KPMG has recently completed a study that seeks to compare the relative economic and financial performances of both countries and explore why their respective banking systems have proved so resilient. The document, Canadian Economy & Major Banks: A Comparison with Australia, focuses on Australia's 'Big Four' banks (Commonwealth Bank, Westpac, ANZ and National Australia Bank) and the Canadian five major banks (Royal Bank of Canada, Toronto Dominion, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce).
The highlights of the study and the key factors that contributed to the strong performance of Australian and Canadian banks during and after the financial crisis are as below:
- The past conservatism of Canadian and Australian regulatory requirements with respect to capital adequacy requirements, including the emphasis given to Tier 1 capital, allowed their national banking systems to act as absorbers rather than as transmitters of the shocks which were occurring in the financial system
- The relative stock price performance of banks over a 10-year period, the Canadian ‘big five’ outperformed their Australian ‘big four’ counterparts with a relative market-cap weighted price return of 195 percent.
- The ‘big four’ Australian banks all featured in the top 50 global banks by market capitalisation, both preceding and following the crisis period. In contrast, only three of the ‘big five’ Canadian banks figured in the top 50 (RBC, TD and BNS) during the pre-crisis period, however, all five banks featured in the post-crisis period rankings.
- Lending standards were not compromised to the same extent as elsewhere. For example, Australian and Canadian banks had minimal sub-prime exposures compared with their US counterparts with <1 percent and <3 percent exposure respectively compared to approximately 15 percent in the U.S.
- Australian and Canadian banks' balance sheets remained heavily weighted to domestic loans, particularly to the historically low-risk household sector. House price indexes of both countries have displayed high correlation during 2004-10.
- The Australian major banks are all rated AA by Standard & Poor's while the Canadian major banks are all rated AA minus or A plus.
- All Australian and Canadian mortgages are 'full recourse' loans. In Canada, mortgage insurance is compulsory for federally regulated financial institutions when the loan-to-value ratio exceeds 80 percent. Australian prudential standards encourage such insurance.
- Canadian majors are comparatively more geographically diversified than Australian majors (only ANZ and NAB having more than 10 percent of their revenue generated outside the domestic market).
- The funding structure of Canadian banks relies much less on wholesale funding, and much more on depository funding. Canadian majors source more of their funding from deposits (66 percent for 1H10) compared to the Australian majors (55 percent for 1H10).
- Net interest income constitutes about 67-68 per cent of total revenue for Australian majors vis-á-vis 50 per cent of total revenue for Canadian majors.
- The average cost to income ratio for Canadian majors is higher at 55.9 per cent compared with 45.0 percent for Australian majors.
- Canadian and Australian major banks have larger retail lending than business lending (median of 66.6 per cent for Canadian majors compared with 62.5 percent for Australian majors).
Based on the most recently announced results, major banks of both countries have delivered positive lending and earnings growth. Business credit is improving from the lows of 2009 due to improved economic activity and business confidence. Increasing pressure on trading and underwriting revenues coupled with rising funding costs continue to impact earnings.
For a copy of the study referred to above, or to discuss any of the matters raise in this article, please contact: