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Industry Report - Banking - November 2008
A Company and Industry Analysis November 2008
CONTENTS
Current Environment US Sector Overview Sector Performance Leading Players Mergers and Acquisitions
Current Environment Canada Sector Overview Sector Performance Leading Banks Mergers and Acquisitions
Industry Prole US Industry Size and Value Industry Focus Policy and Regulatory
EnvironmentIndustry Prole Canada Industry Size and Value
Industry Highlights Policy and Regulatory
EnvironmentMarket Trends and Outlook US Electronic Bank Crime on the
Rise Foreclosures and Delinquencies
Still Building Mortgage Applications Slow Market Outlook
Market Trends and Outlook Canada Canada Leads Online Banking
Adoption Rates Ination in Canada Remains
High Market Outlook
Currency Conversion TableThe Scope of This ReportKey ReferencesComparative DataReports Coverage
Current Environment Key Points
The credit turmoil continued to depress the US banking sector over the last six months and left
banks in worsening state.
Over the last six months, worse news about the sector sent worldwide banking stocks downward.
Faced with the most challenging operating environment seen in decades, ongoing concerns about
the health of bank balance sheets hampered M&A activity in the US banking industry. Although there was collateral damage to the Canadian economy from a slowdown in the US,
nancial trauma in the Canadian banking system was more subdued compared to its US and
European counterparts.
Over the six-month period ending September 2008, the S&P/TSX Composite Index tumbled
1,072.13 points to 12,064.57. Canadian banking stocks lost their shine and showed depressed
performances.
Losses from bad loans and slowing revenue from equity markets caused Canadian major banks to
register steep prot declines.
Industry Prole Key Points
As of March 2008, Federal Deposit Insurance Corporation (FDIC) gures put assets held by the
US banking industry at US$13.37 trillion, an increase from US$13.03 trillion in the rst quarter of
2007.
Banks have been forced to boost their capital levels to ensure sufcient funds to repay depositors
and investors and to continue making loans to consumers and businesses.
A new mortgage lending rule aimed at facilitating more responsible lending and protect consumers
from shady lending practices was approved on July 14. The new rule will take effect on October 1,
2009.
Canadian banks manage over C$2.6 trillion (US$2.45 trillion) in assets, accounting for over 70%
of the total assets of the countrys nancial services market.
Canadian banks are touting their commitment to become more customer-centric and more service-
oriented in the hope that this approach will differentiate them from the rest.
Market Trends and Outlook Key Points
Banking crimes in the US, particularly check fraud and identity theft, are growing at a fast rate.
A combination of factors, including tighter lending criteria, a slowing US economy and weak
housing sales, have left more US homeowners facing foreclosure and bankruptcy.
With loan rates hovering near one-year highs exacerbating the housing markets woes, application
volumes for US home mortgages tumbled to their slowest pace in July since December 2000.
Canadians lead most countries in embracing online banking. According to comScore, a global
internet information provider, 67.1% of Canadian did their banking online in April alone.
Ination in Canada is expected to peak at 4.3% early next year, rising beyond the BOCs 1% to 3%
target range.
1
North America
Banking Sectors
Adding Value to Information Since 1900
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Copyright Statement
Copyright 2008 by Mergent, Inc. All Information contained herein is
copyrighted in the name of Mergent, Inc. and none of such information may be
copied or otherwise reproduced, repackaged, further transmitted, transferred,
disseminated, redistributed or resold, or stored for subsequent use for any
such purpose, in whole or in part, in any form or matter or by any means
whatsoever, by any person without prior written consent from Mergent.
http://www.mergent.com
Disclaimer
All information contained herein is obtained by Mergent, from sources believed
by it to be accurate and reliable. Because of the possibility of human and
mechanical error as well as other factors, however, such information is
provided as is without warranty of any kind. NO WARRANTY, EXPRESS
OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS,
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF
ANY INFORMATION IS GIVEN OR MADE BY MERGENT IN ANY FORM OR
MANNER WHATSOEVER. Under no circumstances shall MERGENT have
any liability to any person or entity for (a) any loss or damage in whole or
in part caused by, resulting from, or relating to, any error (negligent or otherwise)
or other circumstance involved in procuring, collecting, compiling, interpreting,
analyzing, editing, transcribing, transmitting, communicating or delivering any
such information, or (b) any direct, indirect, special, consequential or incidental
damages whatsoever, even if Mergent is advised in advance of the possibility
of such damages, resulting from the use of, or inability to use, any such
information.
The North America Industry Reports are
published by Mergent, Inc., headquartered in
Fort Mill, South Carolina, USA. Each
industry sector report is updated every six
months. Mergent, Inc., a leading provider of
global business and financial information on
publicly traded companies, operates sales
offices in key North American cities as well as
London, Tokyo and Sydney.
Publisher
Jonathan Worrall
Director
John Pedernales
Managing Editor
Peter OShea
Research Analyst
Angelina Ho Li Na
Website:
http://webreports.mergent.com
Customer Service:
1800 342 5647 or 704 559 7601
email: [email protected]
Sales Enquiries:
Fred Jenkins - Executive Vice President, Sales704 559 6897
email: [email protected]
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Industry Report - Banking - November 2008
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Current EnvironmentUnited States
Even after a year since the credit crisis erupted, the health
of the US banking system continued to deteriorate and
its banks remained in a miserable state. Headlines went
from bad to bleak and the torrent of troubles caused the
sector to be confronted with an uninspiring six months.
Alan Greenspan, who retired two years ago after serving
18 years as Federal Reserve Chairman, even said that the
current credit turmoil was the most wrenching in at least
50 years and possibly more. The horrifying credit distress
continued to depress the sector where it downed evenresilient banks which used to yield juicy prots but started
to report stunning losses.
The nations economy continued to slow over the last six
months, exacerbated by higher energy prices and the pain
in the housing market that seemed to deteriorate. More
worrisome, the weakening economy made investors,
especially bond traders, harder to invest with condence
because even areas such as auto loans, commercial
mortgages and credit cards that previously looked secure
seemed vulnerable to losses. Concerns about the status of
the nations banks, which were dogged by double fears of
capital shortages and worsening credit, were heightenedwith further loan losses not ruled out. The past six months
saw non-performing assets and net charge-offs continue to
rise, while shares of banks sagged and many banks in the
US reported massive write-downs. Once again, they had to
beef up their loan loss reserves as the economy sputtered
and the housing market softened. Globally, US housing
deterioration sparked about US$500 billion in credit market
losses and markdowns for banks since the start of 2007,
according to the International Monetary Fund (IMF).
Grappling with panic, the meltdown has morphed into a
full-blown crisis and saw growing lists of bank failures. The
enormous breadth and depth of the troubles has squeezedthousands of small lenders, local builders and businesses
that rely on those banks for nancing. Data revealed by
the Federal Deposit Insurance Corp (FDIC), the US federal
agency which guarantees bank deposits, showed that the
number of ailing US banks jumped to 117 during the
second quarter of 2008, the highest level in ve years.
By the end of March, there were only 90 on the list that
exhibited nancial, operational or managerial weaknesses.
A turn of events shocked many and forever changed the US
banking sector when investment bank Lehman Brothers
and Washington Mutual (WaMu) (NYSE: WM), the largest
US savings and loans, collapsed in September under the
weight of their huge bad bets on the mortgage market.
Merrill Lynch (NYSE: MER), on the other hand, was lucky
to be saved after being snapped up by the Bank of America
(BofA) (NYSE: BAC) for a mere US$50 billion.
The 158-year-old Lehman Brothers came to an ugly
end after ling for bankruptcy and after failing to attract
investors to shore up its capital position. The company that
began in the boom in US cotton trade before the Civil War
was weakened by its large exposure to commercial real
estate and wrote down its assets by US$5.6 billion in the
third quarter, initiating a second straight quarterly loss of
US43.9 billion. Lehman faded into history after efforts to
hash out an orderly sale for the company faltered.
With debts of more than US$8 billion and insufcient
liquidity to meet its obligation, Seattle-based WaMu, which
had about US$307 billion of assets and US$188 billion of
deposits, was seized and shut down by the federal Ofce
of Thrift Supervision (OTS) and the FDIC on September26. Hit hard by the nations housing and credit crisis and
already suffering from soaring mortgage losses, the lender
by far was the biggest US bank to fail in history, eclipsing
the US$40 billion failure of Continental Illinois National
Bank, which failed in 1984, and the US$32 billion failure
of IndyMac, which the Government closed down on July
11. A chunk of the thrifts banking assets were later sold to
JPMorgan Chase & Co (NYSE: JPM) for US$1.9 billion,
six months after bailing out Bear Stearns.
