2012 shaping up to be a demanding year for Canadian banks

Regulatory demands and narrowing domestic growth prospects will challenge bank performance: PwC

TORONTO—While Canadian banks continue to be the envy of their global peers, regulatory demands and a fragile global economy will still make the next year a challenging one, says PwC in its annual review of the banking industry.

The PwC report notes that the big six banks continued to show strong earnings and Tier I capital growth over the past year and indeed since the financial crisis. These capital ratios range from 12% to 14.7% and position the banks well for upcoming regulatory changes. This was achieved in spite of a continued soft global economy and several acquisitions made by the banks, some without diluting shareholders.

“Last year Canadian banks presented solid results, primarily thanks to their strong retail banking businesses and growth in loan portfolios,” says PwC’s Canadian financial services leader Diane Kazarian. “However, 2012 may see slowing growth in consumer credit markets and continued pressure on margins as banks battle for market share.”

Adds John MacKinlay, PwC’s financial services consulting leader: “With limited domestic acquisition and growth opportunities, banks will continue to look for growth prospects. The challenge is that regulatory uncertainty makes it more difficult to form an opinion on the predictability of earnings, capital consumption and hence values. Notwithstanding these challenges, the need for many global banking institutions to recapitalize and release capital consumed by certain businesses means that there will be interesting opportunities in the market.”

“If you can get yourself past the regulatory uncertainty, the challenge then becomes one of agreeing on price and given the market conditions there is often significant differences of opinion between buyer and seller. As this global restructuring will take years to unfold, the Canadian banks have the luxury of being able to sit on the sidelines and be very selective about their targets,” MacKinlay says.

On the regulatory side, not only is uncertainty a key issue but so too is the cost of additional reporting and compliance.  Wholesale changes to the regulatory system are being negotiated in the United States and Europe, impacting not only Canadian banking operations in those countries but also the way that they function at home.

The regulatory changes impact a multitude of aspects at the banks including capital requirements, tax reporting, proprietary trading accounts, and derivative transactions among others.

Bottom line, the top three issues facing the banks are regulatory uncertainty, macroeconomic conditions and pressure to grow, says Kazarian, and when growth becomes challenged cost management becomes the order of the day. However, reigning in costs increases in difficulty when new regulatory requirements add additional layers of operational risk in systems and reporting.

The PwC report provides an in-depth report on each of the big six banks, their performance and strategies for growth. For a copy go to www.pwc.com/ca/canadianbanks or contact David Rowney. The firm has also recently published its 15th Annual Global CEO Survey on the banking and capital markets sector. For a copy of this report go to http://www.pwc.com/gx/en/ceo-survey/industry/banking-capital-markets.jhtml

About PwC Canada

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