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Industry Report - Banking - November 2008

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North America

Banking Sectors
A Company and Industry Analysis
Current Environment Key Points Current Environment US Sector Overview Sector Performance Leading Players Mergers and Acquisitions Current Environment Canada Sector Overview Sector Performance Leading Banks Mergers and Acquisitions Industry Profile US Industry Size and Value Industry Focus Policy and Regulatory Environment Industry Profile Canada Industry Size and Value Industry Highlights Policy and Regulatory Environment Market Trends and Outlook US Electronic Bank Crime on the Rise Foreclosures and Delinquencies Still Building Mortgage Applications Slow Market Outlook Market Trends and Outlook Canada Canada Leads Online Banking Adoption Rates Inflation in Canada Remains High Market Outlook Currency Conversion Table The Scope of This Report Key References Comparative Data Reports Coverage The credit turmoil continued to depress the US banking sector over the last six months and left banks in worsening state. Over the last six months, worse news about the sector sent worldwide banking stocks downward. Faced with the most challenging operating environment seen in decades, ongoing concerns about the health of bank balance sheets hampered M&A activity in the US banking industry. Although there was collateral damage to the Canadian economy from a slowdown in the US, financial trauma in the Canadian banking system was more subdued compared to its US and European counterparts. Over the six-month period ending September 2008, the S&P/TSX Composite Index tumbled 1,072.13 points to 12,064.57. Canadian banking stocks lost their shine and showed depressed performances. Losses from bad loans and slowing revenue from equity markets caused Canadian major banks to register steep profit declines. Industry Profile Key Points As of March 2008, Federal Deposit Insurance Corporation (FDIC) figures put assets held by the US banking industry at US$13.37 trillion, an increase from US$13.03 trillion in the first quarter of 2007. Banks have been forced to boost their capital levels to ensure sufficient funds to repay depositors and investors and to continue making loans to consumers and businesses. A new mortgage lending rule aimed at facilitating more responsible lending and protect consumers from shady lending practices was approved on July 14. The new rule will take effect on October 1, 2009. Canadian banks manage over C$2.6 trillion (US$2.45 trillion) in assets, accounting for over 70% of the total assets of the countrys financial services market. Canadian banks are touting their commitment to become more customer-centric and more serviceoriented in the hope that this approach will differentiate them from the rest. Market Trends and Outlook Key Points Banking crimes in the US, particularly check fraud and identity theft, are growing at a fast rate. A combination of factors, including tighter lending criteria, a slowing US economy and weak housing sales, have left more US homeowners facing foreclosure and bankruptcy. With loan rates hovering near one-year highs exacerbating the housing markets woes, application volumes for US home mortgages tumbled to their slowest pace in July since December 2000. Canadians lead most countries in embracing online banking. According to comScore, a global internet information provider, 67.1% of Canadian did their banking online in April alone. Inflation in Canada is expected to peak at 4.3% early next year, rising beyond the BOCs 1% to 3% target range.
November 2008

Industry Report - Banking - November 2008

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Industry Report - Banking - November 2008