The consequent panic on Wall Street prompted investors
and clients to abandon even the most secure investment
banks and made large, independent investment banks anendangered species. It forced Goldman Sachs (NYSE:
GS) and Morgan Stanley (NYSE: MS) to convert to
traditional bank holding companies. By transforming
into bank holding companies, the two of Wall Streets
last remaining investment bank came under the scrutiny
of national banking regulators and will be subject to new
capital requirements. The Fed and Treasury in the US were
keen to treat the situation abruptly and were prepared to
go to great lengths to defend the nations nancial system.
Sector Overview
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Current Environment - United States
On September 20, they swung into action to pacify themarkets and avert an even worse meltdown. The Bush
Administration announced a gargantuan US$700 billion
bailout plan to keep credit owing and to rescue fragile
banks from bad loans that could derail the nation and
global economies.
Sector Performance
After experiencing a great run for many years, US banks
did not seem to be protable in the current situation.
Stubborn woes in the real estate market, the economic
slump and stricter credit conditions continued to trim prots
at the nations banks and added pressure on the banking
industry in the second quarter of 2008. As the mortgage
crisis unfolded, the earnings of many of the largest banks
and thrifts remained weak and volatile and fewer banking
institutions improved their earnings. By any yardstick, it
was clearly another tough quarter for bank earnings. While
the rising trend in troubled loans showed no sign of abating,
loan losses rose much more sharply at the major banks.
Higher loan loss provisions were the main cause of the
drop in industry earnings, hampered also by market-related
charges such as write-downs on asset-backed securities
(ABS) and collateralized debt obligations (CDOs).
The industry performance for the second quarter displayed
dim results and data from FDIC disclosed that net incomecame at only US$5.0 billion. It was the second lowest
quarterly total since 1991 and was US$31.8 billion or 86.5%less than what was earned in the second quarter of 2007.
For the rst half of 2008, prots of US commercial banks
and thrifts were down by 66%. Quarterly loss provisions
where banks have to add more money to reserves to cover
potential loan losses eclipsed US$50 billion more than
four times the US$11.4 billion quarterly total of a year
ago.
Stocks on Wall Street nished the six months ended
September 3, 2008, with a downward plunge on worries
that the rot of the credit crisis was spreading and the
growing evidence of danger times ahead for the US
economy. After the technology bubble burst in 2000 and
the September 11 attacks, stocks were hurled lower but
many on Wall Street feared that the effects of the nations
current problems could end up being just as destructive, or
more so. Disturbing news about the banking sector piled
up during the period and banks that were poised to reveal
that they remain on shaky footing sent stocks to steep
losses. During the six-month period, the DJ Banks Titan 30
Index staggered and dropped 9.1% to reach 91.46 points on
September 3. Its lowest level was at 72.88 points on July
15, with many banks looking the cheapest they had been in
a decade. Banking stocks led the decliners and among the
heaviest fallers were troubled mortgage nanciers Fannie
Mae and Freddie Mac whose share prices plummeted by
72.3% and 77.3% respectively after reporting larger-than-expected second quarter losses.
Table 1: Quarterly Earnings of the US Banking Industry from 2004 to Q2 2008
Source: Federal Deposit Insurance Corporation, August 2008
(US$ billions)
40.0
30.0
15.0
35.0
20.0
25.0
10.0
5.0
0.0Q1
31.8 31.232.5
31.0
34.0 33.234.7
32.6
36.9 38.0 38.1
35.3 35.636.8
28.7
0.6
19.3
5.0
Q1 Q1 Q1 Q1
2004 2005 2006 2007 2008
Q3 Q3 Q3 Q3Q2 Q2 Q2 Q2 Q2Q4 Q4 Q4 Q4
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Current Environment - United States
Although many believed that Wachovia Corp (NYSE:
WB) would be able to survive on its own and was unlikely
to suffer the same fate as WaMu, investors were concerned
about its large troubled mortgage portfolio. Shares of the
Charlotte, North Carolina-based bank plunged 43.5%to US$17.18. With the exception of Wells Fargo & Co
(NYSE: WFC) and Goldman Sachs, shares of Citigroup
Inc (NYSE: C), BofA and JPMorgan Chase & Co all
registered their cheapest trades in at least a year, declining
by 15.1%, 15.9% and 0.3% respectively. Unlike previous
bad times, there was no swift rebound in banking stocks,
with many analysts saying it would be a year until the
market recovered in a more stable manner.
Leading Players
Tension in the nancial markets was not eased and the
mortgage meltdown that started last year continued tosaddle the US major banks while losses that started
with CDOs spread from one asset type to another. The
leading banks were forced to make further write-downs
in addition to the billions that had already been recorded.
In April, Citigroup, which has topped the ranking with
the most write-downs and credit losses at US$55.1 billion
since the third quarter of 2007, and Merrill Lynch that
followed with US$51.8 billion of write-downs, disclosed
fresh subprime write-downs totaling US$15 billion or
more. In another sign of the intense pressure on leading
banks, a string of them were forced to slash dividends
or raise new capital in response to losses deriving from
falling values of securities related to all types of home
loans and commercial mortgages as well as leveraged-loan commitments.
As the credit crunch continued to wreck havoc, the six
leading banks Citigroup, BofA, JPMorgan Chase, Wells
Fargo, Wachovia Corp and US Bancorp (NYSE: USB)
reported a slew of disappointing earnings. Wachovias
operations were hit by billions of dollars in losses related
to the mortgage and credit markets. A major player in retail
banking and mortgages, things were from bad to worse for
Wachovia over the past year. In the rst quarter of 2008,
the fourth largest US bank, which registered its rst trip
into the red since 2001, plunged into losses once again
in the second quarter. This time it was about 12 timesas large. It lost US$8.86 billion, which was more than it
had ever earned in a full year. Since acquiring Oakland-
based Golden West Financial Corp in 2006, it has been
suffering massive mortgage losses from its so-called Pick-
a-Payment loans inherited from Golden West.
More misfortunes hit the US largest banks. JPMorgan
Chase, the third largest US bank, also lagged behind and
reported dipped earnings although it largely dodged the
Table 2: Share Performance of Key Players in the Industry (US$)
BanksClosing Price
Total Return (%)March 3, 2008 September 3, 2008
Decliners
Freddie Mac $23.72 $5.38 -77.3%
Fannie Mae $26.44 $7.32 -72.3%
Washington Mutual $13.65 $4.40 -67.8%
Wachovia Corp $30.41 $17.18 -43.5%
Merrill Lynch $48.64 $28.33 -41.8%
Bank of America $39.18 $32.96 -15.9%
Citigroup Inc $23.09 $19.61 -15.1%
JPMorgan Chase & Co $39.82 $39.71 -0.3%
Gainers
Wells Fargo $28.87 $31.01 7.4%
Goldman Sachs $165.08 $167.61 1.5%
Source: Mergent Analysis & Respective Companies
Note: Returns are calculated using the price of stock from March to September 2008
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Industry Report - Banking - November 2008
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Current Environment - United States
subprime bullet by shunning CDOs. JPMorgan was hurt byturmoil in the credit and mortgage markets, lower levels
of liquidity and the cost of crippled rival Bear Stearns
US$2.3 billion acquisition in March. Its net income of
US$2.0 billion for the second quarter was down from its
rst quarter earnings of US$2.37 billion and less than half
of the US$4.2 billion it earned in the second quarter of
2007. As more customers failed to pay back their loans,
Wells Fargo, the nations fth largest bank and the biggest
US bank on the West Coast, dwindled and posted a drop in
prot. For the April to June period, its prot fell by 22% to
US$1.75 billion, down from US$2.28 billion for the same
timeframe last year. A number of poor results were also
displayed from a group of regional nancial institutions,
such as Cincinnati-based Fifth Third Bank (NYSE: FITB),
Regions Financial (NYSE: RF), SunTrust Banks (NYSE:
STI), National City (NYSE: NCC) and KeyCorp (NYSE:
KEY).
Citigroup (NYSE:C)
After having to weather hard times brought on by the
subprime crisis, Citigroup was keen to get its house in
order and continue to focus on strengthening its business.
