Canada’s banks climb in rankings as U.S. giants stumble
Sean B. Pasternak and Doug Alexander, Bloomberg Published: Monday, March 16, 2009
Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia and Bank of Montreal pushed deeper into the ranks of North America’s 10 biggest banks after U.S. counterparts stumbled or disappeared in the past year.
Royal Bank, Canada’s biggest bank by assets, is now seventh-largest in North America after tripling assets in the past decade, according to data compiled by Bloomberg from company filings. At the end of 2007, Toronto-based Royal Bank was the sole Canadian firm among the top 10. Toronto-Dominion, Scotiabank and Bank of Montreal rank eight, ninth and 10th.
Canadian banks have remained profitable, outperforming their peers, because of tighter government restrictions on lending and capital requirements. The country’s six biggest lenders reported less than $20-billion in debt-related writedowns since the credit crisis began in 2007, about 2% of the US$887.1-billion recorded by banks and brokerages worldwide.
“It’s a combination of the deleveraging that you’re seeing at some of the U.S. banks and, frankly, the relative strength of the Canadian banks,” National Bank Financial analyst Robert Sedran said in a March 13 interview. “They’ve been less disrupted on a relative basis than a lot of their U.S. peers.”
While New York-based Citigroup Inc. lost US$17.3-billion in the fourth quarter, San Francisco-based Wells Fargo & Co. had a net loss of US$2.55-billion and Bank of America Corp., the biggest by assets, lost US$1.79-billion, Canada’s six largest banks were profitable in the quarter ended Jan. 31, and each beat analyst estimates.
Canada’s performance has been noticed. U.S. President Barack Obama said in a February interview with Canadian Broadcasting Corp. that Canada has been “a pretty good manager of the financial system and the economy.” In October, the World Economic Forum ranked Canada as the soundest financial system.
“The Canadian system is more or less working,” Scotiabank chief executive Richard Waugh said in a Feb. 25 interview. “Even during this crisis, we have a lot of good assets on our balance sheet that are earning good, sustainable revenue.”
U.S. banks have racked up record losses and received unprecedented financial support from the government in the past year. Shares of Citigroup, once the world’s biggest bank by market value, dropped below $1 in New York Stock Exchange composite trading March 5.
Canadian banks have climbed in rank as U.S. banks collapsed or were bought in the past year. Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection in September and Bear Stearns Cos. agreed to be purchased by JPMorgan Chase & Co. last March. Wachovia Corp., which ranked sixth last year, was acquired by No. 4 Wells Fargo & Co. and Merrill Lynch & Co. was bought by Bank of America Corp., which ranked third at the end of last year.
A decade ago, Canada’s banks failed to make the top 10 list. Royal Bank had the equivalent of US$183.9-billion in assets at the end of 1999, making it the 12th-biggest bank on the continent. Royal’s assets more than tripled to US$577.6-billion by the end of January, in part by adding a U.S. franchise based in Raleigh, N.C.
Toronto-Dominion has spent more than US$15-billion in the past four years expanding in the U.S., including purchases of Portland, Me.-based TD Banknorth and Cherry Hill, N.J.-based Commerce Bancorp Inc. The lender’s U.S. branches exceed its Canadian network. Scotiabank and Bank of Montreal have expanded from their Canadian base in recent years to increase revenue.
Shares of Canada’s banks dropped amid the global financial crisis. The nine-member S&P/TSX Banks Index has dropped 4.2% so far this year, less than the 42% drop among the 24-member KBW Bank Index.
“We’ve beaten expectations to some degree, but I wouldn’t overplay that,” Royal Bank CEO Gordon Nixon told reporters in Vancouver on Feb. 26. “The expectation is the Canadian banks will continue to generate profitability throughout this turmoil and I think that’s a real positive.”
What Will the Bank of Canada Do?
Is the Bank of Canada running out of bullets? JULIAN BELTRAME Globe and Mail Report on Business The Canadian Press
OTTAWA — Just about now, Bank of Canada governor Mark Carney should be experiencing that sinking, helpless feeling about the economy.
It’s not for want of trying to shock the economy back to life.
On Tuesday, the telegenic former Goldman Sachs executive is widely expected to cut short-term interest rates another half-point to bring the central bank’s overnight rate to a barely-noticeable 0.5 per cent. For all practical purposes, zero.
That would make it the seventh time Mr. Carney has eased a notch, sometimes several notches, on interest rates since taking charge of the central bank last February. In that time he has also injected $40-billion in cash into the economy through asset swaps with banks, and last week took the unusual step of agreeing to accept corporate bonds as collateral to try and free up credit.