Current Environment
United States
Sector Overview Even after a year since the credit crisis erupted, the health of the US banking system continued to deteriorate and its banks remained in a miserable state. Headlines went from bad to bleak and the torrent of troubles caused the sector to be confronted with an uninspiring six months. Alan Greenspan, who retired two years ago after serving 18 years as Federal Reserve Chairman, even said that the current credit turmoil was the most wrenching in at least 50 years and possibly more. The horrifying credit distress continued to depress the sector where it downed even resilient banks which used to yield juicy profits but started to report stunning losses. The nations economy continued to slow over the last six months, exacerbated by higher energy prices and the pain in the housing market that seemed to deteriorate. More worrisome, the weakening economy made investors, especially bond traders, harder to invest with confidence because even areas such as auto loans, commercial mortgages and credit cards that previously looked secure seemed vulnerable to losses. Concerns about the status of the nations banks, which were dogged by double fears of capital shortages and worsening credit, were heightened with further loan losses not ruled out. The past six months saw non-performing assets and net charge-offs continue to rise, while shares of banks sagged and many banks in the US reported massive write-downs. Once again, they had to beef up their loan loss reserves as the economy sputtered and the housing market softened. Globally, US housing deterioration sparked about US$500 billion in credit market losses and markdowns for banks since the start of 2007, according to the International Monetary Fund (IMF). Grappling with panic, the meltdown has morphed into a full-blown crisis and saw growing lists of bank failures. The enormous breadth and depth of the troubles has squeezed thousands of small lenders, local builders and businesses that rely on those banks for financing. Data revealed by the Federal Deposit Insurance Corp (FDIC), the US federal agency which guarantees bank deposits, showed that the number of ailing US banks jumped to 117 during the second quarter of 2008, the highest level in five years. By the end of March, there were only 90 on the list that exhibited financial, operational or managerial weaknesses. A turn of events shocked many and forever changed the US banking sector when investment bank Lehman Brothers and Washington Mutual (WaMu) (NYSE: WM), the largest US savings and loans, collapsed in September under the weight of their huge bad bets on the mortgage market. Merrill Lynch (NYSE: MER), on the other hand, was lucky to be saved after being snapped up by the Bank of America (BofA) (NYSE: BAC) for a mere US$50 billion. The 158-year-old Lehman Brothers came to an ugly end after filing for bankruptcy and after failing to attract investors to shore up its capital position. The company that began in the boom in US cotton trade before the Civil War was weakened by its large exposure to commercial real estate and wrote down its assets by US$5.6 billion in the third quarter, initiating a second straight quarterly loss of US43.9 billion. Lehman faded into history after efforts to hash out an orderly sale for the company faltered. With debts of more than US$8 billion and insufficient liquidity to meet its obligation, Seattle-based WaMu, which had about US$307 billion of assets and US$188 billion of deposits, was seized and shut down by the federal Office of Thrift Supervision (OTS) and the FDIC on September 26. Hit hard by the nations housing and credit crisis and already suffering from soaring mortgage losses, the lender by far was the biggest US bank to fail in history, eclipsing the US$40 billion failure of Continental Illinois National Bank, which failed in 1984, and the US$32 billion failure of IndyMac, which the Government closed down on July 11. A chunk of the thrifts banking assets were later sold to JPMorgan Chase & Co (NYSE: JPM) for US$1.9 billion, six months after bailing out Bear Stearns. The consequent panic on Wall Street prompted investors and clients to abandon even the most secure investment banks and made large, independent investment banks an endangered species. It forced Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) to convert to traditional bank holding companies. By transforming into bank holding companies, the two of Wall Streets last remaining investment bank came under the scrutiny of national banking regulators and will be subject to new capital requirements. The Fed and Treasury in the US were keen to treat the situation abruptly and were prepared to go to great lengths to defend the nations financial system.

Industry Report - Banking - November 2008

Current Environment - United States

On September 20, they swung into action to pacify the markets and avert an even worse meltdown. The Bush Administration announced a gargantuan US$700 billion bailout plan to keep credit flowing and to rescue fragile banks from bad loans that could derail the nation and global economies. Sector Performance After experiencing a great run for many years, US banks did not seem to be profitable in the current situation. Stubborn woes in the real estate market, the economic slump and stricter credit conditions continued to trim profits at the nations banks and added pressure on the banking industry in the second quarter of 2008. As the mortgage crisis unfolded, the earnings of many of the largest banks and thrifts remained weak and volatile and fewer banking institutions improved their earnings. By any yardstick, it was clearly another tough quarter for bank earnings. While the rising trend in troubled loans showed no sign of abating, loan losses rose much more sharply at the major banks. Higher loan loss provisions were the main cause of the drop in industry earnings, hampered also by market-related charges such as write-downs on asset-backed securities (ABS) and collateralized debt obligations (CDOs). The industry performance for the second quarter displayed dim results and data from FDIC disclosed that net income came at only US$5.0 billion. It was the second lowest quarterly total since 1991 and was US$31.8 billion or 86.5% less than what was earned in the second quarter of 2007. For the first half of 2008, profits of US commercial banks and thrifts were down by 66%. Quarterly loss provisions where banks have to add more money to reserves to cover potential loan losses eclipsed US$50 billion more than four times the US$11.4 billion quarterly total of a year ago. Stocks on Wall Street finished the six months ended September 3, 2008, with a downward plunge on worries that the rot of the credit crisis was spreading and the growing evidence of danger times ahead for the US economy. After the technology bubble burst in 2000 and the September 11 attacks, stocks were hurled lower but many on Wall Street feared that the effects of the nations current problems could end up being just as destructive, or more so. Disturbing news about the banking sector piled up during the period and banks that were poised to reveal that they remain on shaky footing sent stocks to steep losses. During the six-month period, the DJ Banks Titan 30 Index staggered and dropped 9.1% to reach 91.46 points on September 3. Its lowest level was at 72.88 points on July 15, with many banks looking the cheapest they had been in a decade. Banking stocks led the decliners and among the heaviest fallers were troubled mortgage financiers Fannie Mae and Freddie Mac whose share prices plummeted by 72.3% and 77.3% respectively after reporting larger-thanexpected second quarter losses.