After months of intense review, new Chief Executive
Vikram Pandit had plans in mind to shrink the company
by about one fth and shed between US$400 billion and
US$500 billion of its US$2.2 trillion in assets. The three-year plan also includes cutting new loans to be held in
portfolio mostly within its consumer and securities banking
sectors by half and growing its revenue by 9% as it strivesto rebound from the massive credit markets losses. Apart
from closing 32 sales distribution outlets and 540 ATMs
in Japan, Citigroup also sold several businesses including
CitiStreet, CitiCapital and Diners Club. Despite US$11.7
billion in write-downs and credit losses, its second quarter
loss of US$2.5 billion was smaller than the market
expected.
Bank of America (NYSE: BAC)
News grew tougher for BofA earnings as credit quality
continued to weaken during the second quarter, particularly
in markets that suffered the most signicant drops in home
prices. While its chairman and CEO, Ken Lewis warned
that credit losses would remain an issue and would spread
from residential customers to commercial borrowers,
BofA was exposed to the struggling auto industry in the
Midwest due to its purchase of LaSalle Bank late 2007
for US$21 billion. Prot for the nations second largest
bank, which was also the largest retail bank, dived by
41% to US$3.41 billion during the April-June period as it
more than tripled its reserve for loan losses due to a weak
economy and declining home prices. This was the fourth
straight quarterly decline but, was less than expected on
record revenue. However, Ken Lewis remained optimistic
and hoped that its high-prole acquisition of the troubled
once largest mortgage lender, Countrywide Financial Corpon July 1, would add to prot by the end of the year and
result in US$900 million of cost savings.
Table 3: Ten Largest US Banks Ranked by Assets
Rank BankReported Assets
(US$ billion)as of June 30, 2008
Reported Assets(US$ billion)
as of June 30, 2007% Change
1 Citigroup Inc 2,100.54 2,220.87 -5.4
2 JPMorgan Chase & Co 1,775.67 1,458.04 21.8
3 Bank of America 1,716.88 1,534,36 11.9
4 Wachovia Corp 796.44 704.77 13.05 Wells Fargo & Co 609.07 539.86 12.8
6 US Bancorp 246.54 222.53 10.8
7 Bank of New York Mellon 195.99 114.32 71.4
8 SunTrust Banks Inc 176.23 180.75 -2.5
9 National City Corp 153.67 140.64 9.3
10 BB&T Corp 136.46 127.58 6.9
Source: Mergent Analysis, September 2008
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Current Environment - United States
Mergers and Acquisitions
Facing the most challenging operating environment ever
seen, mergers and acquisitions (M&As) within the US
banking industry went through a quiet spell. Downward
pressure on banking stocks was a dampener on M&A
activity, with acquiring companies not ush when their
stock prices are depressed. Likewise, targeted companies
cannot argue for healthy acquisition prices if their shares
are sinking. Many will not sell because they wont get
a good price and those that have high levels of lending
portfolios tied-up with residential housing will further
hamper M&A activity.
Ongoing concerns about the strength of many banks
balance sheets reduced the likelihood of M&As in the
banking industry. Buyers tend to feel apprehensive about
a target banks viability or attractiveness when capital is
in short supply and prots are damaged. It is difcult to
ascertain how much bad debt a bank might have when
real estate loans have been securitized, bought and sold
many times. This further compounded a difcult M&A
landscape. During the tough credit conditions, most
deals that came were likely related to banks that were
underperforming and needed a partner soon to survive
or worse. Larger banks with stronger capital positions
acquired several troubled institutions over the past months
for example. JPMorgan Chase purchased Bear Stearns inMarch and BofA acquired Countrywide Financial in July.
It is uncertain whether these giants still have room to
acquire others.
After failing in the talks to buy Lehman, BofA turned its
head to Merrill, which is considered a better t for the
retail giant. The 94-year-old Merrill, the worlds largest
brokerage rm, agreed on September 14 to be taken over
by BofA in a rushed bid to ride out the storm. The US$50
billion deal would create a global nancial giant to rival
Citigroup in terms of assets. Merrill, which had reported
four straight quarterly losses, was struggling with tight
credit markets and attempting to sell off toxic debt thatcaused the company to bleed capital. The transaction,
which was expected to close in the rst quarter of 2009,
represented a perfect t for BofA because by adding
Merrills more than 16,000 nancial advisers, BofA would
have the largest brokerage in the world with more than
22,000 advisers and US$2.5 trillion in client assets. The
combination would add give strength BofA in emerging
markets such as India as well as strength in global debt
underwriting, global equities and global M&A advice.
Renowned for large acquisitions, BofA has spent over
US$100 billion since 2004 buying other companies.
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Current EnvironmentCanada
The past six months were clearly a bad season for the
entire banking sector. The gigantic nancial meltdown left
Canadian banks bruised and some beaten. In the month of
September alone, a nancial bomb exploded and the end
result in the US saw three Lehman Brothers, Merrill
Lynch and giant insurer American International Group
(AIG) (NYSE: AIG) cave in within a day. Fears of a
total breakdown of the global nancial system took over
and the values of shares worth billions of dollars around
the globe were wiped off.
In an effort to ensure sufcient cash and revived a system
that has virtually ground to a halt, the worlds major
central banks injected US$180 billion into global nancial
markets. This amount included US$10 billion pumped by
the Bank of Canada (BOC) to ward off a total freeze-up of
global capital markets. The massive US$180 billion rescue
packages involved loans, sales of assets and company
restructuring, all served to prop up condence and stabilize
the situation for the time being. However, the Canadian
nancial system was neither in the same shape as its US
counterpart, nor suffered the same damage.
Although there was collateral damage to the Canadian
economy from a slowdown in the US, Canadas nancial
institutions were in a stronger position to weather the crisis.
Big nancials not only in the US, but also in Asia and
Europe, were damaged with problem of risky mortgages
packaged into bad securities but the number of Canadian
banks that jumped on this risky bandwagon appeared to
be much lesser. Compared with more than 30% in the US,
the Canadian market for subprime mortgages accounted
for only about 5% of residential mortgages, data from
Toronto-Dominion Bank (TD) (TSX: TD) indicates.
As for the nations own mortgage market, due to its banks
more conservative nature, it contained very few risky
mortgages and was less dependent on securitization for
nancing and on capital markets for revenues. Furthermore,
there were fewer traumas on the housing market since
prices were not in freefall as experienced in the US.
Apart from having healthy balance sheets with good core
funding and absolute leverage that was signicantly lower
than many of their international peers, Canadian banks
tend to be more diverse across investment, mortgage and
general retail operations. They hardly concentrate on one
particularly area as US banks tend to practice and more
importantly, the major banks were not involved largely in
the subprime business. Another upside was that Canadian
banks had better capitalizations and their write-downs
paled in comparison to those of American and European
banks, although the banks endured weaker results and
lower earnings.
Sector Performance
Last year, despite an overall positive earnings growth,
Canadian banking stocks lost their shine and put in a
depressed performance. Canadian banking stocks were
battered as dark stormy clouds spread over their US
counterparts and, as a result, saw banks loose a tenth of
their stock value in 2007. However, it was not as bad
compared to American banks which were down by a third.
Worries about the US nancial system, the aftershocks of
the implosion on Wall Street and signs of deteriorating
loans at some of the regional banks in the US continued
to reverberate across the Canadian nancial landscape and
put its banking stocks under pressure.
Shaken by falling prices for Canadas main commodities
and renewed fears in credit markets, the S&P/TSX
Composite Index, the Tees benchmark index, dropped
1,072.13 points to 12,064.57 over the six-month period
ending September 18. Following dismal news that Lehman
Brothers led for bankruptcy protection and after the take
over of Merrill Lynch, investors dumped their stocks which
resulted in a massive sell-off in North American stock
markets. On September 17, S&P/TSX Composite Index
was at its lowest at 11,877.69 points. The share prices of
several banks tracked by Mergent were dragged down by
the widespread US contagion, fresh rounds of write-downs
and worries about overall nancial market stability. The
two biggest weighted losers were TD, sliding by C$3.72
(US$3.51) or 5.9% to C$59.25 (US$55.91), and Canadian
Western Bank (CWB) (TSX: CWB), the nations eighth
largest lender, down 3.0% to C$22.06 (US$20.82). TD
saw its shares pushed lower by investor concerns about
mounting credit losses while CWB said that disruption in
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Current Environment - Canada
the global nancial markets may keep the regional bankfrom meeting its prot growth targets for the year.
