Banks in Canada:
How Do They Rank?
Helen Mallovy Hicks
In this episode of Strategy Talks, Diane Kazarian, banking and capital markets national leader, and George Sheen, financial services national leader discuss some of the findings of the Canadian Banks 2010 report, and how Canada stacks up globally.
Voiceover: Welcome to Strategy Talks, the business podcast series from PricewaterhouseCoopers Canada. Hosted by Dean Mullett, a corporate finance partner specializing in Capital Markets and M&A, and Helen Mallovy Hicks, a partner the Dispute Analysis and Valuations group, this interview series, featuring new topics and guests every episode, is designed to give you valuable insight into some of today's hottest issues affecting your business.
Helen: PwC’s Canadian Bank 2010 report highlights the results of two key surveys. Our PwC sponsored survey on global risks and a Leger sponsored survey of Canadian consumers on their overall confidence on their banking industry. Joining us today are George Sheen, financial services national leader and Diane Kazarian banking and capital markets national leader, welcome.
George: Thank you.
Helen: Diane, maybe you can start out telling us about the two pieces that we will be talking about today.
Diane: Thanks Helen. The first piece that we’re going to talk about is called Canadian Banks 2010 and what it is an amalgamation of the various results of the six largest banks in Canada and management discussion and analysis, if you will, of those results. Coupled with some interesting other articles with the economic environment, with that piece we actually have Leger Marketing perform a survey on our Canadian consumers to better understand their attitudes toward Canadian banks and towards Canadian banking system. The second piece that we’re going to be speaking about is based upon on a global PricewaterhouseCoopers survey of 450 people across the world in financial executive and risk management roles to discuss the biggest risks facing the banking industry and that is called Banana Skin Survey.
Dean: So Diane, starting with the Canadian Banks 2010, perhaps you can share with our listeners some of the key findings.
Diane: The key findings are actually quite interesting and one of the things that it focuses on is that despite the continued economic volatility in the marketplace, our six largest banks in Canada have earned very strong results and have earned the continued confidence of our Canadians. The results of these banks produced annual profits just over 14 billion dollars, ahead of the 2008 results by approximately 8 billion, but still behind record earnings in 2007.
George: It’s quite amazing to actually look at how much profile the Canadian banks have gotten globally as how well as an industry we’ve done. So we talk a little bit about, as Diane says, how large they are globally but more interestingly is how many more organizations are actually looking at Canadian banks and trying to figure out why did Canadian banks works so much better than everyone else’s.
Helen: Why did they? George?
George: Well, in a nutshell, like Canadians the banking system is conservative. In particular we’re finding from a lending perspective that some of the underwriting procedures and policies that some of the banks used were much more conservative than some of their global providers. As well, certainly sub-prime products in particular never really caught on a Canadian marketplace. Secondly, our banks operated on national level, so what that means that it’s ready access to deposits right across the country and they don’t have the same issues and challenges from a liquidity stand point that some of the global banks did in other countries.
Lastly, interestingly, I think that Canadian banks are markedly well regulated and one regulator across Canada makes it much easier to have more consistent regulatory guidelines and procedures. Secondly, the regulators really focus on capital levels and prudent lending practices and as a result of that I think that banks have taken on a much conservative position. Lastly, to be frank, it’s much easier to regulate an industry that only has five or six players, vis-à-vis the US, who has 9000 different banks.
Diane: The only other thing that I would add to that, George, is that in last year’s 2009 Canadian Banks we have a piece called “Back to Basics,” and that was back to basics in terms of banks needing and wanting to focus on their core customers and their core businesses on cutting costs and really back to the basics of risk management principles and we can see as a result of those labors that’s really paid off in their results this year.
Dean: So would it be safe to say or maybe even characterize that the way Canadian banks operate the conservatism that George had mentioned, is this their moment of shining in the sun? And does the world go back into some type of different business model in the future and I know we will talk about risk etc., later or is this an opportunity to seize it’s place in the top 10 on a more longer term basis?
George: It’s an interesting question; I think there are a couple of angles to it. One is that there are no questions that globally regulators in banks are looking much more closely at the approaches at Canadian banks have taken and our regulators have taken in the past few years. So I think there will be a Canadianism to some extent or a Canadian viewpoint coming through some of our regulator changers that we see globally. I think even more interesting is whether or not Canadian banks will look at the opportunity to invest in other jurisdiction such as US, such as Asia and so forth and that will be interesting one to watch. I’ll talk about a little bit later in this session about the challenges from a regulatory standpoint and an uncertainty that our Canadian banks face in trying to make investment decisions in foreign climate.
Dean: I guess Diane you have talked a little bit about the Leger survey that was done in conjunction with the Canadian banks publication, so what are consumer’s attitudes these days towards our Canadian banks?
Diane: They’re actually very positive and here are some of the results, 80 percent of those surveyed indicate that they do have confidence in their banks here in Canada. About 72 percent of them feel like they’re well run, over 80 percent believe that the strength of the Canadian banks is absolutely critical to the overall health and well being of the economy. We asked a question about their attitudes towards their own credit availability in this environment and 79 percent Canadians had a view that the banks responded well to their credit needs during this period of time. We felt that these survey results were important profile when coupled with looking at the results of the Canadian banks as discussed in our piece. Frankly if you were to look across the border and in other jurisdiction across the world you would not see those kinds of results.