Table 1: Quarterly Earnings of the US Banking Industry from 2004 to Q2 2008

(US$ billions) 40.0 35.0 30.0 25.0

19.3 31.8 31.2 32.5 34.0 31.0 33.2 34.7 32.6 28.7 36.9 38.0 38.1 35.3 35.6 36.8

20.0 15.0 10.0 5.0 0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2004 2005 2006 2007 2008
0.6 5.0

Source: Federal Deposit Insurance Corporation, August 2008

Industry Report - Banking - November 2008

Current Environment - United States

Table 2: Share Performance of Key Players in the Industry (US$)

Banks Decliners Freddie Mac Fannie Mae Washington Mutual Wachovia Corp Merrill Lynch Bank of America Citigroup Inc JPMorgan Chase & Co Gainers Wells Fargo Goldman Sachs

Closing Price March 3, 2008 $23.72 $26.44 $13.65 $30.41 $48.64 $39.18 $23.09 $39.82 $28.87 $165.08 September 3, 2008 $5.38 $7.32 $4.40 $17.18 $28.33 $32.96 $19.61 $39.71 $31.01 $167.61

Total Return (%)

-77.3% -72.3% -67.8% -43.5% -41.8% -15.9% -15.1% -0.3% 7.4% 1.5%

Source: Mergent Analysis & Respective Companies Note: Returns are calculated using the price of stock from March to September 2008

Although many believed that Wachovia Corp (NYSE: WB) would be able to survive on its own and was unlikely to suffer the same fate as WaMu, investors were concerned about its large troubled mortgage portfolio. Shares of the Charlotte, North Carolina-based bank plunged 43.5% to US$17.18. With the exception of Wells Fargo & Co (NYSE: WFC) and Goldman Sachs, shares of Citigroup Inc (NYSE: C), BofA and JPMorgan Chase & Co all registered their cheapest trades in at least a year, declining by 15.1%, 15.9% and 0.3% respectively. Unlike previous bad times, there was no swift rebound in banking stocks, with many analysts saying it would be a year until the market recovered in a more stable manner. Leading Players Tension in the financial markets was not eased and the mortgage meltdown that started last year continued to saddle the US major banks while losses that started with CDOs spread from one asset type to another. The leading banks were forced to make further write-downs in addition to the billions that had already been recorded. In April, Citigroup, which has topped the ranking with the most write-downs and credit losses at US$55.1 billion since the third quarter of 2007, and Merrill Lynch that followed with US$51.8 billion of write-downs, disclosed fresh subprime write-downs totaling US$15 billion or

more. In another sign of the intense pressure on leading banks, a string of them were forced to slash dividends or raise new capital in response to losses deriving from falling values of securities related to all types of home loans and commercial mortgages as well as leveragedloan commitments. As the credit crunch continued to wreck havoc, the six leading banks Citigroup, BofA, JPMorgan Chase, Wells Fargo, Wachovia Corp and US Bancorp (NYSE: USB) reported a slew of disappointing earnings. Wachovias operations were hit by billions of dollars in losses related to the mortgage and credit markets. A major player in retail banking and mortgages, things were from bad to worse for Wachovia over the past year. In the first quarter of 2008, the fourth largest US bank, which registered its first trip into the red since 2001, plunged into losses once again in the second quarter. This time it was about 12 times as large. It lost US$8.86 billion, which was more than it had ever earned in a full year. Since acquiring Oaklandbased Golden West Financial Corp in 2006, it has been suffering massive mortgage losses from its so-called Picka-Payment loans inherited from Golden West. More misfortunes hit the US largest banks. JPMorgan Chase, the third largest US bank, also lagged behind and reported dipped earnings although it largely dodged the

