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Risk management under question at Canadian Banks

With these two quotes taken from various press, and summarised on the always complete Canadian Banks blog, it is clear we are entering a period of signficant mistrust amongst at least two of the Banks.

Canadian Banks & Insurance Blog

Canadian Imperial Bank of Commerce is putting its stock — and the fortunes of its shareholders — at the mercy of hedge funds and other sophisticated players because of the piecemeal way the bank is disclosing its exposure to investments in U.S. subprime mortgages and other complex securities, says a Bay Street analyst.

Also not fully explained yesterday was how CIBC, whose mantra for the past couple of years has been to de-risk the bank, got enmeshed in a variety of U.S. businesses that some other financial institutions avoided. In short, what was the culture of an organization that believed it could be an active participant in a U.Smarket with some of the smarter and major U.S. players? A partial explanation was that CIBC was in the structured-credit business, a business it deemed to be “low-risk” — while some of the others weren’t.

Canadian Banks & Insurance Blog

This announcement does not give us comfort that the headline risks that plague BMO are behind it, as we believe the bank is still exposed to more writedowns and many questions remain unanswered. Outside of these headline risks, the bank is weaker than its peers in retail banking, has more exposure to low multiple wholesale earnings, and more exposure to potential calls on liquidity if the financial services system sees more liquidity contraction.

At the core of these three points, is the earlier promise and history of risk avoidance that has now turned into an apparent willingness to take extreme risks beyond that which other Banks have done. Banks have a history of risk management, and the central tenet of risk management is to not take unnecessary risk. Presumably these risks have been taken to buoy earnings that may have been otherwise lagging in traditional bank products, but those decisions do not look so good now.

There is also the point, that some of those trusts have funds invested by some of the wealthiest Canadians, and they would not be happy to lose their investment, so to a certain extent, these Banks are caught in a classic trap of whether to satisfy analysts / markets, or customers.

The good news is that Canadian Banks are generally well capitalised, and will weather the storm over time with some careful stick handling.

Written by Colin Henderson

February 29, 2008 at 17:54

Canadian Banks restructure debt | Globe & Mail

Reported in the Business section today, the Canadian financial institutions have agreed on a restructure of $33 Bn in Asset Backed Commercial Paper (ABCP). That ABCP has been frozen and not able to be traded since August, when the US Subprime crunch hit.

The deal includes a $14 Bn credit facility, and basically exchanges short term notes for longer dated paper.

Interestingly the spokesperson for the group that arranged the deal, is a Toronto lawyer, Purdy Crawford. The group is called Pan-Canadian Investors. Based on conversations with a colleague, I suspect this is all a front for the Bank of Canada attempting to calm the markets, by replacing short term pressure on the market with longer terms.

Written by Colin Henderson

December 24, 2007 at 10:06

Canadian Banks write off $2.1Bn in US Sub Prime mortgages

So we have all the main expected players having reported in Canada now, with a projection on National Bank. As predicted it exceeds $2bn. There has been nothing like this since in size since the 80’s real estate losses, which were driven by high interest rates. This situation in 2007, however is driven purely by bad lending practices, and risk assessment.

  • RBC $ 360M
  • CIBC $ 753M (includes write down from 2nd Qtr)
  • BMO $ 320M
  • BNS $ 190M
  • National $ 500M (projected)


Other significant losses include the Natural gas commodity speculation
$700M (BMO). Note the Banks are able to mask these losses
somewhat, with expected one time gains in the areas of Visa and MasterCard. BMO takes $320-million in debt writedowns

Bank of Montreal said it will take pretax writedowns of about $320-million in the fourth quarter as a result of its exposure to complicated credit products ranging from asset-backed commercial paper to structured investment vehicles.

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Written by Colin Henderson

November 17, 2007 at 16:47

Posted in Uncategorized

Canadian Banks write off $1.2 Bn … so far – [33% default rate]

RBC announce $0.4Bn charge related to sub prime, bringing the Canadian total to $1.2 Bn so far.  The astounding statistic here is that the RBC charge relates to 33% of their outstanding in that sector. 

What kind of risk assessment was done on an investment made within the last 2 years that produces 33%+ default rates?  And using Canadian depositors money no less.   I could comment on the less than 3% default rate at Prosper, but no, I won’t go there … today. RBC to take $360-million charge amid credit crunch

The subprime writedown, which amounts to about one-third of the bank’s exposure, is slightly smaller — on a percentage basis — than the charge that Canadian Imperial Bank of Commerce has taken, Genuity Capital Markets analyst Mario Mendonca said in a note to clients.