Dean: Does this survey perhaps telling us that we an end to bank bashing in Canada? Consumers have always said that in the press and things of that nature always beat up on the banks service charges etc.
George: It’s actually funny you raise that because part of the reason we decided a couple of years ago to include consumer attitudes in the banking survey, is frankly a bit of a frustration that we had that we didn’t think that Canadian banks got full credit for how strong and how well managed they are. I think the interesting positive through the last twelve to 18 months is not only globally have, you know many banks and other regulators understood how strong the Canadian system is. From the results of both the survey that Diane talked about this year and last year survey, in our minds, pretty clearly Canadian consumers understand how well they have it.
Helen: Sorry, those results came out last year as well? Is it any different in this year survey?
George: Some minor changes in numbers but overall the results were pretty much the same. Both cases the consumer attitudes to how well the banks were run, how well capitalized they were, how important they were to the economy were basically the same.
Dean: Yeah I guess that would have been on the front end of the crisis as it hit some of those survey results last year.
George: Well interestingly in fact our survey last year was taken in December of 2008 which is right at the height of the crisis, so if there was concern expressed at anytime over the last 18 months it would have been in December and we certainly didn’t see any.
Helen: Interesting. George you were talking earlier about playing on the strengths that Canadian banks now have, Diane do you have anything to add to that? About in terms of Canadian banks using their strengths to make acquisitions outside of Canada, are we seeing any of that? And if so, where?
Diane: I think it’s a little bit early. There are a number of Canadian banks that have done quite a bit of expansion in another jurisdiction and then there are others that happened. With that said, in reality the relative strengths of the Canadian banks and the capital access that they have puts them in a very good position as they move forward to be really be able to understand what potential other opportunities will be out there, other acquisition opportunities, potentially in other countries. In doing so though I think that they acknowledge that they need to be very selective. They need to be very selective in their due diligence processes. I think there have been some experiences written about all across the world of mega acquisitions and mergers and things of that nature that haven’t worked out well. So that level of assessment both private risk and market risk standpoint, strategic standpoint, needs to be rather robust and I think we need to really kind of keep posted on that to see what the future brings in the next 12 to 18 months.
Dean: George, earlier I had asked you a little about the banks in Canada’s shining moment in the sun and before this crisis hit in banking there it was better in a lot of respects. As we move forward and listening to Diane’s view and looking at acquisitions and being assertive and diligent, which is obviously very prudent, does that perhaps maybe stop them from being forward if the market gets into “bigger is better,” or maybe it never gets back to “bigger is better.” I just don’t know.
George: Yeah, it’s an interesting trade off in terms of size. In one hand obviously the extent of organizations continue to grow, there are opportunities for economies to scale and make them more efficient, provide a broader range of services to the client. There are lots of advantages to scale. On the other hand obviously one of the fears in the market place is a lot of jurisdiction is that if an organization gets too big, it really does become quote ‘too big to fail’, so certainly in the US in particular there is a lot of concern for the raw size of these organizations. However, I think what we’ll see overtime is rational view that size is important in the marketplace and it’s important that they get the right regulatory valves to get controls for the large organizations.
Helen: George, are there any trends that Canadian bankers should be concerned with?
George: Probably the biggest concern right now in the market place and we’ve seen this in several surveys is around credit risk and that is not unusual at this point in the business cycle. So when you look at for example in the consumer side, in particular debt levels for the Canadian consumers, it continues to rise and they’re much higher than normal. There’s obviously been a lot of press recently on challenges on housing prices and a concern with low mortgage rates that housing pricing have continued to get bit up and a substantial concern some think that this could lead to a fall. I think thirdly we’ve seen unemployment levels level off to some extent. We’ve not seeing them come down, there is a concern there are number factors that could impact the median term, some of the levels on the consumer side. The other thing that has been getting more press recently is commercial real estate; typically lags a little bit the cycle. So there is a concern 6 to twelve months out there may be a breakdown in commercial real estate prices as well that would also have an impact on credit risk. So in a nutshell, I think that credit risk is the biggest concern that they have but as you can imagine they’re actively reviewing and managing it.
Helen: Now how does that differ from Canadian banks versus banks in the US or globally?
George: Well it’s an interesting question and it actually leads us into a discussion of one of the other surveys that we did that Diane mentioned and that’s what we refer to as our banana skinned survey which is a survey that we commissioned to look at what banks, both bankers and bank analyst believe as the key risks in the banking community. What was particularly fascinating this year in the global results is that for the first time ever political interference made the list of top 50 risks and it went right number one. So the number one risk globally by large banks and large bank analyst was that political interference would have a significant impact in how they ran their business. Now you might as why is it a concern? What it potentially does, moving forward it actually adds more uncertainty that more risk to bankers, to banking industry as they try to decide where are they going to invest in terms of geographically, where do they invest is going to impact in terms of where they’re going to put their money and lines of business and what type of products they focus on. So it’s interesting that you know over the last year the political involvement ha reduced the risk in the marketplace now looking forward in fact it’s increased because of this level of uncertainty.