Industry Report - Banking - November 2008

Current Environment - United States

subprime bullet by shunning CDOs. JPMorgan was hurt by turmoil in the credit and mortgage markets, lower levels of liquidity and the cost of crippled rival Bear Stearns US$2.3 billion acquisition in March. Its net income of US$2.0 billion for the second quarter was down from its first quarter earnings of US$2.37 billion and less than half of the US$4.2 billion it earned in the second quarter of 2007. As more customers failed to pay back their loans, Wells Fargo, the nations fifth largest bank and the biggest US bank on the West Coast, dwindled and posted a drop in profit. For the April to June period, its profit fell by 22% to US$1.75 billion, down from US$2.28 billion for the same timeframe last year. A number of poor results were also displayed from a group of regional financial institutions, such as Cincinnati-based Fifth Third Bank (NYSE: FITB), Regions Financial (NYSE: RF), SunTrust Banks (NYSE: STI), National City (NYSE: NCC) and KeyCorp (NYSE: KEY). Citigroup (NYSE:C) After having to weather hard times brought on by the subprime crisis, Citigroup was keen to get its house in order and continue to focus on strengthening its business. After months of intense review, new Chief Executive Vikram Pandit had plans in mind to shrink the company by about one fifth and shed between US$400 billion and US$500 billion of its US$2.2 trillion in assets. The threeyear plan also includes cutting new loans to be held in portfolio mostly within its consumer and securities banking
Table 3: Ten Largest US Banks Ranked by Assets

sectors by half and growing its revenue by 9% as it strives to rebound from the massive credit markets losses. Apart from closing 32 sales distribution outlets and 540 ATMs in Japan, Citigroup also sold several businesses including CitiStreet, CitiCapital and Diners Club. Despite US$11.7 billion in write-downs and credit losses, its second quarter loss of US$2.5 billion was smaller than the market expected. Bank of America (NYSE: BAC) News grew tougher for BofA earnings as credit quality continued to weaken during the second quarter, particularly in markets that suffered the most significant drops in home prices. While its chairman and CEO, Ken Lewis warned that credit losses would remain an issue and would spread from residential customers to commercial borrowers, BofA was exposed to the struggling auto industry in the Midwest due to its purchase of LaSalle Bank late 2007 for US$21 billion. Profit for the nations second largest bank, which was also the largest retail bank, dived by 41% to US$3.41 billion during the April-June period as it more than tripled its reserve for loan losses due to a weak economy and declining home prices. This was the fourth straight quarterly decline but, was less than expected on record revenue. However, Ken Lewis remained optimistic and hoped that its high-profile acquisition of the troubled once largest mortgage lender, Countrywide Financial Corp on July 1, would add to profit by the end of the year and result in US$900 million of cost savings.

Rank 1 2 3 4 5 6 7 8 9 10

Bank Citigroup Inc JPMorgan Chase & Co Bank of America Wachovia Corp Wells Fargo & Co US Bancorp Bank of New York Mellon SunTrust Banks Inc National City Corp BB&T Corp

Reported Assets (US$ billion) as of June 30, 2008 2,100.54 1,775.67 1,716.88 796.44 609.07 246.54 195.99 176.23 153.67 136.46

Reported Assets (US$ billion) as of June 30, 2007 2,220.87 1,458.04 1,534,36 704.77 539.86 222.53 114.32 180.75 140.64 127.58

% Change -5.4 21.8 11.9 13.0 12.8 10.8 71.4 -2.5 9.3 6.9

Source: Mergent Analysis, September 2008

Industry Report - Banking - November 2008

Current Environment - United States

Mergers and Acquisitions Facing the most challenging operating environment ever seen, mergers and acquisitions (M&As) within the US banking industry went through a quiet spell. Downward pressure on banking stocks was a dampener on M&A activity, with acquiring companies not flush when their stock prices are depressed. Likewise, targeted companies cannot argue for healthy acquisition prices if their shares are sinking. Many will not sell because they wont get a good price and those that have high levels of lending portfolios tied-up with residential housing will further hamper M&A activity. Ongoing concerns about the strength of many banks balance sheets reduced the likelihood of M&As in the banking industry. Buyers tend to feel apprehensive about a target banks viability or attractiveness when capital is in short supply and profits are damaged. It is difficult to ascertain how much bad debt a bank might have when real estate loans have been securitized, bought and sold many times. This further compounded a difficult M&A landscape. During the tough credit conditions, most deals that came were likely related to banks that were underperforming and needed a partner soon to survive or worse. Larger banks with stronger capital positions acquired several troubled institutions over the past months for example. JPMorgan Chase purchased Bear Stearns in March and BofA acquired Countrywide Financial in July. It is uncertain whether these giants still have room to acquire others. After failing in the talks to buy Lehman, BofA turned its head to Merrill, which is considered a better fit for the retail giant. The 94-year-old Merrill, the worlds largest brokerage firm, agreed on September 14 to be taken over by BofA in a rushed bid to ride out the storm. The US$50 billion deal would create a global financial giant to rival Citigroup in terms of assets. Merrill, which had reported four straight quarterly losses, was struggling with tight credit markets and attempting to sell off toxic debt that caused the company to bleed capital. The transaction, which was expected to close in the first quarter of 2009, represented a perfect fit for BofA because by adding Merrills more than 16,000 financial advisers, BofA would have the largest brokerage in the world with more than 22,000 advisers and US$2.5 trillion in client assets. The combination would add give strength BofA in emerging markets such as India as well as strength in global debt underwriting, global equities and global M&A advice. Renowned for large acquisitions, BofA has spent over US$100 billion since 2004 buying other companies.

