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Canadian Banks

Contents

The Canadian Banking System

General Structure and Environment

The Canadian banking system is structured differently the United States. Whereas in the States, banks operate as bank holding companies, Canadian banks follow a parent company approach, which leaves enough shares to influence management. The industry is much more consolidated than in the US. The Big Five in Canada control 90% of Canadian domestic banking assets, whereas, in the United States, the five biggest banks accounted for 9.7% of total American banking assets in 2002.[1] The "Big Five", RBC, Bank of Nova Scotia (BNS), Toronto Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM), and Bank Of Montreal (BMO) dominate the remaining 14 domestic banks in terms of total assets.[2] In fact the the 5th largest bank, Bank Of Montreal (BMO), is about 3 times the size of the 6th largest bank, National Bank of Canada (NA-T).[3] The top five banks all ranked in the top 200 global banks by Forbes.[4] Royal Bank of Canada is the largest with C$724 billion in total assets and TD Bank is second with C$563 billion.[5] In total, Canada has 19 domestic banks.[6]

Canadian Banks and the 2008 Financial Crisis

The Canadian banking system has not been immune to the 2008 Financial Crisis as RBC, Toronto-Dominion Bank (TD), and Canadian Imperial Bank of Commerce (CM) have written down more than C$2 billion[7], but the Bank of Canada and Geneva's based World Economic Forum acknowledge the resilience of the Canadian banking sector. In a December 2008 report, the Bank of Canada published their Financial System Review Report[8], which explains how lower leverage and more conservative lending practices helped Canada's 19 domestic banks[2] weather the financial turmoil. The World Economic Forum published its survey of 12,000 corporate executives in October 2008. The report showed that these head of companies ranked Canadian banks as the soundest in the World; US banks ranked 40th on the list. Canada achieved a score of 6.8. 7.0 indicates a perfect score, which means banks are seen as entirely healthy and in no need of government assistance. 1.0 means the bank is in dire need of government aid due to insolvency. The US scored 4.0.[9] For FY 2008, Canadian banks wrote off C$16.17 billion; total write offs from global financial institutions was estimated at USD$720 billion.[5]

Canadian banks average a tier 1 capital ratio of 9.8%, which compares favorably to US Investment Banks that average 4% and European commercial banks at 3.3%.[7] At the end of FY 2008, Canadian Imperial Bank of Commerce (CM) led the group with 10.5% and Royal Bank Of Canada (RY) was the lowest at 9.0%.[10] Canada requires banks to maintain 7.0%. Further, Canadian banks are less leveraged than international counterparts. Whereas, the average loan-to-deposit ratio is 78% in Canada, peers in US average 83%, and in the UK, the ratio is much higher 96%.[11]

Canada versus the US Financial Health

While Canada is geographically located next to the United States, the difference in levels of trade imbalances, consumer and country indebtness vary greatly. The financial health of a country's citizens impact their ability to pay debt owned by banks.

  • According to RBC Economics Research in June of 2008, Canadian household debt as percentage of disposable income is 137% versus 182% in the US.[12]
  • As reported by Statistics Canada in December 2007, homeowner's equity as a percentage of total real estate assets is 70% in Canada versus 48% in the US.[12]
  • Loan delinquency rates in Canada is 0.29% compared to 2.20% in the US as published by the CBA, Mortgage Bankers' Association in July 2008.[12]

In addition, the US continues to build its trade and fiscal deficits, but Canada has had 10 consecutive quarters of fiscal surpluses, its net foreign indebtness is at the lowest level since 1945, and it has had 9 consecutive quarters of current account surpluses.[12]

References

  1. ↑ Wikipedia.org "Canadian and American economies compared" Accessed 1-Jan-09
  2. ↑ 2.0 2.1 Excise Duty Memoranda Series 2.2.4 "Approved Financial Institutions and Acceptable Bonding Companies"
  3. ↑ Statistics Canada "Canada's Banks" August 2002
  4. ↑ Helium “Why Canada’s Banking System is so stable” Dr. Jones October 2008
  5. ↑ 5.0 5.1 Excise Duty Memoranda Series 2.2.4 "Approved Financial Institutions and Acceptable Bonding Companies"
  6. ↑ Excise Duty Memoranda Series 2.2.4 "Approved Financial Institutions and Acceptable Bonding Companies"
  7. ↑ 7.0 7.1 Time Magazine "Why Canada's Banks Don't Need Help" Erik Heinrich Nov 10, 2008
  8. ↑ Bank of Canada “Financial System Review “Highlights – December 2008”
  9. ↑ Reuter’s “Canada rated world’s soundest bank system: survey” October 2008
  10. ↑ RY Wikinvest Page
  11. ↑ SeekingAlpha "Canadian Banks Show Less Risk - UBS" February 12, 2009
  12. ↑ 12.0 12.1 12.2 12.3 “RBC Company Presentation” “December 2008 Facts” December 2008

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