Diane: And with political risk, if I can jump in here and political interference comes then the need for over regulation and potentially and that’s been the knee jerk reaction that’s happened in the marketplace. I would say that in the past few weeks even and that’s been three weeks after the banana skin survey has taken place, the uncertainty around regulation and the regulatory environment has significantly creeped and you can read about it every day in terms of what Canadian banks need to anticipate in the future and all the banks across the world really is being able to manage through and maneuver the various regulatory uncertainties that are coming. We know that there is going to be regulatory change. The question will be is what will be quality and the quantity of that change, how global will it be, how principle based will it be? And it is all part in parcel part of political interference and really what’s happened in the market place.
Helen: But given that Canadian banks have faired so well, weathered the storm and come out five of the top ten, isn’t that risk much lower here? And they likelihood there’s going to be more regulatory change and political interference elsewhere, but not so much in Canada?
George: Well certainly there are results of our survey showed some degree of difference in risk attitude between the Canadian banks and global ones around that issue. For example our top risk for the Canadian respondents was in fact credit risk rather than political interference. Political interference still made the top five as in concerns that Diane talked about were regulation. So there is no question that the banks are less concerned given that there’s the same type of appetite for political change.
Having said that, they are impacted by political changes in the US, they are impacted by political changes in China and India and so forth, as they think about what their global plans for investments are. Similarly our politicians and our regulators will also need to assess how they’re going to respond any changes they’re going to make globally because also they don’t want to have our banks in a situation where it’s a disadvantage.
Dean: So the fewer banks CEO or board of public bank, long terms decisions are pretty difficult to make in this environment with this uncertainty. So is there some type of paralysis that causes in the banks and some of the maneuvers that they want to make strategically? We talk about Canadian banks making an acquisition in the US but the uncertainty for that very reason could make them not do it.
Diane: It absolutely does Dean and in fact there were four of the top five CEO’s that talked about it in a recent article about one of the papers a couple of weeks ago and it does cause paralysis because it doesn’t allow you on really focus on what exactly it is to strategically what it is you want to do given the amount the amount of uncertainty out there. It may be something that interferes with Canadian banks and their ability to really use their strengths to leverage their position, so we need to wait and see.
Helen: So let’s get back to that other survey, the Global Survey – the Banana Skins. George, you mentioned the top risk, what were the other risks that were identified for Canadian banks in that global survey?
George: So certainly as you said, credit was the top one, political interference concerns was an issue with over regulation, but a couple of other ones that were identified, one of them was quite interesting to us was further up the list in Canada and what we saw in the global survey, was concerns that had to deal with the whole compensation issue. That actually was a top 10 risk concern in Canada and interestingly much lower elsewhere. We believe that part of that is that Canadian banks have been a little bit more open and focused on how they get that right balance between on one hand being a fiscally responsible to their shareholders on what they pay their executives and how their executives are rewarded.
On the other hand having to balance the fact that this is a competitive marketplace and if they don’t provide the competitive compensation they’re not going to get the best people. So I’m not surprised it was the top ten concern raised by Canadian banks, I’m actually more surprised it wasn’t the top ten concern raised by other institutions.
Helen: I would have thought it was going to be a bigger concern, certainly in the US it’s getting much more media attention than in Canada but you’re saying it’s a bigger focus in Canada, a higher priority?
George: It was certainly raised as a higher risk in Canada. Partly this may be because some of the other risks that have to be dealt with elsewhere in the world are not priorities for Canada. For example, one of the things that was important in a lot of institutions was capital availability, where is in Canada capital availability ranked number 24 in risk because we’re well capitalized, our access capital is strong or perceive as strong in our institution.
Dean: So Diane, George has talked about some of the risks that were found on this year’s survey, if we look back to our past surveys in 2008 and 2009 what were the differences?
Diane: In past years Dean, a liquidity risk was obviously number one. The last year and we’ve seen the markets come back and that’s moved down. Derivatives, credits spreads, equities, all of these were much higher ranked last year in the survey in 2008 actually and again those have come down in terms of the views of the participants who were surveyed. Much of that we think is due to the fact that there is some more transparency over the derivative market place, there’s a bit of less heat on it, that the equity markets have come back as we know. There are good reasons for that. In years past, risks such back office systems, payment systems, were higher from an operational perspective and there’s been a lot of infrastructure spent on these sort of areas on the past number of years so those risks have come down. To George’s point one of the most interesting ones was the availability capital that was ranked fairly low in Canada compared to the globe where it was ranked rather high and we think that that makes sense well.
Dean: Diane and George thank you for sharing your perspectives here today on the Canadian and Global banking industry. I can speak on behalf of Helen and myself that it’s very insightful. To learn more or to download a copy of our 2010 report, please visit our webpage at pwc.com/ca/canadianbanks.
Voiceover: This concludes this episode of Strategy Talks. Thank you for listening. We hope you’ll join us again, soon for another episode. To download or subscribe to this podcast series, or to find more information on this topic, please visit pwc.com/ca/strategytalks.
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