Industry Report - Banking - November 2008

Current Environment
Sector Overview The past six months were clearly a bad season for the entire banking sector. The gigantic financial meltdown left Canadian banks bruised and some beaten. In the month of September alone, a financial bomb exploded and the end result in the US saw three Lehman Brothers, Merrill Lynch and giant insurer American International Group (AIG) (NYSE: AIG) cave in within a day. Fears of a total breakdown of the global financial system took over and the values of shares worth billions of dollars around the globe were wiped off. In an effort to ensure sufficient cash and revived a system that has virtually ground to a halt, the worlds major central banks injected US$180 billion into global financial markets. This amount included US$10 billion pumped by the Bank of Canada (BOC) to ward off a total freeze-up of global capital markets. The massive US$180 billion rescue packages involved loans, sales of assets and company restructuring, all served to prop up confidence and stabilize the situation for the time being. However, the Canadian financial system was neither in the same shape as its US counterpart, nor suffered the same damage. Although there was collateral damage to the Canadian economy from a slowdown in the US, Canadas financial institutions were in a stronger position to weather the crisis. Big financials not only in the US, but also in Asia and Europe, were damaged with problem of risky mortgages packaged into bad securities but the number of Canadian banks that jumped on this risky bandwagon appeared to be much lesser. Compared with more than 30% in the US, the Canadian market for subprime mortgages accounted for only about 5% of residential mortgages, data from Toronto-Dominion Bank (TD) (TSX: TD) indicates. As for the nations own mortgage market, due to its banks more conservative nature, it contained very few risky mortgages and was less dependent on securitization for financing and on capital markets for revenues. Furthermore, there were fewer traumas on the housing market since prices were not in freefall as experienced in the US. Apart from having healthy balance sheets with good core funding and absolute leverage that was significantly lower than many of their international peers, Canadian banks tend to be more diverse across investment, mortgage and general retail operations. They hardly concentrate on one particularly area as US banks tend to practice and more importantly, the major banks were not involved largely in the subprime business. Another upside was that Canadian banks had better capitalizations and their write-downs paled in comparison to those of American and European banks, although the banks endured weaker results and lower earnings. Sector Performance Last year, despite an overall positive earnings growth, Canadian banking stocks lost their shine and put in a depressed performance. Canadian banking stocks were battered as dark stormy clouds spread over their US counterparts and, as a result, saw banks loose a tenth of their stock value in 2007. However, it was not as bad compared to American banks which were down by a third. Worries about the US financial system, the aftershocks of the implosion on Wall Street and signs of deteriorating loans at some of the regional banks in the US continued to reverberate across the Canadian financial landscape and put its banking stocks under pressure. Shaken by falling prices for Canadas main commodities and renewed fears in credit markets, the S&P/TSX Composite Index, the Tees benchmark index, dropped 1,072.13 points to 12,064.57 over the six-month period ending September 18. Following dismal news that Lehman Brothers filed for bankruptcy protection and after the take over of Merrill Lynch, investors dumped their stocks which resulted in a massive sell-off in North American stock markets. On September 17, S&P/TSX Composite Index was at its lowest at 11,877.69 points. The share prices of several banks tracked by Mergent were dragged down by the widespread US contagion, fresh rounds of write-downs and worries about overall financial market stability. The two biggest weighted losers were TD, sliding by C$3.72 (US$3.51) or 5.9% to C$59.25 (US$55.91), and Canadian Western Bank (CWB) (TSX: CWB), the nations eighth largest lender, down 3.0% to C$22.06 (US$20.82). TD saw its shares pushed lower by investor concerns about mounting credit losses while CWB said that disruption in

