10.3%
46.0%
3,975
5,775
3,710
4,946
24,662
(4,718)
32,760
12.4%
16.5%
18.6%
21,932
(4,051)
27,631
19,916
(3,800)
24,772
2,756
7,376
90
7,605
(487)
17,340
-12.7%
8.4%
-6.3%
24.8%
34.9%
9.8%
3,156
6,804
96
6,095
(361)
15,790
3,156
6,241
92
5,156
(370)
14,275
477,423
16.0%
411,640
388,458
575,256
9.2%
526,657
496,516
350,002
-0.6%
352,040
335,944
Assets
Cash resources (including deposits with banks)
Securities
Available-for-sale (including loan substitutes)
Held-for-trading
Other
Total cash resources and securities
Securities purchased under resale agreements
Other
Acceptances
Securities – short sales
Securities – repos
Unrealized losses on trading derivatives
Liabilities from Discontinued Operations
Other liabilities (including non-controlling interests)
Subordinated debt
Preferred share liability
Trust securities
Total liabilities and debt
Shareholders’ Equity
Preferred share capital
Common share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total equity
Total liabilities and shareholders’ equity
66 Canadian Banks 2012
NBC
RBC
TD
2011
Change
2010
2009
2011
Change
2010
2009
2011
Change
2010
2009
2,858
25.7%
2,274
2,228
25,428
17.2%
21,694
17,276
24,111
11.1%
21,710
21,517
15,884
42,295
–
61,037
44.4%
-2.3%
–
7.9%
10,997
43,271
–
56,542
13,281
36,952
–
52,461
34,284
145,274
–
204,986
-11.2%
0.2%
–
-0.1%
38,594
144,925
–
205,213
46,210
140,062
–
203,548
117,269
68,279
6,990
216,649
14.6%
14.7%
-28.0%
12.1%
102,355
59,542
9,715
193,322
84,841
54,320
9,662
170,340
9,388
-13.7%
10,878
7,637
84,947
16.8%
72,698
41,580
53,599
5.8%
50,658
32,948
17,569
22,906
23,896
(550)
63,821
11.2%
11.5%
11.3%
-13.5%
11.6%
15,806
20,549
21,469
(636)
57,188
14,961
18,313
20,003
(640)
52,637
134,804
91,199
72,239
(1,958)
296,284
6.3%
6.7%
15.0%
-3.9%
8.5%
126,790
85,435
62,819
(2,038)
273,006
122,130
80,243
81,778
(3,188)
280,963
86,769
119,283
93,245
(2,313)
296,984
21.3%
8.7%
2.4%
0.2%
10.0%
71,507
109,750
91,072
(2,309)
270,020
65,665
102,509
87,322
(2,368)
253,128
7,394
7,348
–
7,309
156,297
24.4%
0.5%
–
-1.7%
7.6%
5,946
7,309
–
7,438
145,301
5,733
6,798
–
6,872
132,138
7,689
115,565
27,143
15,088
751,702
4.3%
13.3%
-21.0%
-52.2%
3.5%
7,371
102,021
34,364
31,533
726,206
9,024
86,165
–
33,709
654,989
7,815
49,244
–
62,069
686,360
0.7%
19.0%
–
10.0%
10.8%
7,757
41,368
–
56,420
619,545
9,946
40,654
–
50,203
557,219
35,695
46,589
4,830
87,114
4.6%
11.0%
-15.1%
6.5%
34,112
41,985
5,688
81,785
34,609
36,698
3,863
75,170
166,030
258,494
19,657
444,181
9.7%
8.1%
-18.0%
7.1%
151,347
239,233
23,981
414,561
152,328
220,772
25,204
398,304
268,669
200,779
11,666
481,114
7.8%
19.4%
-6.7%
11.9%
249,251
168,212
12,508
429,971
223,228