Other banks that joined in the list of fallers were Canadian
Imperial Bank of Commerce (CIBC) (TSX: BCM) and
Laurentian Bank of Canada (TSX: LB), which slipped 1.8%
and 0.1% to close at C$59.68 (US$56.32) and C$41.95
(US$39.59), respectively. Market conditions hurt CIBCs
wholesale and retail brokerage operation. By far, CIBC
took the unwanted prize as the worst suffering of the banks
hit by exposure to the US subprime crisis. The broader
market overall was perturbed by concerns over how much
the US Governments US$700 billion bailout plan, which
was initiated earlier, to take over bad mortgage-related debtfrom nancial groups will help nancial markets in the long
run. Investors were not sure over the effectiveness of the
plan and whether it can successfully mop up the problem.
However, not all experienced bad news. On the upside, the
shares of Bank of Montreal (BMO) (TSX: BMO) jumped
C$7.46 (US$7.04) or 17.8% over the six-month period
ending September 18, while smaller rival National Bank
of Canada (NBC) (TSX: NA) added C$4.39 (US$4.14) or
9.3% to C$51.35 (US$48.46). Meanwhile, Bank of Nova
Scotia (BNS) (TSX: BNS) and Royal Bank of Canada
(RBC) (TSX: RY), Canadas biggest lender, both climbed
by 7.3% and 3.1% to close at C$47.37 (US$44.70) andC$47.99 (US$45.29), respectively on September 18.
BNS, faced with lesser mortgage and credit losses, is
geographically limited with excellent growth exposure inthe Caribbean, South America and Mexico.
Leading Players
As the earnings season wrapped up, Canadian banks were
seen to hit a steep prot decline on losses from bad loans and
slowing revenue from equity markets. Since last summers
nancial crisis began, the major banks went through a
rough stretch and endured weaker results although they
eluded the state of calamity. The major banks in Canada
have taken about C$11.6 billion (US$10.95 billion) in debt
write-downs since the collapse of the subprime market last
year and overall earnings were cut nearly in half to C$2.47billion (US$2.33 billion) in the second quarter ended April
30. The prot continued to retreat in the third quarter and
the nations six biggest banks RBC, TD, BNS, BMO,
CIBC and NBC recorded a 21% drop in combined
total earnings. Although the results were somewhat better
than investors expected and write-downs were pale in
comparison with their counterparts, prots were down to
C$4.15 billion (US$3.92 billion) from a year ago C$5.26
billion (US$4.96 billion) due primarily to the major banks
slacking capital markets divisions.
The leading banks practically spent the quarter logging
more credit losses with CIBC the far worst affected amongCanadas big banks. CIBC, ravaged by write-downs from
its subprime mortgage and CDO exposure, saw its earnings
Table 4: Performance of Canadian Banking Stocks
BankClosing Share Price as on Percentage of
Change (%)March 18, 2008 September 18, 2008
Decliners
Toronto-Dominion Bank C$62.97 C$59.25 -5.9%
Canadian Western Bank C$22.75 C$22.06 -3.0%
Canadian Imperial Bank of Commerce C$60.75 C$59.68 -1.8%
Laurentian Bank of Canada C$42.00 C$41.95 -0.1%
Gainers
Bank of Montreal C$41.89 C$49.35 17.8%
National Bank of Canada C$46.96 C$51.35 9.3%
Bank of Nova Scotia C$44.16 C$47.37 7.3%
Royal Bank of Canada C$46.53 C$47.99 3.1%Source: Mergent Analysis, September 2008
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Current Environment - Canada
tumble 91% year-over-year to C$71 million (US$67million), compared with C$835 million (US$787.96
million) in the corresponding period of 2007. The fth
largest bank, which sold off its US investment banking
division to one of the leading national investment boutiques
to Oppenheimer Holdings Inc (NYSE: OPY) late last year,
took a total of C$7.58 billion (US$7.15 billion) in write-
downs over the past nine months. By far, the gure was
the greatest wallop from the credit crunch among Canadian
banks. However, the prot numbers were not as bad as
previously thought. CIBC moved into the black after two
consecutive quarterly losses.
Meanwhile, the prots for BMO, Canadas fourth largestbank, and BNS, the No. 3 lender for the third quarter
slipped from last year on rising loan losses. After taking
a C$96 million (US$90.59 million) after-tax charge
stemming from capital market losses, BMOs performance
was less than stellar and displayed a drop in its prot. Its
net income for the period dropped 21% to C$521 million
(US$491.65 million), its fth straight prot slide. BNS, on
the other hand, fared better than BMO due to its limited
US operations. BNS, which operates mainly in Canada,
Mexico and Latin America, saw its net income for the
period ended July 31 down only by 1.9% to C$1.01 billion
(US$953.09 million). The Toronto-based banks strategy
of diversifying across business lines and geographies hasenabled it to perform better.
Montreal-based NBC, the smallest of the Big Six, was a big
winner in the third quarter. Compared with disappointment
at several of the nations banks, NBC did not suffer the
same fate but instead was the only one of the Big Six to
report a higher prot. Although having to struggle with aC$37 million (US$34.92 million) pre-tax loss from asset-
backed commercial papers (ABCP), NBC reported a solid
performance in the third quarter and actually saw its prot
rise to a record C$286 million (US$269.89 million), up
from C$243 million (US$229.31 million) a year earlier.
While its peers took further hits on their troubled credit
portfolio, NBCs good surprise was driven by a solid
contribution from the nancial markets segment, as well as
by personal and commercial lending.
After taking a C$498 million (US$469.94 million) hit in
pretax write-downs, RBC faltered and reported a lower
prot. The third quarter prot at the nations largest bankwas C$1.26 billion (US$1.19 billion), down by 10% from
a year ago. The prot, which declined for a third straight
quarter, its longest streak in nine years, was hurt by capital
markets charges and higher loan loss provisions largely in
its US banking operations. During the quarter, RBC set
aside C$334 million (US$315.18 million) for bad loans,
almost double from a year earlier. Its earnings from the
RBC Capital Markets investment banking unit tumbled
25% to C$269 million (US$253.84 million) as stock sales
and takeovers in Canada cooled, while RBCs international
consumer banking unit reported a C$16 million (US$15.09
million) loss, versus a prot of C$87 million (US$82.09
million) a year earlier.
TD Bank, Canadas second largest bank, was not fortunate
either. Compounded by a signicantly large drop (down by
85%) of net income at its wholesale banking unit, overall
third quarter prot fell to C$997 million (US$940.83
million) from C$1.1 billion (US$1.04 billion) from the
Table 5: Key Players in the Canadian Banking Industry
AssetRank
BankReported Assets
(C$ million)as of July 31, 2008
Reported Assets(C$ million)
as of July 31, 2007
PercentageOf Change (%)
1 RBC Financial Group 636,792 604,582 5.32 TD Bank Financial Group 508,839 403,890 25.9
3 Bank of Nova Scotia 462,407 406,115 13.9
4 Bank of Montreal 375,047 359,154 4.4
5Canadian Imperial Bank ofCanada
329,040 338,881 -2.9
6 National Bank of Canada 121,931 123,353 -1.1
Source: Mergent Analysis, September 2008
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Current Environment - Canada
same time in 2007. While it was clearly a tough quarter for
its wholesale bank, TD Canada Trust, its main Canadianretail operation, registered record earnings of C$644
million (US$607.72 million) in the third quarter, up 8%
over the corresponding period last year. In further good
news, earnings at its US personal and commercial banking
unit, which now includes New Jersey-based Commerce
Bancorp (NYSE: CBH), more than doubled to C$244
million (US$230.25 million).
Mergers and Acquisitions
During the rst three months of 2008, lingering concerns,
tighter equity markets, higher borrowing costs and
economic uncertainty in the US and Canada continued tocurb M&A activity in Canada. M&As in Canada were much
rarer and went back to their lowest level since early 2005
after a three-year long boom. M&A activity was on hold
as buyers questioned just how much the market had fallen,
while sellers were not comfortable that the buyers were the
right solution at the right price. Stronger and capable banks
decided to wait until the economy and housing market
showed signs of stabilizing. Compared to a year ago, the
value of M&A continued its downward trend and recorded
a dramatic drop from C$62 billion (US$58.51 billion) to
C$24 billion (US$22.65 billion) in the rst quarter of 2008,according to Toronto-based investment bank Crosbie & Co.
There were only 338 transactions, well off the 523 deals
in the rst quarter of 2007. It was noted that the nancial
services group made 23 deals during the January to March
period, down from 43 deals in the corresponding period
of 2007.
