Canadian banks strong in 2012 and heading towards a ‘new normal’: PwC

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Persistent regulatory reform, limited economic growth and shifting consumer behaviours are shaping banks’ future plans

TORONTO, February 25, 2013— Canadian banks experienced another strong year in 2012-- the Big Six earned a combined $28.6 billion in net income attributable to bank shareholders, translating into an average 17.1% return on equity (ROE). However, according to PwC’s annual Canadian Banks: Perspectives on the Canadian Banking Industry report, Canadian banks must address persistent regulatory reform and uncertainty, shifting consumer behaviours and the subsequent impact on growth -- all in a limited economic growth environment--in order to see these strong results continue.  

“Canadian banks are entering an era of a new normal,” says Diane Kazarian, PwC’s Canadian Financial Services Leader.  “While they continue to demonstrate their strength, the banks face conflicting expectations from shareholders, consumers, regulators and central banks, all of which add additional layers of complexity to the business of banking.”

Banks are adapting to regulatory changes

Ongoing regulatory reform is part of the new normal for Canadian banks, and additional rules are expected to keep coming for the foreseeable future. In addition to changes to regulatory capital requirements, banks are facing increased operational costs to meet these new requirements -- such as overhauling IT systems and adding headcount to new compliance functions—that can impact the bottom line. In order to maintain current profit levels, this new reality is likely to lead to changes internally as well. According to the 16th Annual CEO Survey, 63% of banking and capital markets CEOs plan to implement new cost reduction initiatives and nearly three-quarters (72%) are planning to change their organizational structure.

“The costs of implementing regulatory changes are unavoidable, so banks must seize opportunities to streamline operations and ensure continued productivity and optimization,” says John MacKinlay, PwC’s Financial Services Consulting Leader. “To create efficiencies, for example, we recommend to banks that they bring all regulatory projects together under a single control. This will help maintain consistency in operations and costs, and not least of all, the customer experience.”

‘New normal’ means new business priorities and opportunities for Canadian banks

Interest rates are low, which, in prolonged periods, leads to net interest margin compression and may put ROE at risk. And, while retail lending did see some growth in 2012, this market appears to be reaching its saturation point, in part due to the record high household debt levels faced by Canadians. This cautious outlook for retail lending was also a factor in the recent cut in credit ratings for the banks.

Still, the future does look positive overall for Canadian banks. The change in the retail lending landscape presents the opportunity for the Big Six to offer new services and focus on other profitable areas of business. For example, commercial and small business lending, wealth management , new insurance products and trading and investment banking and are all avenues banks have the potential to capitalize on over the next few years.

Another space in which Canadian banks are well-positioned to make significant inroads is mobile payments. This is a competitive arena-- while payments used to be the banks’ exclusive domain, now other players are looking to capitalize on the opportunity for profit that mobile and digital transactions provide. However, Canadian banks may already have an advantage, as recent PwC research has shown that the majority of Canadians would prefer that their mobile payments be provided by their bank.

“Canadian banks need to make sure they have a seat at the table as the landscape continues to alter,” says Kazarian. “While changes are certainly in store, there are new opportunities as well, and the Big Six are in a strong position to pave the road ahead. Proactively seeking out new growth drivers will help Canada maintain the resilience and strength that has earned us worldwide admiration over the past five years.”

About Canadian Banks 2013: Perspectives on the Canadian Bank Industry

Now in its 30th year, the report provides an analysis of each of the Big Six banks (CIBC, Scotiabank, RBC, BMO, TD and National Bank of Canada) and assesses their performance and strategies for growth. A copy of the report is available here and can also be provided by the media contacts upon request. 

About PwC Canada

PwC Canada helps organizations and individuals create the value they’re looking for. More than 5,700 partners and staff in offices across the country are committed to delivering quality in assurance, tax, consulting and deals services. PwC Canada is a member of the PwC network of firms with more than 180,000 people in 158 countries. Find out more by visiting us at www.pwc.com/ca.

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