162,326
5,480
391,034
7,394
18,181
13,837
7,564
24.4%
-0.6%
10.6%
17.9%
5,946
18,292
12,513
6,418
5,733
13,221
12,736
5,859
0.7%
3.1%
0.8%
20.6%
7,757
23,695
25,426
45,674
9,946
17,641
16,472
41,049
11,106
10,925
7,371
46,597
41,207
104,832
24,454
40,825
7,815
24,434
25,625
55,070
15.9%
4.3%
-5.0%
12.1%
12.4%
-17.9%
-46.0%
9,024
41,359
35,150
79,747
12,871
7,689
44,284
46,188
117,807
20,071
22,026
46,643
33,748
6.7%
31,632
28,529
2,000
–
–
148,961
-1.6%
–
–
7.9%
2,033
–
–
138,093
2,017
–
–
125,661
7,749
–
–
709,995
16.0%
–
-100.0%
3.3%
6,681
–
727
687,255
6,461
–
1,395
618,083
11,670
32
–
639,508
-6.7%
-94.5%
–
10.8%
12,506
582
–
577,243
12,383
550
895
518,499
762
2,016
55
4,361
142
7,336
-30.0%
11.8%
-16.7%
6.9%
-15.5%
1.8%
1,089
1,804
66
4,081
168
7,208
1,089
1,729
48
3,515
96
6,477
4,813
14,025
212
24,282
(1,625)
41,707
0.0%
5.5%
-10.2%
6.9%
-22.6%
7.1%
4,813
13,295
236
22,706
(2,099)
38,951
4,811
12,980
246
20,585
(1,716)
36,906
3,395
18,301
281
24,339
536
46,852
0.0%
10.0%
-7.9%
16.1%
-46.7%
10.8%
3,394
16,639
305
20,959
1,005
42,302
3,395
15,342
336
18,632
1,015
38,720
156,297
7.6%
145,301
132,138
751,702
3.5%
726,206
654,989
686,360
10.8%
619,545
557,219
Perspectives on the Canadian banking industry
67
Income statement highlights
(in millions of Canadian dollars)
BMO
BNS
CIBC
2011
Change
2010
2009
2011
Change
2010
2009
2011
Change
2010
2009
8,348
2,437
130
14.8%
14.2%
75.7%
7,270
2,134
74
7,960
2,427
186
13,479
4,887
346
8.9%
15.6%
18.5%
12,372
4,227
292
14,363
4,090
482
8,073
1,963
63
7.9%
25.7%
21.2%
7,481
1,562
52
7,507
1,705
85
10,915
15.2%
9,478
10,573
18,712
10.8%
16,891
18,935
10,099
11.0%
9,095
9,297
Interest expense
Deposits
Subordinated debt
Other1
2,641
157
1,038
11.8%
31.9%
36.2%
2,362
119
762
4,041
135
827
7,598
315
1,529
12.3%
9.0%
26.1%
6,768
289
1,213
8,339
285
1,983
2,787
215
747
27.1%
14.4%
46.2%
2,192
188
511
2,879
208
816
Total interest expense
3,836
18.3%
3,243
5,003
9,442
14.2%
8,270
10,607
3,749
29.7%
2,891
3,903
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
7,079
857
6,222
13.5%
-18.3%
20.0%
6,235
1,049
5,186
5,570
1,603
3,967
9,270
1,046
8,224
7.5%
-15.6%
11.4%
8,621
1,239
7,382
8,328
1,744
6,584
6,350
841
5,509
2.4%
-19.6%
6.8%
6,204
1,046
5,158
5,394
1,649
3,745
Other income
Capital market fees
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
1,698
145
93
283
495
172
577
633
821
834
571
317
13.7%
-37.8%
0.0%
-11.8%
39.4%
14.7%
0.9%
15.1%
21.1%
4.0%
-13.3%
41.5%
1,493
233
93
321
355
150
572
550
678
802
504
224
1,370
121
53
295
344
(354)
556
467
929
820
723
170
624
469
368
11.2%
10.1%
9.2%
561
426
337
620
424
373
1,013
239
868
1,100
236
922
740
1,439
29.7%
-32.7%
4.5%
