Canada’s Changing Financial Landscape: Part 2, Banking

Canadians generally take pride that their banks have been able to weather the 2008 storm well and continue to exhibit solid performance. Recent financial results point to growing profits, increases in dividends and improvements in reserve requirements. Yet, the industry is aware of serious challenges from the collapse of oil prices as well as the challenges that all banks worldwide face from a low or negative interest rate environment. In this blog we will look at what will influence the performance of the Canadian banks in the near term.

For the benefit of our American readers, we should point out there are significant differences between the Canadian and US banking systems. The industry in Canada is dominated by six large banks ( Big Six) which are national in scope, each having as many as one thousand branches throughout the country and each providing a full range of commercial and personal banking services ( much like the money centre banks in the US) . There are dozens of much smaller banks that operate only regionally or in specific market segments In the US, even after a consolidation ,post-2008, there are about 7000 commercial banks and savings institutions , the majority of which operate independently only in local communities and have no national presence.

Canadian banks feature a high percentage of assets in personal loans, especially mortgages; whereas, the US banks sell their loans through the securitization market. The Canadian banks carry very little risk of loss since higher loan-to-value mortgages must carry mortgage insurance.

Finally, the Canadian financial regulatory environment has remained basically untouched even after the 2008 crisis; the US industry underwent dramatic changes that are still being implemented to this day. With a more stable regulatory environment, the Canadian industry is able to operate with little disruption, compared to what we see happening in the US and in the European market⁽¹⁾.

Lets turn our attention to challenges facing the Canadian industry. To begin, we note the structure of banks assets and revenues. Chart 1 sets out the asset classes and their relative importance.