Canadian Banks: Stable, Growing and Profitable

Canada's GDP is expected to decline by about 2.13% in 2009 (total GDP is less than 10% of USA) and unemployment will rise to around 9-10% levels in 2009. Most of this malaise is attributable to the big brother, USA, since more than 80-85% trade is done with USA while Canada also happens to be the No.1 oil exporter to USA. With a cost advantage to most US companies of 10-20% with the lower priced loonie, lots of goods such as cars and medicines are manufactured in Canada which is now taking a beating with the US owned companies going through concerns such as lower sales and lack of bank funding among other things. US economy is certainly going through a very rough phase mostly due to lax regulation, lack of financing, still declining real estate prices, rising unemployment, greed on Wall Street and wasteful spending by the Govt.

However, despite real estate prices declining a bit in Canada and some loan losses hurting Canadian banks, most banks except CIBC have come out unscathed from the global financial crisis.

Infact, RBC and TD bank have both risen to the Top 25 most profitable banks in the world in 2008.

The World’s 25 Most Profitable Banks in 2008

RBC comes out at No. 10 in the world and TD follows with a 24th ranking. Only one bank from USA, Bank of America shows up at 22nd ranking in the top 25 list. This is a stark reminder to what happened with the globalisation of the US banking industry in 2008 and how the new world will shape up in the future. 5 Chinese banks show in the Top 25 while one is from Russia. Two from Spain and France while one each from Brazil, Sweden, Italy, Belgium, Australia, Japan etc comprise the list.

This indicates how much of global ranking the US banks have lost in the past 2 years alone and have been replaced by various other nations despite being the leaders in globalisation over the last few decades and expanding in all kind of countries worldwide but the setback in their home turf led them to mark extensive declines not only in their workforces but in their outreach and their future ambitions including their market capitalisations and hurting their debt/capital ratios. HSBC is getting out of consumer finance in USA while RBS from UK sells assets across Asia, Bank of America's merger with Merrill leads to job losses worldwide and other banks such as Citi, JP Morgan, Morgan Stanley continue with retrenchment worldwide.

A very interesting article in the USA Today outlines how Canada has become a leader in the regulatory regime and has been following prudent banking regulations in managing their banks.

U.S. regulators could learn from Canada's banks

By David J. Lynch, USA TODAY

Our northern neighbor sometimes seems so similar to the United States that it's hard to tell where the USA ends and Canada begins. Here's one way: Canada is the place with healthy banks, taxpayers unscathed by megabillion-dollar bailouts and no need to overhaul financial regulation because it was done right the first time.

As U.S. officials scramble to prevent a crisis sequel, the ability of Canadian banks to navigate the current financial storm is earning global plaudits. The World Economic Forum in October ranked the country's financial institutions No. 1 in the world for solvency. U.S. banks came in 40th, two rungs behind Botswana.

A few months ago, a report from WEF ranked Canada as the No. 1 nation worldwide in terms of the soundness of their banks.

Ireland is having a crisis of their own design just like UK, USA and Iceland, however, one of their newspapers sung praises for the Canadians.

Canadian bank system gets the balance right

The reasons for Canada’s sturdy banking system are many and varied: prudent lending and cautious borrowing; a tight government rein over the country’s property and mortgage market; strict capital requirements to ensure banks set aside plenty of capital for the bad times; intensive and constant regulatory spot-checks; and, of course, a national culture of fiscal conservatism.

Canada, unlike Ireland, does not subsidise mortgages with tax relief. “Canada has no policy incentives that push people to get into homes,” says Terry Campbell of the Canadian Bankers’ Association, though it has roughly the same level of home ownership (67 per cent of households) as the US.

Why Canada has a stronger system

- It has a more robust regulatory regime to supervise its banks.

- The banking regulator conducts regular forensic inspections of the banks and continuously demands information.

- Canadian banks have higher capital reserves and must have a minimum tier-one ratio of 7 per cent. Some 75 per cent of this must be held in ordinary shares or common equity.

- The banks are cautious lenders and Canadians are prudent borrowers.

- Customers are not allowed to take on mortgages of more than 80 per cent of a property’s value unless they buy mortgage default insurance from the government- owned Canada Mortgage and Housing Corporation (CMHC) or two state-sponsored private insurers. The minimum deposit is 5 per cent and maximum term is 35 years.

- An investor must seek government approval to acquire more than 10 per cent of a bank.

- Just 30 per cent of bank loans, all insured against default, are sold to investors in securitisation deals. This motivates the banks to ensure they hold high-quality loans.

- The five biggest banks control between 80 and 85 per cent of the domestic market.

- Canadian finance minister Jim Flaherty says bank mergers are “not a priority”. This has stopped any one bank becoming too large.

- The CMHC monitors housebuilding to ensure it does not rise significantly above 225,000 new units a year, suppressing price fluctuations.

- The biggest bank, Royal Bank of Canada, pays bonuses in its capital markets division based on pretax net income rather than revenue.

World crisis puts bank mergers out of mind

03/07/09
By Pav Jordan

Any talk of mergers in Canada has now been out of sight or out of fashion since it has been proven by the global crisis that big is not necessarily better.