89.0%
90.3%
4.4%
-27.2%
45.6%
781
355
831
582
124
883
1,016
988
728
(412)
866
371
409
905
1,057
788
1,010
99
237
320
486
273
381
849
1,063
756
(74)
499
12.2%
-67.4%
-65.3%
15.5%
5.9%
-222.4%
11.7%
13.0%
68.5%
0.0%
112.3%
25.1%
900
304
683
277
459
(223)
341
751
631
756
603
399
950
328
496
258
419
242
304
658
518
773
(531)
119
Total other income
6,639
11.1%
5,975
5,494
8,018
16.5%
6,884
6,129
5,899
-0.3%
5,881
4,534
Non-interest expenses
Employee compensation and benefits
Premises and equipment costs
Other expenses
4,881
1,566
2,158
11.8%
16.6%
14.6%
4,364
1,343
1,883
4,385
1,281
1,715
5,399
1,719
2,446
16.2%
12.6%
21.8%
4,647
1,526
2,009
4,344
1,543
2,032
4,163
1,658
1,529
7.5%
0.4%
1.6%
3,871
1,651
1,505
3,610
1,607
1,443
Total other expenses
8,605
13.4%
7,590
7,381
9,564
16.9%
8,182
7,919
7,350
4.6%
7,027
6,660
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)
4,256
917
73
–
3,266
19.2%
33.5%
-1.4%
–
16.2%
3,571
687
74
–
2,810
2,080
217
76
–
1,787
6,678
1,410
93
–
5,175
9.8%
-19.2%
-7.0%
–
22.1%
6,084
1,745
100
–
4,239
4,794
1,133
114
–
3,547
4,058
969
10
–
3,079
1.1%
-36.8%
-63.0%
–
25.6%
4,012
1,533
27
–
2,452
1,619
424
21
–
1,174
144
5.9%
136
120
216
7.5%
201
186
177
4.7%
169
162
3,122
16.8%
2,674
1,667
4,959
22.8%
4,038
3,361
2,902
27.1%
2,283
1,012
Interest and dividend income
Loans
Securities
Deposits with banks
Total interest income
Less: Preferred dividends
Net income (loss) attributable to common shareholders
68 Canadian Banks 2012
NBC
RBC
TD
2011
Change
2010
2009
2011
Change
2010
2009
2011
Change
2010
2009
2,301
1,059
15
19.6%
9.9%
200.0%
1,924
964
5
2,029
1,155
12
13,711
5,118
91
5.7%
8.5%
54.2%
12,968
4,719
59
13,371
5,739
162
13,941
4,164
354
7.7%
10.2%
-47.0%
12,939
3,780
668
13,691
4,754
442
3,375
16.7%
2,893
3,196
18,920
6.6%
17,746
19,272
18,459
6.2%
17,387
18,887
808
92
524
34.9%
-8.0%
85.8%
599
100
282
820
102
308
5,242
353
2,725
6.6%
-83.8%
787.6%
4,917
2,184
307
6,426
1,790
351
4,289
659
680
-6.3%
-1.2%
13.5%
4,578
667
599
5,818
671
1,072
1,424
45.2%
981
1,230
8,320
12.3%
7,408
8,567
5,628
-3.7%
5,844
7,561
1,951
119
1,832
2.0%
-17.4%
3.6%
1,912
144
1,768
1,966
305
1,661
10,600
975
9,625
2.5%
-21.4%
5.8%
10,338
1,240
9,098
10,705
2,167
8,538
12,831
1,465
11,366
11.2%
-9.8%
14.6%
11,543
1,625
9,918
11,326
2,480
8,846
635
40
105
127
11.6%
-4.8%
-3.7%
5.0%
569
42
109
121
549
37
110
117
85
329
427
338
228
22
305
-24.8%
4.8%
14.2%
17.0%
-0.4%
-128.2%
7.4%
113
314
374
289
229
(78)
284
(97)
259
327
351
230
12
270
2,818
646
683
1,119
1,998
128
707
1,977
797
1,324
800
473
14.4%
24.0%
12.3%
19.2%
12.6%
236.8%
13.8%
25.8%
4.3%
0.2%
-40.0%
93.9%
2,464
521
608
939
1,774
38
621
1,571
764
1,321