None of it has worked and the economy continues to decline.
One problem Mr. Carney faces is that in the current global credit crunch, financial market interest rates are volatile so there’s no assurance Canadian banks will pass along the full Bank of Canada rate cuts by reducing their prime lending rate by the same amount.
The prime is the base used by banks to set rates on consumer and corporate loans, lines of credit and some mortgages. While the prime has dropped in most cases by the same amount as the Bank of Canada rate in the last year or so, other interest rates in the market have been rising and loans have been harder to get as the banks avoid riskier lending during a recession.
A recent survey shows a majority of manufacturers say access to credit is still the major obstacle they face.
“There is clear evidence that very low interest rates are not working to expand economic activity,” former Conservative cabinet minister Doug Peters, once also a TD Bank chief economist, wrote in a paper for the Canadian Centre for Policy Alternatives.
“In the current recessionary environment, banks are obviously worried about lending to each other, and of course, are worried about lending to consumers and firms. Interest rates that count, such as inter-bank lending rates, mortgage lending rates, bank commercial lending rates, are all unusually high, especially considering that inflation is also very close to zero.”
Even before Mr. Carney’s Tuesday move, a new report Monday from Statistics Canada is expected to reveal that the Canadian economy, in Finance Minister Jim Flaherty’s blunt words, “fell off the table” in the fourth quarter of 2008.
Private sector economists are predicting a sharp three-to-four per cent contraction in economic activity — severe recessionary territory — but remarkably it could be worse. In fact, Mr. Carney is predicting worse for the first three months of this year with a 4.8-per-cent economic contraction.
In his last public speech in January, Mr. Carney insisted that monetary action taken so far “will work,” noting the lengthy lag time between action and impact, often cited as 12 to 18 months.
Since the bank started cutting 15 months ago, Canada should be just beginning to feel the effects.
Of course, Mr. Carney has invested a lot of credibility in the assertion it will work. He has stuck out his neck by predicting the economy will bounce back like an Indian rubber ball to 3.8 per cent growth next year, a forecast that has a few supporters and many detractors.
Although he doesn’t believe the rebound will be as dramatic, Bank of Montreal economist Douglas Porter says there are good reasons to buy into Mr. Carney’s rosy assessment, which would make the current slump milder than the recessions of the early 1980s and 1990s.
First, interest rates are much lower now than during the previous downturns. Second, aggressive stimulus policy is kicking in. And lastly, corporate balance sheets were in better shape heading into the current recession as compared to the previous two.
These act as shock absorbers for the economy’s hard landing. However, they will be of little use if the world financial system is not fixed.
That’s because until global banks have the confidence and wherewithal to start lending again, the U.S. and global economies will continue to struggle. And that will keep prices for commodities that Canada exports low, sap demand for Canadian manufactured goods, and in turn stifle Canadian job creation and incomes.
And that’s where Mr. Carney’s frustration comes in. He is largely a spectator in a game played outside his borders, able to influence the outcome only at the margins.
Mr. Carney has received some heat for some of his decisions, most notably keeping interest rates unchanged for a full five months from May to October last year in the mistaken belief that financial markets were stabilizing. But given that he’s made up for lost time since then, most economists conceded the period of inaction wasn’t critical.
“There are some quibbles I might have over what the Bank of Canada or Ottawa have done, but those are just specks of sand on the beach compared to what’s hit us from outside this country,” says Mr. Porter.
“There are things policy makers here can do to cushion the blow, but the tools at their disposal are only so big and they can only do so much to offset this deep global downturn.”
In his January speech, Mr. Carney talked about other measures at his disposal besides rate cuts, no doubt foreshadowing last week’s action on corporate bonds. The bank could also follow the Fed example by implementing so-called “quantitative easing” facilities to pump funds into the private sector, or follow Japan’s lead by directly buying corporate bonds, or still more exotic intrusions in the money markets.
But Mr. Holt cautions non-traditional initiatives, even if Mr. Carney judged taking on the added risk necessary, would likely not be game-changing in isolation.
The next big round of central bank action should be left to the Fed and perhaps the Bank of England, he said. This could involve printing mounds of money to buy up government treasury bills in order to free up more cash for the private sector economy.
“You can cut rates to near zero, you can stimulate the domestic economy through fiscal policy, but you still need a rebound in the U.S. and European economies,” he explains.
“The smart position (for Carney) is to cut rates Tuesday and wait and see what global central banks do elsewhere.”