Throughout the years, Canadian banks have grown their
banking businesses outside of Canada signicantly through
acquisitions and organic growth after facing ceaseless
frustration in their attempts to merge domestically. The
Canadian Government has effectively ruled out big
domestic bank mergers ever since 1998, with fears thatsuch deals would lead to price-gouging or higher service
charges and would have a negative effect on services. With
deals off the table in the domestic market, major banks
such as RBC, BNS and TD have ed to expand in south of
the border over the past years.
RBC has made more than 20 acquisitions in a range
of business lines over the past eight years and intends
to grow its capital markets business through building
Table 6: M&A Activity by Industry
First Quarter 2008 First Quarter 2007
Industry Group No. of DealsValue
(C$ millions )No. of Deals
Value(C$ millions )
Industrial Products 91 2,892 98 15,967
Oil & Gas 70 7,429 85 8,786
Metals & Minerals 40 2,360 68 2,528
Real Estate 28 1,339 113 7,677
Financial Services 23 1,982 43 9,148
Consumer Products 19 707 39 851
Merchandising 19 217 33 1,559
Transportation & Environmental Services 11 221 10 253
Utilities 11 3,517 10 5,098
Gold 10 3,224 5 546
Communications & Media 10 183 14 4,071
Paper & Forest 6 210 4 3,977
Pipelines 0 0 1 1,060
TOTAL 338 24,281 523 61,521
Source: Crosbie & Co, May 2008
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Current Environment - Canada
businesses and making small acquisitions such as energyrms, money managers, wealth managers and investment
management companies. In June, RBC bought Boston-
based money manager Access Capital Strategies LLC,
its second acquisition in the month and its 11th in the
past two years. A few weeks earlier, the countrys largest
bank completed its acquisition of Richardson Barr & Co
(NYSE: RY), a leading Houston-based energy advisory
rm. The acquisition was expected to strengthen RBCs
US investment banking business. The terms of both deals
were not disclosed.
With US banks looking increasingly vulnerable and rather
cheap and with Canadian banks armed with a strongerloonie, there was no better time than this year to seize the
opportunity to buy up more US banks. Canadian banks
have tended to be labeled as timid and criticized as not
being able to complete globally because they are too small.
However, thanks to the credit crisis, they might have the
chance to do transformative deals that could make them
bigger North American players. Although it may sound
attractive, Canadian banks are unlikely to buy US banks
just because they are cheap and may prefer to pay more
but be very comfortable with a banks assets. From the
banks perspective, it is a time to be extremely cautious and
avoiding deals that might prove to be disastrous. The banks
may not rush into a spending spree in the US and get caughtin potential targets weak balance sheets. Furthermore, the
targets the Canadian banks are scouting for are much more
likely to be solid acquisitions that complement existing
plans.
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Industry ProfileUnited States
One role of banks is to support the growth of its countrys
economy and create jobs. Playing a central role in keeping
the many parts of the nations economy moving, banks turn
new deposits into funds that can be lent out to individuals
and businesses. This stimulates growth and promotes
economic exibility. The recently unveiled rst quarter
2008 gures by the Federal Deposit Insurance Corporation
(FDIC) show that the US banking industry held a total of
US$7.97 trillion of loans in its own portfolios.
Moreover, the physical presence of 99,221 bank ofces and
branches and the convenience of 415,321 ATMs not only
assures convenient access to local nancial services, but
gives banks a personal stake in the economic growth and
vitality of both small towns and large cities everywhere.
US banks hold US$8.56 trillion in total domestic deposits
and process more than 40 billion checks each year. The
widespread adoption of ATMs has enabled the total US
ATM transaction volume to increase to 14.9 billion in
2007 from 10.7 billion in 1996. The number of ATM
machines also tripled from 139,134 in 1996 to 415,321
in 2007. In addition to the contribution banks make to
general economic growth, the banking industry itself is
an important component of the economy. The industry
employs 2,212,766 people.
Banks in the US have always supported the nancial
needs of businesses both large and small, from start-ups
to multinational corporations. Bank credit helps small
businesses, which represent 99.7% of all rms in the US
and are responsible for generating 60-80% of net new
jobs annually over the last decade, according to the SmallBusiness Administration (SBA). US banks had almost
US$600 billion in small business loans in 2007, accounting
for almost a quarter of bank business lending. Meanwhile,
gures from FDIC show that loans to individuals were
US$1.05 trillion and farm loans reached US$53.89 billion
in the rst quarter of 2008, supporting the credit needs of
rural Americans and improving the nations agricultural
activity.
However, as the nations economy slows and banks
reel from the housing crisis, getting a business loans
is becoming much harder and more expensive. Credit
Industry Size and Value
Table 7: Share of US Banking Industry Assets by Group
Source: Federal Deposit Insurance Corporation, July 2008
International Banks, 23.1%
Agricultural Banks, 1.2%
Credit Card Lenders, 3.4%
Commercial Lenders, 39.4%
Mortgage Lenders, 10.2%
Consumer Lenders, 0.5%
Other Specialized>$1 Billion, 0.3%
All Other >1 Billion, 0.8%
All Other >1 Billion, 21.1%
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Industry Profile - United States
extended by banks to companies and consumers still grewat double-digit rates earlier this year but, by mid-June,
bank credit declined at an annualized pace of more than
6%. Banks, ghting for their nancial life and shocked by
their multibillion-dollar losses on real-estate, scaled back
loans to American business, depriving even healthy rms
of money for hiring and expansion. According to Federal
Reserve data, two vital forms of credit used by companies
short-term commercial paper not backed by collateral
and commercial and industrial (C&I) loans collectively
fell almost 3% over the last year, from US$3.36 trillion to
US$3.27 trillion. The gure was the largest annual drop
since the credit tightening that began with the last recession
in 2001.
FDIC gures put assets held by the industry at the end
of March 2008 at US$13.37 trillion, an increase from
US$13.03 trillion from the rst quarter of 2007 and
US$11.86 trillion from the rst quarter of 2006. Large
nancial banks, which hold more than US$15 billion in
assets, continue to dominate and remain the market share
leaders. The total assets of the nations three banking titans
Citigroup, BofA and JPMorgan Chase total US$5.59
trillion. Citigroup, which previously ranked number one,
even lost to fellow rivals BofA and JPMorgan & Chase,
revealing major surprises and the most noticeable change
in the breakup of the US domination.
Statistics from FDIC show that the number of banking
institutions dropped from 15,158 in 1990 to 8,494 in the
rst quarter of 2008. The total comprises 7,240 commercial
banks and 1,254 savings banks or thrifts. There was a
55.4% drop in the number of thrifts from 1990 to March
2008 due mostly to acquisitions by, or conversions to,
commercial banks or other savings banks, while the number
of commercial banks fell by 41.3% to 7,240. Thrifts that
tend to be small were originally established to promotepersonal savings through saving accounts and home
ownership but now provide a range of services similar to
many commercial banks.
Industry Focus
Banks Latest Efforts to Raise New Capital
Maimed by self-inicted wounds and lost money from
wrong-way bets on mortgage-backed securities and other
risky investments, the nations banks are in need of new
capital. The enormous losses on bad loans have shrunk the
capital of banks, threatening to leave them in a dangerous
state and further hampering their ability to continue to
make new loans. This has implications for the broader
economy. Since the credit crunch began, US banks large
or small have estimated to raise more than US$120 billion
while all global nancial services companies have raised
over US$300 billion. Even further efforts to repair balance
sheets and raise capital are likely as conditions worsen and
more banks announce grim results and are forced to take
further losses.
To ensure that banks have enough money to repay
depositors and investors and to continue making loans to
consumers and businesses to provide credit that fuel the
economy, banks were forced to increase their capital levelsthrough several methods and diverse sources including
slashing dividends, new stock offerings and raising
billions of dollars from large shareholders, private-equity
rms and other institutional investors that are willing to
plunge billions of dollars into the foundering sector. Both
methods of cutting dividends and issuing more shares will
eventually erode shareholder value because prot gets split
among more shares.
Table 8: Size of US Banking Industry (as of March 2008)
First Quarter 2008 All Institutions Commercial Banks Savings Institutions
Number of FDIC-Insured 8,494 7,240 1,254Total Assets (US$ billion) 13,369 11,495 1,875
Total Loans (US$ billion) 7,968 6,666 1,301
First Quarter 2007 All Institutions Commercial Banks Savings Institutions
Number of FDIC-Insured 8,649 7,379 1,270
Total Assets (US$ billion) 11,982 10,135 1,847
Total Loans (US$ billion) 7,278 5,972 1,306Source: Federal Deposit Insurance Corporation, July 2008
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Industry Profile - United States
Federal regulators and the US Government have beenpressuring banks to increase their capital levels and not
hesitate to curb their dividend and share-repurchase
programs to strengthen their balance sheets. With credit
losses clearly on the rise in a number of different categories
of assets, capital and higher loan loss reserves are the best
buffer. For now, before further credit problems make
raising capital even more costly and difcult, regulators
main emphasis is to see banks restore their balance sheets
in a proactive manner. Without banks able and willing to
extend loans, the nations economy could weaken further
and negatively affect economic expansion.