1,333
244
2,406
728
635
1,025
1,615
(611)
522
1,400
1,169
1,299
2,380
126
1,468
961
180
1,173
215
393
687
941
450
1,602
43
650
6.5%
17.2%
11.8%
14.1%
13.8%
424.0%
8.4%
9.9%
-8.0%
-3.0%
-91.1%
153.9%
1,379
820
161
1,028
189
75
634
856
489
1,651
484
256
1,303
733
201
913
191
(437)
622
718
468
1,507
685
(370)
2,641
11.6%
2,366
2,165
13,470
10.4%
12,198
12,694
8,763
9.2%
8,022
6,534
1,750
551
621
7.8%
1.3%
-3.4%
1,624
544
643
1,538
582
542
8,958
2,038
3,457
6.3%
7.0%
10.3%
8,430
1,904
3,135
8,480
1,892
3,064
6,723
2,085
4,275
12.8%
-1.5%
4.6%
5,960
2,116
4,087
5,839
2,110
4,262
2,922
3.9%
2,811
2,662
14,453
7.3%
13,469
13,436
13,083
7.6%
12,163
12,211
1,551
284
54
–
1,213
17.2%
28.5%
-20.6%
–
17.3%
1,323
221
68
–
1,034
1,164
252
58
–
854
8,642
1,888
104
(1,798)
4,852
10.4%
-5.4%
5.1%
253.2%
-7.1%
7,827
1,996
99
(509)
5,223
7,796
2,015
100
(1,823)
3,858
7,046
1,299
(142)
–
5,889
22.0%
2.9%
-10.1%
–
26.8%
5,777
1,262
(129)
–
4,644
87
38.1%
63
59
258
0.0%
258
233
180
-7.2%
194
167
1,126
16.0%
971
795
4,594
-7.5%
4,965
3,625
5,709
28.3%
4,450
2,953
Notes
1. Includes interest on preferred share
liabilities, trust securities and other
liabilities. 3,169
241
(192)
–
3,120
Perspectives on the Canadian banking industry
69
Derivatives
(in millions of Canadian dollars)
BMO
BNS
CIBC
2011
Change
2010
2009
2011
Change
2010
2009
2011
Change
2010
2009
2,691
540
30.2%
15.3%
2,067
469
1,968
442
1,788
439
29.4%
23.3%
1,382
356
965
291
928
254
37.9%
16.1%
673
219
638
148
48
76
68
192
31.4%
-10.5%
-37.2%
-16.4%
36
85
108
229
28
107
187
322
33
73
42
147
-6.8%
-8.8%
121.4%
10.2%
35
79
19
133
28
89
10
127
28
26
22
75
11.5%
-30.4%
59.7%
-0.4%
25
37
14
76
23
59
12
94
3,423
23.8%
2,765
2,732
2,373
26.9%
1,870
1,383
1,257
30.0%
967
880
Asset liability management (ALM) derivatives
Interest rate contracts
Foreign exchange contracts
Other
74
15
–
10.5%
9.5%
–
67
14
–
78
–
–
114
52
3
-12.1%
-0.2%
-6.3%
130
52
3
106
48
4
310
26
1
12.1%
63.3%
-56.9%
277
16
2
217
8
3
Total notional amount of ALM derivatives
89
10.4%
81
78
168
-8.7%
184
158
337
14.5%
294
228
3,512
23.4%
2,846
2,810
2,542
23.7%
2,055
1,541
1,594
26.4%
1,261
1,107
97.2%
2.8%
97.2%
2.8%
93.4%
6.6%
91.0%
9.0%
89.7%
10.3%
78.9%
21.1%
76.7%
23.3%
79.4%
20.6%
Notional amounts (in $ billions)
Trading derivatives
Interest rate contracts
Foreign exchange contracts
Other contracts
Equity contracts
Credit contracts
Other contracts
Total other contracts
Total notional amount of trading derivatives
Total outstanding notional balances
As a percentage of total notional balances
Trading derivatives
ALM derivatives
70 Canadian Banks 2012
97.5%
2.5%
NBC1
2011
398
71
Change
26.2%
14.3%
RBC2
2010
