Have Canadian Banks Played It Too Safe

“Canadian banks have never really been known as powerhouses in terms of size, profits, innovation, or anything else. The one thing we have always been—and probably always will be—is prudent”

By Victoria Chau, Staff Writer

In the midst of the subprime debacle that resulted in the global financial crisis (beginning some three years ago), Canadian banks were hailed as the forerunners of banking systems everywhere. Ranked first in a survey by the World Economic Forum in 2008, Canada was declared to have “the soundest banking system” while the United States and Britain were ranked No. 40 and No. 44 respectively.

However, now that we have established our banking system is sound, Canadian banks should be taking great strides to take advantage of this position and place themselves more competitively on a global scale.

Canadian banks have never really been known as powerhouses in terms of size, profits, innovation, or anything else. The one thing we have always been—and probably always will be—is prudent.

This isn’t necessarily a bad thing, as it’s the reason why Canadian banks did so well during the economic crisis when the larger and more competitive banks the world over failed and looked toward government bailouts. Yet, whenever the global economy does well, Canadian banks are left behind and miss out on the big profit party.

That is not to say that Canadian banks have not proven that the system itself is sound, and that much of this security is rooted in a sense of conservatism. However, the conservatism of the Canadian Banking system was merely a cloak that postponed a crisis, but it would never have entirely averted it. Had the crisis occurred a year or even a few months later, even the system’s conservatism would have succumbed to the same bleak realities that the rest of the world wallowed in.

All that has happened in this past recession does not mean that Canadian banks are the best in the world; it merely means that we were conservative enough not to take the huge risks that our global counterparts did and consequently did not fall in the same holes. Therefore, as it stands, Canadian Banks are in an advantageous position as global financiers look towards Canada as a secure and financially sound place to invest their funds.

Canadian banks are experiencing historically high yields while banks worldwide are insolvent and are relying on their respective governments as a crutch. The solvency of Canadian banks can be attributed to the conservative measures that the Office of the Superintendent of Financial Institutions (OSFI) and the banks themselves have placed on their capital restrictions.

As a result of these measures, Canadian banks have enjoyed capital reserves that on average are two times higher than those in the United States and three times higher than those in the European Union.

These good times for Canadian banks should mean that they’re out there looking for good deals and bargains on smaller and more regional banks worldwide so that they can continue to expand. This should, of course, continue to be done according to the more conservative nature that is the core of the Canadian banking system.

However, we haven’t seen much movement from Canadian banks in terms of acquiring new sources of revenue. Mainly, the banks have been revelling in the stagnant global limelight that had been previously pointed south of the border as the world reveres our prudence.

The profit structure of Canadian banks are much different than their American counterparts. Canadian banks earn a lot more revenue from service charges and fees from their everyday customers, whereas American banks look towards making investments and profiting from those decisions. Consequently, Canadian banks haven’t felt the need to expand or innovate new financial instruments that could be used to earn more revenue.

For example, in March of 2008, following the financial meltdown, the market capitalization of the Canadian banks exceeded many of their US counterparts, such as those of Merrill Lynch and Morgan Stanley. This placed the Canadian banks in the optimal position to continue expansion into the States.

But it did not happen as simply as it seems it could have. In fact, although there have been numerous ‘scouting’ opportunities for Canadian banks since the crisis began in September 2007, many of these opportunities have been turned down or ignored as a result of risk avoidance.

American banks meanwhile, such as JPMorgan Chase, Goldman Sachs and Wells Fargo, all made purchases and expansions within the States. Across the ocean, Barclays (based out of London) purchased Lehman Brothers after it sank, and BBVA of Spain bought what was left of Guaranty Financial.

Canada doesn’t have much to say in response, aside from TD purchasing Commerce Bancorp and CIBC unveiling its plans to purchase Citigroup’s $2.1 billion Canadian MasterCard credit card portfolio last month. Overall, Canadian banks have been quite lethargic in making use of these basement-bargains.

In the end, this is the optimal time for Canadian banks to take advantage of their positions and begin to find ways to become more globally competitive. Whether this means a more extensive expansion into the American and other world markets, committing to the research and development of other not so dangerous financial instruments, or a little bit of both, these choices are up to each individual bank.

One thing that should be agreed upon though, is that Canadian banks should not be relying on their current profit structure any longer, as it has resulted in stagnation while the rest of the financial world has become much more developed.

By Victoria Chau, Staff Writer

In association with:

The ARB Team
Arbitrage Magazine
Business News with BITE

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