The Canadian Banking Industry: Strength in the Face of Economic Turbulence

The Canadian Banking Industry

While the Canadian economy has not escaped the recent global financial crisis completely unscathed, comparatively speaking, it has emerged in an enviable position.  A significant factor contributing to this achievement is the relative strength of Canada’s banks vis-à-vis banking and other financial service firms in other parts of the world.

Not surprisingly therefore, the World Economic Forum in its 2010-2011 Global Competitiveness Report ranked Canada’s banking system for the third straight year as the soundest in the world.  In addition, Global Finance Magazine (October 2010) counted all of Canada’s six largest banks - Royal Bank of Canada (“RBC”), Bank of Nova Scotia (“BNS”), Bank of Montreal (“BMO”), The Toronto-Dominion Bank (“TD”), Canadian Imperial Bank of Commerce (“CIBC”) and National Bank of Canada - as among the safest in the world.  Even U.S. President Barack Obama has offered praise of Canada’s financial system and its governance.

The primary reasons credited for the strength of Canada’s banks are the strong capital adequacy requirements of the Canadian regulatory regime, active supervisory oversight, and conservative risk management and lending practices of Canadian financial institutions.

International Growth

While Canada’s major banks have the ability, as well as the appetite, to expand their businesses, opportunities for expansion within Canada are limited.  Past merger proposals among Canada’s banks have been turned down by regulators, and legislation requires that Canada’s major banks be widely held.  The result is that the Canadian banking system is highly concentrated, with six major banks holding almost 90 percent of total bank assets.  Accordingly, the growth strategy of most of Canada’s major banks is focused outside of Canada.

Canada’s major banks have had a substantial international presence for many years, including, in particular, in the United States, the Caribbean, Latin America and East Asia.  Moreover, 2010 saw a marked increase in the number of international acquisitions by Canada’s banks, notably:

• RBC acquired wealth management assets from, among others, UK-based BlueBay Asset Management plc and Fortis Wealth Management Hong Kong Limited;
• BNS bolstered its long-time presence in Latin and South America with an agreement to acquire one of the largest banks in Uruguay - Nuevo Banco Comercial - as well as the corporate and commercial banking assets of Royal Bank of Scotland in Chile;
• BMO expanded its presence in the U.S. Mid-West, by acquiring Wisconsin’s biggest bank, Marshall & Ilsley Corp.;
• In December 2010, TD announced its agreement to purchase Chrysler Financial Corp., which will make TD one of the top five motor vehicle financiers in North America; and
• CIBC purchased an interest in a Bermuda bank, Bank of N.T. Butterfield and Son Ltd.

In 2011 it is likely that we will see Canada’s major banks continue to use their balance sheets to expand their presence abroad.

Financing Trends - Infrastructure & P3’s

Since the early 1990s, private-public partnerships, or “P3’s” as they are most commonly known in Canada, have been increasingly used in Canada to deliver infrastructure projects.  Despite considerable debate in early years as to the merits of the P3 model, all levels of Canadian government now regularly consider P3 when assessing new projects.  While originally focused on hospitals, schools, roads and bridges, P3’s are now being implemented in sectors including telecommunications, renewable energy and rapid transit.  More recently, there has been an increase in interest in developing P3 structures which accommodate the needs of additional stakeholders, including municipal governments and First Nations’ groups.

The role of Canadian banks in P3 deals has typically been limited to short term construction financing and to financial advisory roles.  Prior to the credit crisis (and to some degree since), long term financing (typically having a 20-30 term) had been provided by UK and European banks.

In the wake of the financing vacuum caused by the credit crisis, Canadian P3 projects have largely been financed through the Canadian US and international bond markets in both private-placement and public bond offerings.  Canadian banks have been active as underwriters and lead arrangers for these bond issuances, and there is every indication that they will increase in 2011 and beyond.

Canadian banks’ strong domestic business models and record of conservative but sustained growth, coupled with the surge in interest in P3 projects, suggest that there will be many opportunities for a more extensive role by Canadian banks in the Canadian P3 sector in the coming years.

Eric Belli-Bivar's practice is focused on corporate finance transactions, including banking, structured finance and securities. He provides advice to all types of providers and consumers of credit, including Canadian and foreign banks and other financial institutions. His practice emphasizes efficient and creative solutions to unique and unusual financings.

Eric's corporate finance work includes both private placement and public issues of a variety of debt instruments, particularly in the area of bond financings.  Eric's bond financing transactions include sophisticated index-linked debt instruments and real return bonds placed domestically, in the USA and European markets.  Eric can be contacted on +1 416 941 5396 or by email at ebelli-bivar@davis.ca