316
62
2009
2011
Change
TD
2010
2009
2011
Change
2010
2009
279
57
5,605
1,416
15.7%
5.5%
4,844
1,342
3,358
1,003
1,924
848
37.5%
7.1%
1,399
792
1,327
688
-48.0%
35.0%
12.0%
88
230
318
127
205
332
48
7
26
80
1.7%
-19.5%
105.6%
18.3%
47
8
13
68
47
64
12
122
6,504
4,692
2,852
26.3%
2,259
2,137
43
-28.2%
60
53
46
310
356
513
17.1%
438
389
7,377
13.4%
30
0
–
37.6%
219.1%
-100.0%
21
0.1
0
172
67
3
-16.8%
-36.4%
-13.4%
207
106
3
208
96
3
387
55
29
4.8%
-12.2%
20.1%
369
62
24
314
63
25
30
38.5%
22
14
242
-23.3%
316
308
470
3.2%
456
401
543
18.1%
460
403
7,619
11.7%
6,820
5,000
3,323
22.4%
2,714
2,539
95.3%
4.7%
96.4%
3.6%
96.8%
3.2%
95.4%
4.6%
93.8%
6.2%
85.8%
14.2%
83.2%
16.8%
84.2%
15.8%
94.5%
5.5%
13
1
0
Notes
1. NBC does not indicate the split
between equity, credit and other
contracts.
2. RBC does not indicate the split
between equity and other contracts.
Perspectives on the Canadian banking industry
71
Credit risk summary
(in millions of Canadian dollars)
BMO3
BNS1,2
CIBC2
2011
Change
2010
2009
2011
Change
2010
2009
2011
Change
2010
2009
Balance sheet credit risk
Consumer loans
Residential mortgages
Personal loans
Credit cards1
54,454
59,445
2,251
11.8%
16.2%
-32.0%
48,715
51,159
3,308
45,524
45,824
2,574
123,082
62,764
2.2%
0.3%
120,482
62,548
101,604
61,048
99,603
34,842
10,408
6.4%
1.5%
-14.2%
93,568
34,335
12,127
86,152
33,869
11,808
Corporate loans
Business and government loans
Customers’ liability under acceptances
Securities purchased under resale agreement
84,953
7,227
37,970
24.3%
3.2%
35.1%
68,338
7,001
28,102
68,169
7,640
36,006
115,673
8,172
34,582
11.2%
7.3%
23.9%
103,981
7,616
27,920
106,520
9,583
17,773
41,812
9,361
27,840
8.4%
21.8%
-25.4%
38,582
7,684
37,342
37,343
8,397
32,751
246,300
19.2%
206,623
205,737
344,273
6.7%
322,547
296,528
223,866
0.1%
223,638
210,320
Allowance for credit losses
Specific provision
General provision
514
1,318
-11.5%
1.6%
581
1,297
596
1,306
1,473
1,352
6.3%
-4.1%
1,386
1,410
1,425
1,450
629
1,018
-0.3%
-11.7%
631
1,153
735
1,225
Total allowance for losses
1,832
-2.4%
1,878
1,902
2,825
1.0%
2,796
2,875
1,647
-7.7%
1,784
1,960
Gross impaired loans
Impaired loans net of specific allowance
2,685
2,171
-16.6%
-17.8%
3,221
2,640
3,297
2,701
4,088
2,615
-7.5%
-13.8%
4,421
3,035
3,939
2,514
1,845
1,216
0.5%
0.9%
1,836
1,205
1,911
1,176
0.7%
68.2%
0.9%
58.3%
0.9%
57.7%
0.8%
69.1%
0.9%
63.2%
0.9%
73.0%
0.7%
89.3%
0.8%
97.2%
1.0%
106.9%
Gross impaired loans as a percentage of total loans
1.1%
1.6%
1.6%
1.2%
1.4%
1.2%
0.8%
0.8%
0.9%
Concentration of Credit Risk
On balance sheet
Canada
US
Other countries
2011
% of total
2010
2009
2011
% of total
2010
2009
2011
% of total
2010
