Canadian Banking Sector: Market Volatility Continues, but Funding Is Stable and Unrealized Losses Appear Manageable
The Big Six Canadian banks lost approximately $57 billion (or 9.2%) in market capitalization over the past two weeks. We do not view the two significant U.S. bank failures as representative of the Canadian banking sector. Moreover, we do not expect the failure of Silicon Valley Bank (SVB) at this stage to have a significant adverse impact on Canadian banks. Our rating coverage universe of Canadian banks generally has a lower exposure to fixed-income securities, diversified and stable funding, sufficient liquidity, prudent risk/liquidity management, and capital buffers that should enable these banks to navigate current market turbulence. Nonetheless, we continue to closely monitor liquidity positions and exposure to fixed-income securities for banks in our rated Canadian bank universe. Additionally, credit default spreads in the banking sector have been widening and the volatility will likely result in higher funding costs that adversely impact profitability.Key highlights include:
-- We view the issues surrounding SVB's sudden failure as idiosyncratic given its highly specialized business model, and we do not expect the near-term impact to the Canadian banking sector to be significant.
-- Deposit funding at rated Canadian banks generally remains sound and well diversified.
-- Higher interest rates have increased the unrealized losses on bond portfolios for Canadian banks; however, the CET1 impact is manageable and illustrates the capacity to absorb these losses in the severe event they become realized.
“The Canadian Banks generally have diversified funding with well-laddered wholesale debt maturities and broader customer deposit bases. Given the higher rate environment that makes alternative opportunities more attractive, such as money market funds, we expect continued pressure on funding costs,” said Carl De Souza, Senior Vice President, North American Financial Institutions. “Canadian banks' investment securities portfolios have seen significant increases in unrealized losses. We do not currently expect that the Canadian Banks will require premature sales of securities given their solid liquidity and funding profiles. Nevertheless, the market remains nervous with market volatility not necessarily based on fundamentals.”
Bank of Montreal is a financial services organization. Co. provides a range of retail banking, wealth management and investment banking products and services. Co. serves its clients through three operating groups: Personal and Commercial Banking, which provides financial services to personal and commercial customers; Private Client Group, which provides wealth management products and services to individuals and select institutional segments; and BMO Capital Markets, which provides clients financial and capital markets services to corporate, institutional and government clients.
Scotiabank is a financial services provider in North America, Latin America, the Caribbean and Central America, and parts of Asia. Through its three operating segments: Canadian Banking, International Banking, and Global Banking and Markets, Co. provides a range of advice, products and services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. As of Oct 31 2017, Co. had total assets of C$915,273 million and total deposits of C$625,367 million.
Canadian Imperial Bank of Commerce is a financial institution. Through its three business units, Co. provides a range of financial products and services to individual, small business, commercial, corporate and institutional clients in Canada and around the world. Co.'s Retail and Business Banking business unit provides financial advice, products and services. Co.'s Wealth Management business unit provides integrated advice and investment solutions. Co.'s Capital Markets business unit provides integrated credit and global markets products, investment banking advisory services and research. As of Oct 31 2017, Co. had total assets of C$565.26 billion and total deposits of C$439.71 billion.
National Bank of Canada is a provider of financial services that include banking and investment solutions for individuals and businesses as well as securities brokerage, insurance and wealth management services. Co. operates in three business segments: Personal and Commercial, which encompasses the banking, financing, and investing services; Wealth Management, which comprises investment solutions, trust services, banking services, lending services and other wealth management solutions; and Financial Markets, which encompasses banking services, investment banking services and financial solutions. At Oct 31 2017, Co. had total assets of C$245.83 billion and total deposits of C$156.67 billion.
Royal Bank of Canada is a financial services company that provides personal and commercial banking, wealth management services, insurance, investor services and capital markets products and services. Co. serves personal, business, public sector and institutional clients through offices in Canada, the U.S. and 37 other countries. Co. is organized into five segments: Personal and Commercial Banking, which is comprised of Co.'s personal and business banking operations, and its auto financing businesses; Wealth Management, Insurance; Investor and Treasury Services; and Capital Markets. As of Oct 31 2017, Co. had total assets of C$1.21 trillion and total deposits of C$789.64 billion.
Toronto Dominion Bank provides financial services. Co.'s segments comprised of: Canadian Retail, which include Canadian personal and commercial banking businesses, Canadian credit cards, TD Auto Finance Canada and Canadian wealth and insurance businesses; US Retail, which includes the US personal and commercial banking businesses, US credit cards, TD Auto Finance US, US wealth business and the Bank's investment its subsidiary, TD Ameritrade Holding Corporation; and Wholesale Banking, which provides a range of capital markets, investment banking, and corporate banking products and services. As of Oct 31 2017, Co. had total assets of C$1.28 trillion and total deposits of C$832.82 billion.
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