Last week, Canadian Imperial Bank of Commerce announced that it will take a $463-million pre-tax hit on its exposure to subprime-relatedsecurities. That brought CIBC’s total writedowns to $753-million for the last six months as a result of these investments, an issue that prompted the bank to parcel off much of its U.S. investment banking operations, which were sold to Oppenheimer Holdings Inc. for a minimal sum.

• There is a lot of uncertainty surrounding BMO in terms of the bank’s
potential write-downs from non-bank ABCP liquidity facilities and
perhaps recent holdings in non-bank ABCP, as well as its Structured
Investment Vehicles (SIVs). The potential magnitude of the writedown is
difficult to ascertain but could be as high as $500 million.

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Written by Colin Henderson

November 13, 2007 at 11:46

Posted in Profitability

Canadian Banks fight for customer loyalty

Interesting dichotomy outlined in this Star story, which has a different and more complete version in the paper version somehow.

Beginning Nov. 1, more than 800 TD Canada Trust branches will open Monday to Saturday at 8:00 a.m. providing at least 62 hours of financial services to customers. In addition, more than 900 branches will stay open till 4 p.m. every Saturday.

Source: The Star

The paper version goes on to compare this TD approach to BMO and Scotiabank, both of whom are using loyalty plans (Airmiles, and movie points respectively) to retain customers.

These are measures that will have some impact no doubt, but will not break one of the banks out of the pack, in my view.

Interestingly, one of the Banks not mentioned in this article is RBC, who are both the largest in Canada, and also reputed to have a sophisticated CRM system implemented across channels.

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Written by Colin Henderson

June 7, 2007 at 18:49

How should Canadian Banks respond to the Government pressure on ATM fees?

 I have had the job of creating the response to this type of criticism.  Its an easy response to make – we own the ATM’s, we can charge other Banks customers, but we don’t charge our own, ATM’s are horribly expensive costing $100’s of millions for a 2 – 3 thousand ATM network.

If the banks gave up, or reduced, ATM fees, maybe implicitly Ottawa is saying, ‘We might look more favourably on you as an industry if you come to us looking for changes in the Bank Act,’ ” he said.

Source: Canadian Banks & Insurance

But all those arguments fall on deaf ears.  Especially in Canada, the weight of opinion will not hear that rationale, and especially not ordinary citizen opinion.

This is the ideal opportunity for a Bank(s) to break away from consolidating their views through the Canadian Bankers Association (CBA) and take a lead position.  Everyone is fighting for market share, and also fighting to retain revenue.  Will market share be improved by taking a common defense?

Question I would ask:  what is the market share benefit of elimination of fees?  This is an interesting business case.


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Written by Colin Henderson

March 1, 2007 at 18:17

Posted in ATM, Profitability

Canadian Banks – not much to differentiate

 Nice succinct review of Dundee’s targets and expectations for Canada’s Banks. 

  • BMO – market neutral, 12-month price target is C$75.00
  • CIBC – market outperform, 12-month price target is C$115.00
  • National Bank, market neutral, 12-month price target is C$68.00
  • RBC – market neutral, 12-month price target is C$59.00
  • Scotiabank – market outperform, 12-month price target is C$57.00
  • TD Bank – market neutral, 12-month price target is C$76.00

Source: Canadian Banks & Insurance

What really is striking from comparing the Canadian Banks over a 5 year view is that there is little to differentiate.  As an investor just buy one, and they all work.  (Not RBC had a stock split, hence the sudden drop in 06).

What does that say about their differentiated strategies?

Written by Colin Henderson

February 20, 2007 at 23:21

Posted in Uncategorized

Canadian Banks asked for answer on ATM fees

 I can’t wait to see the response to this.

Jim Flaherty, the Finance Minister, has asked for a “direct” answer from the CEOs of the country’s biggest banks regarding their ATM fee regime. But the best consumers can hope for is that Mr. Flaherty’s pressure will force the banks to roll back fees. That’s because Ottawa does not regulate the day-today pricing of financial services products

Source: Canadian Banks & Insurance

What a great opportunity for differentiation.  In Canada each Bank charges customers of any other Bank a $1.50 fee for using their ATM.  At first this seemed brilliant because the penalty is against the other Banks’ customers.  However as time goes by, the opposite happened as customers interpreted (subliminally) those fees as a sign of Bank oligarchy.


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Written by Colin Henderson

February 20, 2007 at 21:45

Posted in ATM

Canadian Banks & Insurance | RBC, Scotiabank to Add Branches

In a reversal of recent trends, building branches is becoming popular, in order to attract market share and deposits. 