The fact that big banks such as Citigroup, Wells Fargo,
Wachovia and investment giant Merrill Lynch are running
out to raise capital just proves how bad the situation really
is and that capital cushions are shrinking. After coming
up with US$35 billion since last year, Citigroup also sold
US$6 billion in preferred stock in April hoping to offset
mounting losses that the bank has taken. The New York-
based bank planned to sell close to US$400 billion in assets
over the next two to three years. Fellow rivals BofA and
JPMorgan & Chase followed suit and issued US$4 billion
and US$6 billion of preferred shares, respectively.
The US housing crisis that continued to devastate the
nations banking sector has led tarnished Wall Street
and forced Merrill Lynch to dump billions of dollarsof mortgage debt at a steep loss and shed assets to raise
US$805 billion in capital. Fundraising at the worlds largest
brokerage included selling 20% stake in nancial news
and data group Bloomberg Lp for US$4.4 billion, and its
controlling interest in Financial Data Services for at least
US$3.5 billion. Merrill also plans to raise US$8.5 billion
selling new common stock to bolster its capital position.
Temasek Holdings, a Singapore state-owned investment
rm, committed to buy a US$3.4 billion chunk of the new
shares. The move rocked the condence in the banking
sector, renewing fears that the credit crisis had more to
run.
Policy and Regulatory Environment
The lax risk management at banks that contributed to
credit turmoil has driven regulators to push for improved
disclosure by banks to boost transparency and greater
market discipline. In the rst quarter, banking and mortgage
bankers group such as the Arlington, Virginia-based trade
group Consumer Bankers Association (CBA), and the
Mortgage Bankers Association (MBA) spent US$768,000
and US$1 million respectively lobbying on issues andlegislation related to mortgage lending, credit reporting,
credit card fees, bankruptcy, housing policy and other
issues. In a war that aims to crack down on what they say
are unfair, abusive and shady lending practices, the Federal
Reserve unanimously approved a nal mortgage lending
rule on July 14 to better protect consumers and facilitate
responsible lending.
The nal rule, which modies Regulation Z (Truth in
Lending) and was adopted under the Home Ownership
and Equity Protection Act (HOEPA), primarily follows a
proposal issued by the Federal Reserve Board in December
2007. Although the proposals will not help the millions of
homeowner defaulters, the Fed aims to prevent another
catastrophe and has vowed to vigorously enforce the new
rules, which take effect on October 1, 2009.
Dubious lending practices, particularly those involving
subprime loans made to borrowers with poor credit histories,
have gured prominently in the housing crisis, contributing
to an economic downturn and propelling delinquencies
and foreclosures to record highs. Lax lending during the
heady days of the housing boom only ended up burning
a massive hole among the riskiest subprime borrowers in
addition to the rapid rise of rates of mortgage delinquencies
and foreclosures that imposed huge costs on borrowers,
their communities and the national economy. Lenders thataggressively sold deceptive loans to lure borrowers with
promises of low initial interest rates into loans they could
not even afford contributed to the housing slump when
those risky subprime loans turned sour.
The proposed new rule, as expected, would among other
things, prohibit lenders from making loans without
considering the borrowers ability to repay a home loan
from sources other than the homes value. Lenders will
have to make sure that risky borrowers set aside money
to pay taxes and insurance. The plan would also restrict
lenders from penalizing risky borrowers who settle their
loans early and bans prepayment penalties if the loanpayment amount can change during the initial four years
of the mortgage. Finally, the rule requires all mortgage
advertisements to include information about rates, monthly
payments and other details.
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Industry ProfileCanada
As a major industry in Canada, banking plays a key role
in the countrys economic growth and nancial system.
Canadian banks, also called chartered banks, are essential
contributors to economic growth and remain important
in facilitating the well-being of the country. Engaged in
various businesses and providing myriad products and
services, Canadian banks have diverse revenue streams.
This variety helps make a secure, stable and reliable
banking sector that contributes signicantly to Canadians
and the economy. In fact, the banking sector generates
C$39.8 billion (US$37.56 billion) of gross domestic
product (GDP), representing about 3.3% of total Canadian
GDP directly.
As one of the Canadas largest employers, banks and
their subsidiaries employed 257,000 Canadians and paid
C$20.6 billion (US$19.44 billion) in salaries and benets
in 2007, according to a report released by the Canadian
Bankers Association (CBA). Industry employment has
grown by 16.1% over the last ten years. More than 71,000
employees work in other countries for Canadian banks.
However, difcult economic conditions and depressed
results among the banks capital markets divisions in the
second quarter forced banks to explore layoff options to cut
costs. Widespread pressure on capital markets operations
translated into to 150 job cuts in BMOs securities business,
while CIBC slashed 100 people from its capital markets
division in June.
While core activities among US banks and Canadian banks
are similar, Canadian banks are much smaller in real terms
than those in the US. There are 7,240 domestic commercial
banks in the US versus Canada 20 banks. As of January
31, 2007, the banking industry comprised 73 banks
20 domestic banks, 24 foreign bank subsidiaries, 22 full
service foreign bank branches and seven foreign bank
lending branches in Canada, according to the Ofce of the
Superintendent of Financial Institutions (OSFI). In total,
these institutions managed over C$2.6 trillion (US$2.45
trillion) in assets, accounting for over 70% of the total
assets of the Canadian nancial services market. The six
largest domestic banks continue to dominate the banking
system and together control about 90% of the nations total
assets.
Canadian banks continue to provide reliable, secure,
affordable and greater exibility and accessibility to their
consumers, who have enormous appetites for choice and
convenience in managing their nancial affairs. With
its vast network of electronic and branch access points
among the most extensive in the world, 96% of Canadians
have an account with a bank and the country now has the
highest number of Automated Business Machines (ABMs)
per capita in the world (1,631 ABMs per one million
inhabitants). Along with branch services, internet banking
and phone banking services, Canadas banks invest heavily
in the ABM network to provide their customers with 24/7
access to banking services. In 1982, there were only 965
ABMs that could only be used by customers of the bank
operating the machine but in 2007, the number of cash
dispensing ABMs has snowballed to 16,424, statistics from
CBA shows. The number of banking ABM transactions
logged in 2007 reached 1.01 billion in volume. The credit
card market in Canada is highly competitive with over
550 institutions issuing Visa and MasterCard products
through 23 principal issuers. As of May 2008, there were
64.1 million Visa and MasterCard cards in circulation
throughout the country.
Industry Size and Value
Table 9: Size of Canadian Banking Industry
Contribution to total Canadian GDP 3.3%
Domestic banks 20
Foreign bank subsidiaries 24
Full service foreign bank branches 22
Foreign bank lending branches 7
Total Banks 73
Total Employees 257,000
Total Assets C$2.6 trillion
Total ABMs 16,424
Total ABMs transaction logged on 1.01 billion
Credit Cards in circulation 64.1 million
Source: Canadian Bankers Association, 2008
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Industry Profile - Canada
Industry Highlights
On the Road to Customer-centricity
Long before the credit crisis hit, the shift in focusing on
customers was well underway. Particularly higher emphasis
has been placed on customer service and placing customer
at the center. Canadian banks are going back to basics
and touting their commitment to become more customer-
centric and more service-oriented, believing there is space
in the market to differentiate themselves from the rest by
providing better customer service.
Aware of their customers attitudes towards their banksand the impact perceptions have on protability, Canadian
banks may discover new opportunities to earn market share,
attract new customers and improve customer retention by
rendering genuine value-added and personalized services.
While focusing their attention on renewing core banking
systems and embedding customer centricity into core
banking, branch platforms and system renewal strategies,
Canadian banks are increasingly rolling out analytical tools
and building attrition models to retain existing customers
and acquire new ones.
TD Canada Trust was ranked the highest in customer
satisfaction according to a customer satisfaction studyreleased by J.D. Power and Associates, a global marketing
information services rm, for the third consecutive year
in August 2007. It achieved high scores in transaction
experience, account setup and product offerings, account
statements, facility and problem resolution. Rather than
operating only during traditional banking hours, the bank
opens longer hours, opening 50% longer than the other
banks for customers.
