Canadian banks manage 2.2% growth in 2007—real test is on its way

TORONTO — 2007 was a pivotal year for the banks. According to Canadian Banks 2008, PricewaterhouseCoopers’ (PwC) annual review of the banking industry, Canada’s big six banks combined 2007 net income was CDN$19.5 billion—a small increase in year-over-year growth of just 2.2%, compared to a record-breaking 50% increase in the previous year.

“While many of the banks were concerned about a possible downturn in the credit cycle, few foresaw the extent of the challenges and predicted it would stem from a liquidity crisis,” says Diana Chant, Partner and Leader of the PwC Financial Services Practice in Canada. “Challenging 2008 first quarter results are a clear indication that uncertain market conditions will continue to test the banks.”

In 2007, each bank readied itself for the tightening credit market by making changes and pursuing growth through acquisitions outside our borders. The largest of these deals was TD’s announced US$8.5 billion acquisition of Commerce Bank. The size of these acquisitions, however, paled in comparison to those made by banks at the global level. In fact, Canada’s largest bank, RBC, is now a third of the size of the third largest global bank.

“The growing size gap between Canadian and global banks is making it increasingly difficult for Canadian banks to compete,” says Chant. “Large global banks have far more resources for product development, systems development and acquisitions than their Canadian counterparts. It’s critical that Canadian banks become more focused and invest in a few, carefully chosen areas.”

Canadian Banks 2008 also looked at some of the challenges and opportunities the big six banks will face in the coming years, including:

Seizing environmental product and service opportunities

Facing growing competition from foreign banks

Preparing for the conversion to International Financial Reporting Standards (IFRS)

Protecting and winning market share through a focus on customers and talent

Streamlining the regulatory burden

“All of Canada’s banks are pursuing different strategies to improve their customer experience and their talent and risk management,” says Chant. “Over the next year, banks will be challenged by slower growth and continued instability in the credit markets. It will be very important for each bank to understand the impact of these changing conditions on their own operations, respond quickly and make effective decisions.”