Industry Report - Banking - November 2008

Current Environment - Canada

the global financial markets may keep the regional bank from meeting its profit growth targets for the year. Other banks that joined in the list of fallers were Canadian Imperial Bank of Commerce (CIBC) (TSX: BCM) and Laurentian Bank of Canada (TSX: LB), which slipped 1.8% and 0.1% to close at C$59.68 (US$56.32) and C$41.95 (US$39.59), respectively. Market conditions hurt CIBCs wholesale and retail brokerage operation. By far, CIBC took the unwanted prize as the worst suffering of the banks hit by exposure to the US subprime crisis. The broader market overall was perturbed by concerns over how much the US Governments US$700 billion bailout plan, which was initiated earlier, to take over bad mortgage-related debt from financial groups will help financial markets in the long run. Investors were not sure over the effectiveness of the plan and whether it can successfully mop up the problem. However, not all experienced bad news. On the upside, the shares of Bank of Montreal (BMO) (TSX: BMO) jumped C$7.46 (US$7.04) or 17.8% over the six-month period ending September 18, while smaller rival National Bank of Canada (NBC) (TSX: NA) added C$4.39 (US$4.14) or 9.3% to C$51.35 (US$48.46). Meanwhile, Bank of Nova Scotia (BNS) (TSX: BNS) and Royal Bank of Canada (RBC) (TSX: RY), Canadas biggest lender, both climbed by 7.3% and 3.1% to close at C$47.37 (US$44.70) and C$47.99 (US$45.29), respectively on September 18. BNS, faced with lesser mortgage and credit losses, is
Table 4: Performance of Canadian Banking Stocks

geographically limited with excellent growth exposure in the Caribbean, South America and Mexico. Leading Players As the earnings season wrapped up, Canadian banks were seen to hit a steep profit decline on losses from bad loans and slowing revenue from equity markets. Since last summers financial crisis began, the major banks went through a rough stretch and endured weaker results although they eluded the state of calamity. The major banks in Canada have taken about C$11.6 billion (US$10.95 billion) in debt write-downs since the collapse of the subprime market last year and overall earnings were cut nearly in half to C$2.47 billion (US$2.33 billion) in the second quarter ended April 30. The profit continued to retreat in the third quarter and the nations six biggest banks RBC, TD, BNS, BMO, CIBC and NBC recorded a 21% drop in combined total earnings. Although the results were somewhat better than investors expected and write-downs were pale in comparison with their counterparts, profits were down to C$4.15 billion (US$3.92 billion) from a year ago C$5.26 billion (US$4.96 billion) due primarily to the major banks slacking capital markets divisions. The leading banks practically spent the quarter logging more credit losses with CIBC the far worst affected among Canadas big banks. CIBC, ravaged by write-downs from its subprime mortgage and CDO exposure, saw its earnings

Bank Decliners Toronto-Dominion Bank Canadian Western Bank Canadian Imperial Bank of Commerce Laurentian Bank of Canada Gainers Bank of Montreal National Bank of Canada Bank of Nova Scotia Royal Bank of Canada

Closing Share Price as on March 18, 2008 September 18, 2008

Percentage of Change (%)

C$62.97 C$22.75 C$60.75 C$42.00

C$59.25 C$22.06 C$59.68 C$41.95

-5.9% -3.0% -1.8% -0.1%

C$41.89 C$46.96 C$44.16 C$46.53

C$49.35 C$51.35 C$47.37 C$47.99

17.8% 9.3% 7.3% 3.1%

Source: Mergent Analysis, September 2008

Industry Report - Banking - November 2008

Current Environment - Canada

tumble 91% year-over-year to C$71 million (US$67 million), compared with C$835 million (US$787.96 million) in the corresponding period of 2007. The fifth largest bank, which sold off its US investment banking division to one of the leading national investment boutiques to Oppenheimer Holdings Inc (NYSE: OPY) late last year, took a total of C$7.58 billion (US$7.15 billion) in writedowns over the past nine months. By far, the figure was the greatest wallop from the credit crunch among Canadian banks. However, the profit numbers were not as bad as previously thought. CIBC moved into the black after two consecutive quarterly losses. Meanwhile, the profits for BMO, Canadas fourth largest bank, and BNS, the No. 3 lender for the third quarter slipped from last year on rising loan losses. After taking a C$96 million (US$90.59 million) after-tax charge stemming from capital market losses, BMOs performance was less than stellar and displayed a drop in its profit. Its net income for the period dropped 21% to C$521 million (US$491.65 million), its fifth straight profit slide. BNS, on the other hand, fared better than BMO due to its limited US operations. BNS, which operates mainly in Canada, Mexico and Latin America, saw its net income for the period ended July 31 down only by 1.9% to C$1.01 billion (US$953.09 million). The Toronto-based banks strategy of diversifying across business lines and geographies has enabled it to perform better. Montreal-based NBC, the smallest of the Big Six, was a big winner in the third quarter. Compared with disappointment at several of the nations banks, NBC did not suffer the same fate but instead was the only one of the Big Six to
Table 5: Key Players in the Canadian Banking Industry