Meanwhile, BMO, struggling to keep pace with its
domestic peer group and recently announcing 1,000 job
cuts, made a big push to improve customer service at its
Canadian branches by upgrading the branch network andrevamping debit and credit card offering. BMO is now
intent on changing some of the processes supporting staff
in sales and customer service roles. Its effort have begun to
show some results, with loan growth up 17% on last year
in the rst quarter of 2008 and retail deposit market share
stabilizing to about 12%.
Another bank raising its game and competitiveness in
domestic retail banking was BNS. Striving to become the
best Canadian-based international nancial services group
by building strong relationships with its customers, the bank
rolled out a new customer-centric approach to banking in
retail branches. The program includes building everything
from scratch an industry-leading customer data warehouse,
an essential tool for targeted marketing, cross-selling and
customer retention activity. For BNS, the program aims to
change the branch culture to focus on serving customers.
The bank is planning to roll out its model in a phased
approach throughout the Caribbean, Latin America and
Mexico over the next few years. However, although banks
are focusing on transforming their businesses to providebetter customer service, the task is not that easy and requires
rigorously managed incremental change. Satisfying
customers demands comprehensive changes in strategies,
business processes and underlying technologies.
Policy and Regulatory Environment
Fearful of what was coming out of the US in terms of rises
in the number of defaults and foreclosures, the Canadian
Government tightened the rules for government-guaranteed
mortgages in July to prevent a similar housing market
collapse scenario in Canada. The adjustments marked a
measured approach by the Government to protect andstrengthen the Canadian mortgage system and forestall any
mortgage crisis.
Days of zero down payments and a 40-year mortgage
were over for Canadians starting from October 15, with
consumers thinking about buying a home needing to
produce a 5% down payment. Further, loans can no longer
be amortized over 40 years, with the maximum length
reduced to 35 years. The new rules also require a consistent
minimum credit score requirement and introduce new
loan documentation standards for those applying for a
mortgage, making it tougher to borrow money to buy
a home. A maximum 35-year term and higher downpayment requirements mean some buyers will not be able
to afford to pay as much. The new rules only apply to
new mortgages that require government-backed mortgage
insurance but will not affect mortgages that are already
held by Canadians.
Currently, mortgage insurance that protects mortgage
lenders from losses if a borrower defaults is required on
all loans where the down payment is less than 20% of
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Industry Profile - Canada
the purchase price of a home. The Governments federal
housing agency, Canada Mortgage and Housing Corp
(CMHC), is the largest provider of mortgage insurance in
the country, but the Government backs private mortgage
insurers. Some private rms could still offer mortgage
insurance at no longer supported terms, but they will not
have federal backing. Changes in the rules came after theBOC and Finance Minister Jim Flaherty expressed concern
about the proliferation of looser mortgage conditions
ushered in less than two years earlier. It suggested loans
were feeding a bubble and encouraging people to buy
homes they could not afford. Longer amortizations create
greater affordability for housing but it comes at a big price.
Lowering the monthly installments simply means that
buyers can go into more debt, and more debt means more
interest and less equity.
Although fundamentals are still good and Canadas lending
practices have tended to be more prudent than south of the
border, the Canadian housing sector is cooling after six torridyears of growth. Even before the tighter rules, residential
home sales in Canada are expected to fall by 11.5% to
460,900 this year from last years record of 520,747, the
Canadian Real Estate Association (CREA), a major real
estate organization forecasts. Except for Saskatchewan and
Newfoundland and Labrador, the forecast sees falls in 2008
in all provinces with the biggest sales tumbles taking place
in Alberta, where sales are poised to slide by almost 19%.
Nevertheless, the US mortgage crisis has not ltered into
Canada and, although there are signs of cooling, it is not
as dramatic as in the US. Canadas housing and mortgage
markets are performing much better.
Table 10: Average Residential Price Forecast
Region2007 Average
(C$)2008 Forecast
(C$)% Change
British Columbia 439,123 485,900 10.7%
Alberta 356,235 373,000 4.7%
Saskatchewan 174,405 208,400 19.5%
Manitoba 169,189 187,800 11.0%
Ontario 299,544 312,400 4.3%
Quebec 208,240 218,000 4.7%
New Brunswick 136,603 142,800 4.5%
Nova Scotia 180,989 189,100 4.5%
Prince Edward Island 133,457 141,000 5.7%
Newfoundland & Labrador 149,258 159,200 6.7%
CANADA 307,265 323,500 5.3%
Source: Canadian Real Estate Association, May 2008
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Market Trends & OutlookUnited States
Frustration is obvious among banks as banking crime,
ranging from fraud to phishing (sometimes referred to
as carding or brand spoong that captures personal data
by sending out email messages) and identity theft, are
mounting. More criminals now know how to turn stolen
nancial data into steady income, disrupting the peace
and tranquility of the banks. Bank crime rarely involves
traditional robberies but instead, money and data are stolen
remotely via electronic and paper fraud at seemingly less
risk to the criminal, who often cannot be spotted by securitycameras. The act of stealing can even be done from the
other side of the world, starting with a simple phone call
by fast-talking criminals requesting information from
individuals such as bank account balances. From there, the
data is resold and reused, leading to crimes from simple
credit card fraud to full-blown identity theft resulting in car
loans or even equity loans.
Two of the fastest-growing crimes in the US today are
check fraud and identity theft. While the American Bankers
Association (ABA) says check fraud grows by 25% each
year, the cost of identity theft to banks and businesses is
at US$53 billion a year, the Federal Trade Commission(FTC) reveals. A study, Measuring Identity Theft at Top
Banks released by the FTC in February 2008, found that
major banks and telecommunication rms are among the
companies that suffer the most from identity theft. In terms
of the sheer number of complaints, BofA topped the list
of banks, followed closely by JPMorgan, Capital One
(NYSE: COF) and Citibank, the consumer and corporate
banking arm of Citigroup. Limping home mortgage lender,
Countrywide already hit hard by the lending crisis, faced
another crisis when it suffered insider data loss when an
employee stole the condential data of its customers
throughout the country over a two-year period. The former
employee was suspected of downloading the informationfrom about 20,000 customers each week for two years and
pocketing about US$70,000 from selling the data.
Fraud is now shifting from a crime of prot to a crime of
desperation, with mortgage lenders desperate to close sales
and maintain their income. Three of the nations largest
subprime mortgage lenders Countrywide Financial
Corp, New Century Financial Corp and IndyMac Federal
Bank have been probed by the authorities including the
Federal Bureau of Investigation (FBI) for possible fraud.
Over the past year, reports of mortgage fraud rose as the
subprime mortgage market collapsed, and defaults and
foreclosures skyrocketed. The FBI is looking at whether
the banks were a sometimes a party to fraud in connection
with loans made to homebuyers with poor credit. Since
the subprime loan crisis erupted, the bureau has had 21
corporate fraud probes of investment banks, hedge funds
and mortgage companies. In addition, it also has more than
1,400 pending mortgage fraud cases looking at individuals
such as brokers, appraisers and borrowers.
Foreclosures and Delinquencies Still Building
An overstretching of buyers to get into homes they cannot
afford and an overextending of credit by lax lenders who
were willing to take risk led mortgage foreclosures to hit
a record high at the end of 2007 in the US. A combination
factors declining home values, weak housing sales,
tighter lending criteria and slowing US economy has
left a trail of destruction where nancially strapped
homeowners found themselves under water and were left
with little option than to avoid foreclosure. Compared with0.54% a year earlier, around 0.83% of US loans entered
the foreclosure process in the last three months of 2007,
a report by the MBA concludes. The report also shows
that subprime adjustable-rate mortgages that entered the
foreclosure process jumped to a record 5.29% in the same
period.
The grim news was a new blow to the US economy, which
had been rocked by the subprime crisis. A US Foreclosure
Market Report by California-based RealtyTrac, which
publishes one of the largest national databases of pre-
closure, foreclosure, owner-sold, resale and new homes,
shows a total of 2,203,295 lings consist of default notices,auction sale notices and bank repossessions in 2007, a
surge of 75% from 2006. Separately, the Fed estimates the
net wealth of US households dropped for the rst time in
ve years over the same period as the value of real estate
holdings and stocks deteriorated.
While last year was a bad year for home foreclosures, 2008
so far has been worse. Driven higher by increasing housing
despair, the foreclosure hammer has pounded even harder.