2009
138,678
60,082
7,738
67.0%
29.0%
4.0%
133,717
33,680
9,246
123,809
51,276
11,897
255,312
39,972
108,479
63.0%
10.0%
27.0%
234,670
32,987
101,074
210,866
39,790
97,542
279,040
29,242
30,566
82.0%
9.0%
9.0%
262,043
29,283
44,934
242,487
32,225
42,927
25,240
18,564
11,174
46.0%
34.0%
20.0%
23,896
18,220
9,548
43,719
15,172
5,660
182,421
10,667
14,769
88.0%
5.0%
7.0%
102,704
5,629
4,317
86,830
5,183
2,265
25,092
22,067
14,730
41.0%
36.0%
24.0%
22,418
22,109
11,815
25,283
25,378
11,690
12,072
9,807
6,042
43.0%
35.0%
22.0%
9,636
5,720
9,044
9,334
6,281
8,505
Total loans
Credit related ratios
Allowance for loan losses as a percentage of
Total loans
Gross impaired loans
Off balance sheet
Canada
US
Other countries
Derivatives
Canada
US
Other countries
72 Canadian Banks 2012
21,579
12,360
17,392
42.0%
24.0%
34.0%
19,202
12,450
16,265
19,640
11,783
14,594
NBC1,3
2011
Change
RBC2
2010
2009
2011
Change
TD4
2010
2009
2011
Change
2010
2009
Notes
1. BNS and NBC include credit card
balances in personal loans.
17,569
22,906
11.2%
11.5%
15,806
20,549
14,961
18,313
134,804
82,192
9,007
6.3%
8.8%
-9.2%
126,790
75,519
9,916
122,130
71,310
8,933
86,769
110,297
8,986
21.3%
9.3%
1.3%
71,507
100,880
8,870
65,665
94,357
8,152
23,896
7,394
9,388
11.3%
24.4%
-13.7%
21,469
5,946
10,878
20,003
5,733
7,637
72,239
7,689
84,947
15.0%
4.3%
16.8%
62,819
7,371
72,698
81,778
9,024
41,580
93,245
7,815
53,599
2.4%
0.7%
5.8%
91,072
7,757
50,658
87,322
9,946
32,948
81,153
8.7%
74,648
66,647
390,878
10.1%
355,113
334,755
360,711
9.1%
330,744
298,390
232
318
12.1%
-25.9%
207
429
184
456
646
1,312
-10.4%
-0.4%
721
1,317
1,279
2,023
670
1,643
-1.0%
0.7%
677
1,632
558
1,810
550
-13.5%
636
640
1,958
-3.9%
2,038
3,302
2,313
0.2%
2,309
2,368
407
175
10.3%
8.0%
369
162
407
223
2,387
1,741
-52.3%
-59.3%
4,999
4,278
5,457
4,178
2,196
1,526
-36.5%
-45.1%
3,456
2,779
2,311
1,753
0.7%
135.1%
0.9%
172.4%
1.0%
157.2%
0.5%
82.0%
0.6%
40.8%
1.0%
60.5%
0.6%
105.3%
0.7%
66.8%
0.8%
102.5%
0.5%
0.5%
0.6%
0.61%
1.41%
1.63%
0.61%
1.04%
0.8%
2010
2009
2011
% of total
2010
2009
2011
2010
2009
292,706
38,453
59,719
75.0%
10.0%
15.0%
267,945
30,988
56,180
245,193
50,463
39,099
71%
27%
2%
72%
26%
2%
71%
23%
6%
206,219
62,085
25,985
70.0%
21.0%
9.0%
197,405
52,498
29,243
196,506
56,717
43,582
58%
37%
5%
56%
36%
8%
62%
32%
6%
15,480
21,541
79,634
13.0%
18.0%
68.0%
13,608
24,976
66,259
14,668
19,854
55,190
35%
20%
45%
34%
20%
46%
34%
21%
45%
2011
% of total
% of total
2. General allowance includes amount
recorded in other liabilities (BNS: $8
in 2011, $9 in 2010 and $5 in 2009;
CIBC: $48 in 2011, $64 in 2010, and
$82 in 2009; RBC: $91 in 2011, $99
in 2010, and $114 in 2009).