Royal Bank, the country’s largest bank by assets, may build as many as 112 branches in the next four years, Chief Operating Officer Barbara Stymiest said today at a CIBC World Markets investor conference in Montreal. Scotiabank, the third-biggest bank, plans to open 30 branches next year, Chief Executive Officer Richard Waugh said at the same conference.

Canadian Imperial Bank of Commerce, the fifth-largest bank, said last month that it plans to open or expand 70 branches in the next five years.

Source: Canadian Banks & Insurance

112 branches will cost $1.7 Bn, and add $170 million in annual expenses.  The increase represents a 10% increase in branches, so that suggests that the other 90% of branches have to support the 10% over the 5 years it takes for them to develop profitability.

I keep going back to the “23 branches in 3 months (using Internet)” story and the “Bank for every block (and empty)” story whenever I see this return to branch building.


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Written by Colin Henderson

October 5, 2006 at 21:01

Posted in Branch, Online Banking

Canadian Banks & Insurance: Canadian online brokers ranking belies their success

The Canadian online brokerage industry lives under the shadow of the Globe and Mail rankings, to a far greater extent than the Banks worried about the old Gomez online banking surveys.  I believe those surveys, while useful indicators, can result in dysfunctional investment, and all the while the customer is lost.

Consider the facts:

Globe & Mail Market Share
Qtrade TD
ETrade RBC
Credential BMO InvestorLine






The surveys are useful indicators, but they drive Banks and Brokers into a functionality race, so customer and community engagement is lost.

” No. 1 / Qtrade Investor / / Parent: Privately held

Report Card

Fees and commissions 21/25 Tools and research 12/20 Trading 16/20 Customer satisfaction 9.5/10 Account information 9/10 Investment selection 8/10 Website 4.5/5 Total 80/100 Grade A

” No. 2 / E*Trade Canada / / Parent: E*Trade Financial Corp.

Report Card

Fees and commissions 24.5/25 Tools and research 12/20 Trading 15/20 Customer satisfaction 7.5/10 Account information 6/10 Investment selection 8/10 Website 4.5/5 Total 77.5/100 Grade A-

” No. 3 / Credential Direct / / Parent: The credit union movement 

Report Card Fees and commissions 19.5/25 Tools and research 13/20 Trading 14/20 Customer satisfaction 9.5/10 Account information 9/10 Investment selection 8/10 Website 4/5 Total 77/100 Grade A-

” No. 4 / BMO InvestorLine / / Parent: Bank of Montreal

Report Card Fees and commissions 14.5/25 Tools and research 17/20 Trading 16/20 Customer satisfaction 7.5/10 Account information 9/10 Investment selection 8/10 Website 4/5 Total 76/100 Grade A-

” No. 5 / TD Waterhouse / / Parent: Toronto-Dominion Bank

Report Card Fees and commissions 12/25 Tools and research 18/20 Trading 17/20 Customer satisfaction 6.5/10 Account information 6/10 Investment selection 6.5/10 Website 4/5 Total 70/100 Grade B

” No. 6 / ScotiaMcLeod Direct Investing / / Parent: Bank of Nova Scotia 

 Report Card Fees and commissions 15/25 Tools and research 14/20 Trading 15/20 Customer satisfaction 8/10 Account information 6/10 Investment selection 5/10 Website 3/5 Total 66/100 Grade C+

” No. 7 / CIBC Investor’s Edge / / Parent: Canadian Imperial Bank of Commerce

Report Card Fees and commissions 13/25 Tools and research 13/20 Trading 15/20 Customer satisfaction 6/10 Account information 6/10 Investment selection 6/10 Website 3.5/5 Total 62.5/100 Grade C

” No. 8 / RBC Direct Investing / / Parent: Royal Bank of Canada 

Report Card Fees and commissions 14/25 Tools and research 16/20 Trading 13/20 Customer satisfaction 4.5/10 Account information 5/10 Investment selection 6/10 Website 3/5 Total 61.5/100 Grade C


Source: Canadian Banks & Insurance

Relevance to Bankwatch:

Surveys become self fulfilling, and feed on themselves.  As an example, in the detail here, G&M refer to the one thing that InvestorLine are lacking in “analyst research”, but this year they have addressed that.  I would be more interested in the association of analyst research with the InvestorLine business model, and the customer engagement they are seeking to develop.

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Written by Colin Henderson

September 17, 2006 at 21:02

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