Electronic Bank Crime on the Rise
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Market Trends & Outlook - United States
In the second quarter, the skyrocketing rate of foreclosures
continued to provide headaches for US lenders. As plunging
home prices left borrowers owing more on mortgages
than their properties were worth, US foreclosure lings
more than doubled from a year earlier. One in every 171
households was foreclosed, representing an increase of121% over the second quarter of 2007 and 14% from the
previous quarter, Realtytrac says. The grim numbers were
obvious especially in May where 261,255 homes received
at least one foreclosure-related ling, surging by 48% from
May 2007, the highest monthly rate since 2005.
Two states California and Florida continue to display
high levels of activity, with the most fallout and leading the
nation in foreclosures. Together, they accounted for 109,014
of new lings in May while Arizona, Michigan and Ohio
were next between 12,000 and 13,000. With this, there is
no reason to believe the current wave of foreclosures will
subside anytime soon, because more borrowers continueto fall behind on their payments. Although the Bush
Administration has developed a number of plans to delay
foreclosure proceedings, it has been criticized for not
acting quickly enough to aid those affected.
Mortgage Applications Slow
With loan rates hovering near one-year highs exacerbating
the housing markets difculties, application volumes for
US home mortgages tumbled to their lowest pace in July
since December 2000. The Mortgage Bankers Associations
(MBA) index of applications to purchase a home or
renance a loan declined by 14.1% to 420.8 in the week
ended July 25 from 489.6 the prior week. The Washington-
based MBA, which has compiled a loan survey every weeksince 1990, believes that the culprit behind the drop has
been renance volumes, which plummeted by 22.9% to
1,074.4 during the week, also the lowest since the end of
2000. During the week, renance applications accounted
for 35.2% of all applications. US homeowners are
discovering that they do not have enough equity to renance
their homes. Furthermore, tighter lending standards and
plunging property values are keeping prospective buyers
out of the market and may extend the three-year housing
slump. In turn, falling house prices are making it difcult
for homeowners to re-nance their mortgages.
Banks in the US continue to tighten mortgage lendingcriteria and restrict loan approvals only to those with
larger deposits, which could hamper home sales further.
Mortgage lending choices have all but dried up and, as a
result, fewer companies control more of the market, with
rates and ultimately the housing market suffering as well.
Following in the footsteps of so many mortgage-heavy
banks, Wachovia Corp, which posted dismal results in the
second quarter, is scaling back mortgage lending in 19
states. The bank that made an untimely expansion into the
Table 11: Top Ten Foreclosures States (May 2008)
Source: Realtytrac, June 2008
California 71508
37506
12964
12764
12305
10245
10030
9877
8895
7441
Ohio
Arizona
Texas
New Jersey
0 4000020000 60000 80000
Florida
Georgia
Nevada
Michigan
Illinois
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Market Trends & Outlook - United States
mortgage business by acquiring California-based GoldenWest Financial Corp in 2006 at the peak of the housing
boom, decided to exit its wholesale mortgage lending
business starting July 25.
The credit crisis has hurt banks ability to support the
market for mortgage-backed securities, causing rates that
lenders charge to consumers to spike upward. In the fourth
week of July, mortgage rates have soared in the US with
30-year xed rate mortgage surging to the highest level
in nearly a year. According to troubled home funding
company Freddie Mac, US 30-year mortgage rates grew
to an average of 6.63% from 6.26% the week before while
15-year mortgages averaged 6.18%, rose sharply from
5.10% in the third week. Mortgage rates are on the rise due
to troubles at Fannie Mae and Freddie Mac, threatening to
deal another blow to the already frail housing market.
Market Outlook
The US economy continues to tread water and the woes of
US credit market coupled with housing slump, a strained
banking system, spreading unemployment and rising oil
prices are the undercurrents trying to pull it down in the
second half of the year. At the same time, there is also fear
that upside risks to the ination outlook have intensied
lately. The barrel of ination has run wild with US pricesrising by 5.6% in the year to July, the fastest ination rate
for more than 17 years.
Although economic growth picked up in the second quarter
at an annual rate of 1.9% compared to the feeble 0.9%
growth logged in the rst quarter of 2008, thanks to the
federal tax rebates that energized consumers, the rebound
was not as robust as economists in the nation had hoped.
The growth was less than the earlier forecast 2.4% pace.
The revised data from the US Department of Commerce,
however, indicates that it was a soft pace but enough to
move it away from the path of recession. The arduous task
of cleaning up the subprime mess could take a while, and
the nations economy will require at least months to recover
from its slowdown. In Washington, President Bush urged
Americans not to lose faith as they brace the economy
that falters on a cloudy future and problems at the banks
deepen.
Crucially, a healthy banking system is vital to the economy,
but now economic weakness and a plunge in bank stocks
have raised the prospect of more bank failures, probably
within months, and the need for federal intervention. The
weak economy is hurting consumer lending operations and
mortgage losses may escalate among banks. The current
Table 12: Quarter-to-Quarter Growth in real GDP
Source: US Bureau of Economic Analysis, July 2008
Percent
6
4
2
0
2004 2005 2006 2007 2008
-2
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Previously published Revised Advance estimate
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Market Trends & Outlook - United States
credit crunch is more acute than one that followed thesavings and loan crisis in the early 1990s and could run
into 2009, with the nervousness that follows threatening
market stability, especially after the Government took over
IndyMac on July 11. Within the next 18 months, as many
as 200,000 US banking jobs are expected to be slashed,
with more than half forecast to be in the mortgage lending
sector. This is hardly a surprise with more banks expected
to be on the brink. Around 22,000 jobs were cut during the
rst two months of 2008.
In todays faltering economy, banks are expected to tighten
lending standards for US households and businesses
through to the end of the year and into 2009. The year-long
credit crunch is far from easing and banks are hoarding
more capital and making it harder to borrow. Tighter
lending standards, which are typical in a weakening
economy, create headwinds that will delay recovery, along
with a worsening housing slump and elevated fuel prices,
further dampening any hope of a quick end to the credit
squeeze.
The Fed, which took the nations lending pulse in July,
revealed that lending has slowing. With loss and write-
downs still ongoing, some banks will likely need to raise
additional capital and slash dividends to cover losses and
shore up their balance sheets. So far, US banks have raised
about US$120 billion and may need to raise US$65 billionto cope with mounting losses. Insufcient capital to cover
bad debts is making the banks even more wary of lending
to one another. Indeed, things are going to get tougher
before they get better. Fears over which banks might be
allowed to fail next have completely rocked the condence
in the nations banking system.
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Market Trends & OutlookCanada
As with banks around the world, the internet has created a
momentous and sweeping change in the Canadian banking
industry. It has reshaped the way customers carry out
transactions, transforming traditional face-to-face human
interaction at local branches to the concept of anywhere
banking that allows customers to access their accounts
by just a mouse-click away without stepping a foot inside
a bank. The goal of most Canadian banks is to provide a
true e-banking solution through secure online banking
capabilities for their commercial and personal customers
who now demand more convenience. This including
access to real time account information, balance transfers,
purchasing options and credit card payment. Online
banking in Canada is a must for even the largest banks
survival over the longer term and, due to well-developed
banking system and erce competition in the country, it is
pivotal to meet the needs of online consumers in order to
expand.
Online banking continues to grow in popularity and is the
service of choice to settle bills, check account balances and
activity. A July report released by comScore, a global internet
information provider, brought to light that Canadians are
leading the way with online banking and rank rst in online
banking adoption among the 37 global markets individually
surveyed by the web metrics rm. Specically, the survey
found that 67.1% of Canadians did their banking online
in April, far ahead from other English-speaking countries
which had signicantly lower penetration, including the
UK (49.5%), US (44.4%) and Australia (41.7%). Typically
very savvy internet users, Canadians also led the rest of
the countries in online banking frequency, according to
the survey, with an average of eight usage days and 10.5
online banking visits per visitor in April alone. On average,
Canadians spend 46 minutes on banking sites, viewing
approximately 121 pages per viewer.
Out of nearly 24 million Canadian internet users, 15.5
million visited a banking site in April. Banks in Canada
have been pushing their customers to embrace e-billing,
which seems to be meeting with some success. RBC led
the category with 4.6 million visitors, the most of any
Canadian bank. The bank has added Web 2.0 tools to
ensure that even the tech-shy can get something out of the
web experience where a virtual host was used as a demo
for online bill payments and interactive video session of
loan packages that they offer. A close second, TD Bank had