report a higher profit. Although having to struggle with a C$37 million (US$34.92 million) pre-tax loss from assetbacked commercial papers (ABCP), NBC reported a solid performance in the third quarter and actually saw its profit rise to a record C$286 million (US$269.89 million), up from C$243 million (US$229.31 million) a year earlier. While its peers took further hits on their troubled credit portfolio, NBCs good surprise was driven by a solid contribution from the financial markets segment, as well as by personal and commercial lending. After taking a C$498 million (US$469.94 million) hit in pretax write-downs, RBC faltered and reported a lower profit. The third quarter profit at the nations largest bank was C$1.26 billion (US$1.19 billion), down by 10% from a year ago. The profit, which declined for a third straight quarter, its longest streak in nine years, was hurt by capital markets charges and higher loan loss provisions largely in its US banking operations. During the quarter, RBC set aside C$334 million (US$315.18 million) for bad loans, almost double from a year earlier. Its earnings from the RBC Capital Markets investment banking unit tumbled 25% to C$269 million (US$253.84 million) as stock sales and takeovers in Canada cooled, while RBCs international consumer banking unit reported a C$16 million (US$15.09 million) loss, versus a profit of C$87 million (US$82.09 million) a year earlier. TD Bank, Canadas second largest bank, was not fortunate either. Compounded by a significantly large drop (down by 85%) of net income at its wholesale banking unit, overall third quarter profit fell to C$997 million (US$940.83 million) from C$1.1 billion (US$1.04 billion) from the

Asset Rank 1 2 3 4 5 6

Bank RBC Financial Group TD Bank Financial Group Bank of Nova Scotia Bank of Montreal Canadian Imperial Bank of Canada National Bank of Canada

Reported Assets (C$ million) as of July 31, 2008 636,792 508,839 462,407 375,047 329,040 121,931

Reported Assets (C$ million) as of July 31, 2007 604,582 403,890 406,115 359,154 338,881 123,353

Percentage Of Change (%) 5.3 25.9 13.9 4.4 -2.9 -1.1

Source: Mergent Analysis, September 2008


Industry Report - Banking - November 2008

Current Environment - Canada

Table 6: M&A Activity by Industry

First Quarter 2008 Industry Group Industrial Products Oil & Gas Metals & Minerals Real Estate Financial Services Consumer Products Merchandising Transportation & Environmental Services Utilities Gold Communications & Media Paper & Forest Pipelines TOTAL No. of Deals 91 70 40 28 23 19 19 11 11 10 10 6 0 338 Value (C$ millions) 2,892 7,429 2,360 1,339 1,982 707 217 221 3,517 3,224 183 210 0 24,281

First Quarter 2007 No. of Deals 98 85 68 113 43 39 33 10 10 5 14 4 1 523 Value (C$ millions) 15,967 8,786 2,528 7,677 9,148 851 1,559 253 5,098 546 4,071 3,977 1,060 61,521
Source: Crosbie & Co, May 2008

same time in 2007. While it was clearly a tough quarter for its wholesale bank, TD Canada Trust, its main Canadian retail operation, registered record earnings of C$644 million (US$607.72 million) in the third quarter, up 8% over the corresponding period last year. In further good news, earnings at its US personal and commercial banking unit, which now includes New Jersey-based Commerce Bancorp (NYSE: CBH), more than doubled to C$244 million (US$230.25 million). Mergers and Acquisitions During the first three months of 2008, lingering concerns, tighter equity markets, higher borrowing costs and economic uncertainty in the US and Canada continued to curb M&A activity in Canada. M&As in Canada were much rarer and went back to their lowest level since early 2005 after a three-year long boom. M&A activity was on hold as buyers questioned just how much the market had fallen, while sellers were not comfortable that the buyers were the right solution at the right price. Stronger and capable banks decided to wait until the economy and housing market showed signs of stabilizing. Compared to a year ago, the value of M&A continued its downward trend and recorded