3. BMO does not disclose geographic
allocation for off-balance sheet
credit instruments; NBC does
not disclose geographic split for
concentration of credit risk.
4. For concentration of credit risk, TD
discloses percentages only. For
on-balance sheet risk, only loans
and customers’ liabilities under
acceptances are included.
Perspectives on the Canadian banking industry
73
Assets of banks registered with the Office of the
Superintendent of Financial Institutions of Canada (OSFI)1 By total assets – in millions of Canadian dollars
1
2011
2010
Bank Name
Oct.
31/11
Oct.
31/10
1
1
2
3
Percentage
change
Royal Bank of Canada
751,702
726,206
3.5%
2
The Toronto-Dominion Bank
686,360
619,545
10.8%
3
The Bank of Nova Scotia
575,256
526,657
9.2%
4
4
Bank of Montreal
477,423
411,640
16.0%
5
5
Canadian Imperial Bank of Commerce
353,699
352,040
0.5%
6
6
National Bank of Canada
156,297
145,301
7.6%
7
7
HSBC Bank Canada
80,328
72,699
10.5%
8
8
ING Bank of Canada
38,539
30,843
25.0%
9
9
Laurentian Bank of Canada
24,490
23,800
2.9%
10
10
Manulife Bank of Canada
20,686
16,696
23.9%
11
11
Canadian Western Bank
14,772
12,702
16.3%
12
12
Bank of America, National Association
12,058
11,469
5.1%
13
13
CitiBank Canada
11,597
10,018
15.8%
14
14
Citibank, N.A.
8,672
9,386
-7.6%
15
16
MBNA Canada Bank
8,588
7,394
16.1%
16
15
Dundee Bank of Canada
8,132
7,956
2.2%
17
20
Deutsche Bank AG
7,606
4,920
54.6%
18
17
JPMorgan Chase Bank, National Association
6,141
5,558
10.5%
19
18
Société Générale
5,662
5,345
5.9%
20
21
ICICI Bank Canada
5,153
4,902
5.1%
21
23
State Street Bank and Trust Company
4,949
3,788
30.7%
22
29
Capital One Bank (USA), N.A.
4,732
1,989
137.9%
23
26
Canadian Tire Bank
4,728
3,010
57.1%
24
22
Amex Bank of Canada
4,181
4,744
-11.9%
25
24
Bank of Tokyo-Mitsubishi UFJ (Canada)
3,295
3,121
5.6%
Total of 25 largest OSFI registered banks
3,275,047
3,021,729
8.4%
Total of all OSFI registered banks
3,311,071
3,051,346
8.5%
Ranking of banks per OSFI website, including domestic and foreign banks
74 Canadian Banks 2012
Perspectives on the Canadian banking industry
75
Recent PwC Financial Services publications
To view these publications, please visit our website at www.pwc.com and click on Publications.
Banking Review:
A Canadian perspective
Banking Banana Skins 2012:
The Canadian results
The new digital tipping point
Our quarterly publication of Banking
Review offers a Canadian perspective on the
challenges and opportunities in the banking
and capital markets sector.
Banking Banana Skins 2012, a unique
survey of the risks facing the industry,
which has been produced by the CSFI in
association with PwC. The overall response
of this year’s survey showed that the
Canadian economy and banking system
are seen to be in better shape than in many
other countries, though concern about
contagion from more troubled economies,
particularly the US and Europe, is clouding
the outlook.
Banks are constantly adapting to satisfy the
needs of their stakeholders. In addition, the
number of customers who use the internet
has exploded.
To subscribe to our quarterly publication,
please email [email protected]
Most of the top risks identified by Canada
were in line with those in the global
ranking: macro-economic risk, funding
issues and regulation.
The survey received more than 700
responses from individuals in 58 countries,
including more than 40 from Canada.
76 Canadian Banks 2012
PwC surveyed approximately 3000 banking
customers in nine different markets to
understand customers’ needs, attitudes and
behaviours to digital media.
Our insights from this research can help
banks harness the power of the new
and improved digital market, not just by
saving costs, but by deepening customer
relationships. The new digital tipping
point explores these insights and the
opportunities that exist for banks.
