Canadian banks envy of the world

MONTREAL – What’s wrong with this picture?

Banks in the U.S. and Europe are struggling to adjust to new rules that limit their speculative trading and boost their capital requirements.

They’re bracing for a big hit in credit markets if the European debt crisis gets any worse.

But here in Canada, life is great.

If you’re a banker, your earnings are generally beating expectations and you’re making the kind of money that your counterparts in other countries can only dream about.

The latest example is National Bank of Canada, which Thursday reported record income for 2011 and outdid its Canadian competitors by raising its quarterly dividend by six per cent to 75 cents a share.

For the fourth quarter, profits rose two per cent to $294 million, or $1.74 per share, up from $287 million, or $1.66 a year ago.

If this keeps up, we’ll soon be hearing calls to break up the Canadian banking oligopoly and get more competition into the industry. After all, the Canadian financial sector is among the most concentrated in the world and more competition is always a good thing.

But before we start the bank bashing, let’s consider the alternative. The rest of the world is teetering on the edge of another banking crisis while in Canada we can at least rely on well capitalized institutions without significant exposure to major financial risks such as European sovereign debt.

For example, National Bank officials revealed on a conference call that their net exposure to European sovereign debt in the last quarter was just $736 million – peanuts compared to the total loan portfolio.

Desjardins Securities analyst Michael Goldberg characterizes Canadian, U.S. and European banks as “the good, the bad and the ugly” and that’s not likely to change, even after yesterday’s measures by the European Central Bank to support troubled institutions there.

Louis Vachon, National’s CEO, said that if there’s no recession in 2012 and no nasty macroeconomic incidents, the bank will continue to target earnings per share growth of five to 10 per cent a year, and that could be higher with share buybacks. Return on common equity is pegged between 15 and 18 per cent.

Nice steady growth with no apparent bumps in the road. So far, impaired loans and credit provisions do not show trouble brewing.

Still, it might be considerably harder for Canadian banks to replicate their achievements next year, when there’s so much uncertainty about the economy. Already, analysts are seeing lower margins on the banking sector’s earnings – a sign that times are getting tougher.

Vachon acknowledged as much when he said that “for 2012, we anticipate an environment of low economic growth, intense competition and persistent global macroeconomic uncertainty.”

The low interest rate environment and the tighter regulatory requirements facing banks create challenges but also opportunities, he noted.

The bank will respond with tighter cost controls and more focus on customer service. Its business plan is built around what Vachon calls the “one client, one bank” program offering the full range of financial services to customers.

Investment in new technology will continue to grow as the bank rolls out new platforms like mobile banking to its customers.

And in 2012, Vachon says National will continue its expansion strategy in Canada, after a year that saw it make major acquisitions of the wealth management businesses of both Wellington West and HSBC Securities.

The integration of Wellington West is on plan and less expensive than budgeted. National Bank has retained 96 per cent of the more than 180 financial advisers that came with the deal, along with about $10 billion in assets under management. It’s closing eight offices to achieve financial synergies.

The acquisition is expected to add $15 million in net pre-tax income next year.

The HSBC Securities deal is set to close Jan. 1 and should add up to $9.5 billion in assets and more than 80 advisers.

For National and the rest of Canada’s financial industry, the rich just keep on getting richer.

phadekel@videotron.ca

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