15th Annual Global CEO Survey
Delivering results: Growth and
value in a volatile world
The 15th Annual Global CEO Survey explores
CEO confidence in prospects, and how
they’re building local capabilities and
creating new networks for new markets.
CEOs are adapting how they go to market,
reconfiguring processes, and at times entire
operating models. They’re also addressing
risks that greater integration can amplify
and are focused on making talent more
strategic to pursue market opportunities.
Navigating Through
Regulatory Complexity:
Perspectives on the
Canadian banking
industry
Overall, 2011 was another
successful year for Canadian
banks. However, while Canadian
banks have long established
their ability to manage events
at home, winds of uncertainty
are swirling in the global market
that will likely be felt in Canada.
Governments are introducing
a wide range of regulatory
reforms, impacting Canadian
banking operations in foreign
countries. This publication
provides a perspective on the
key regulatory issues facing the
banking industry.
The Journal:
Too good to fail
Banking in 2050
The Dodd-Frank Wall Street
Reform and Consumer
Protection Act is one of the most
complex pieces of legislation
ever written. Financial service
firms and other impacted
organizations are just beginning
to understand the Act’s many
facets and its full impact.
In this report we present
projections of the long term
growth potential of the banking
sector from now until 2050 in 22
of the world’s leading economies.
Through this series, leaders in
our Regulatory practice will take
A Closer Look at how the Act will
impact several distinct market
segments.
Visit www.pwcregulatory.com
to view the complete series.
This highlights the speed of the
shift in global economic and
financial power to the emerging
E7 economies, which by 2050
could have banking markets
around 50% bigger than the
established G7 economies.
China could overtake the US as
the largest banking market by the
mid-2020s with India and Brazil
also moving rapidly up the world
rankings.
Value through your people:
Workforce performance in
Canadian banking
PwC’s study of workforce
composition and performance
in the Canadian banking sector
included a review of data
submitted for calendar years
2006 to 2010.
Saratoga’s Human Capital
Effectiveness Survey tracks over
150 workforce metrics – covering
a wide range of workforce and
internal corporate function
metrics.
This report covers a select set of
key metrics for Canadian banking
clients.
Anticipating a new age
in wealth management:
Global Private Banking
and Wealth Management
Survey
What are the issues and trends
impacting the world of wealth
management, and what practical
actions should wealth managers
be taking to achieve best
outcomes? Our Global Private
Banking and Wealth Management
surveys keep tabs on the latest
developments to help institutions
meet changing challenges and
demands.
In PwC’s 2011 biennial report,
which surveyed a record
275 institutions from 67
countries, we found that wealth
management continues to be a
lucrative business with untapped
potential for significant growth
if institutions can be agile in
adapting to meet changing
demands.
Perspectives on the Canadian banking industry
77
Financial Services leadership team
PwC Canada
Financial Services
Consulting
John MacKinlay
416 815 5117
[email protected]
Contributors
Jean Enright, Ryan Grey, Andy Lee, Bryan Lee,
Jill Lising, Diego Mesa Puyo, Sasan Parhizgari,
Carmelo Scali, Craig Sebastiano, Andrew Smee,
Jonathan Willis, Ashley Yanke, and Jessica Yu.
Banking and Capital Markets
Tax
Publication Design
Jessica Kim
George Sheen
416 815 5060
[email protected]
Diane Kazarian
416 365 8228
[email protected]
Asset Management
Jillian Welch
416 869 2464
[email protected]
Raj Kothari
416 869 8678
[email protected]
Montréal
Caroline Emond
514 205 5103
[email protected]
Insurance
Calgary
Jonathan Simmons
416 869 2460
[email protected]
Michael Godwin
403 509 7322
[email protected]
Private Equity
Vancouver
Paul Challinor
604 806 7218
[email protected]
Ajay Chadha
416 814 5788
[email protected]
78 Canadian Banks 2012
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copies of this publication, please email:
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This publication can be viewed on our
website at www.pwc.com/ca/canadianbanks.
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
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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.
© 2012 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. 2279-03 0212
Perspectives on the Canadian banking industry
79
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