a dramatic drop from C$62 billion (US$58.51 billion) to C$24 billion (US$22.65 billion) in the first quarter of 2008, according to Toronto-based investment bank Crosbie & Co. There were only 338 transactions, well off the 523 deals in the first quarter of 2007. It was noted that the financial services group made 23 deals during the January to March period, down from 43 deals in the corresponding period of 2007. Throughout the years, Canadian banks have grown their banking businesses outside of Canada significantly through acquisitions and organic growth after facing ceaseless frustration in their attempts to merge domestically. The Canadian Government has effectively ruled out big domestic bank mergers ever since 1998, with fears that such deals would lead to price-gouging or higher service charges and would have a negative effect on services. With deals off the table in the domestic market, major banks such as RBC, BNS and TD have fled to expand in south of the border over the past years. RBC has made more than 20 acquisitions in a range of business lines over the past eight years and intends to grow its capital markets business through building


Industry Report - Banking - November 2008

Current Environment - Canada

businesses and making small acquisitions such as energy firms, money managers, wealth managers and investment management companies. In June, RBC bought Bostonbased money manager Access Capital Strategies LLC, its second acquisition in the month and its 11th in the past two years. A few weeks earlier, the countrys largest bank completed its acquisition of Richardson Barr & Co (NYSE: RY), a leading Houston-based energy advisory firm. The acquisition was expected to strengthen RBCs US investment banking business. The terms of both deals were not disclosed. With US banks looking increasingly vulnerable and rather cheap and with Canadian banks armed with a stronger loonie, there was no better time than this year to seize the opportunity to buy up more US banks. Canadian banks have tended to be labeled as timid and criticized as not being able to complete globally because they are too small. However, thanks to the credit crisis, they might have the chance to do transformative deals that could make them bigger North American players. Although it may sound attractive, Canadian banks are unlikely to buy US banks just because they are cheap and may prefer to pay more but be very comfortable with a banks assets. From the banks perspective, it is a time to be extremely cautious and avoiding deals that might prove to be disastrous. The banks may not rush into a spending spree in the US and get caught in potential targets weak balance sheets. Furthermore, the targets the Canadian banks are scouting for are much more likely to be solid acquisitions that complement existing plans.


Industry Report - Banking - November 2008

Industry Profile
United States
Industry Size and Value One role of banks is to support the growth of its countrys economy and create jobs. Playing a central role in keeping the many parts of the nations economy moving, banks turn new deposits into funds that can be lent out to individuals and businesses. This stimulates growth and promotes economic flexibility. The recently unveiled first quarter 2008 figures by the Federal Deposit Insurance Corporation (FDIC) show that the US banking industry held a total of US$7.97 trillion of loans in its own portfolios. Moreover, the physical presence of 99,221 bank offices and branches and the convenience of 415,321 ATMs not only assures convenient access to local financial services, but gives banks a personal stake in the economic growth and vitality of both small towns and large cities everywhere. US banks hold US$8.56 trillion in total domestic deposits and process more than 40 billion checks each year. The widespread adoption of ATMs has enabled the total US ATM transaction volume to increase to 14.9 billion in 2007 from 10.7 billion in 1996. The number of ATM machines also tripled from 139,134 in 1996 to 415,321 in 2007. In addition to the contribution banks make to
Table 7: Share of US Banking Industry Assets by Group

general economic growth, the banking industry itself is an important component of the economy. The industry employs 2,212,766 people. Banks in the US have always supported the financial needs of businesses both large and small, from start-ups to multinational corporations. Bank credit helps small businesses, which represent 99.7% of all firms in the US and are responsible for generating 60-80% of net new jobs annually over the last decade, according to the Small Business Administration (SBA). US banks had almost US$600 billion in small business loans in 2007, accounting for almost a quarter of bank business lending. Meanwhile, figures from FDIC show that loans to individuals were US$1.05 trillion and farm loans reached US$53.89 billion in the first quarter of 2008, supporting the credit needs of rural Americans and improving the nations agricultural activity. However, as the nations economy slows and banks reel from the housing crisis, getting a business loans is becoming much harder and more expensive. Credit

All Other >1 Billion, 21.1% International Banks, 23.1% All Other >1 Billion, 0.8%

Other Specialized >$1 Billion, 0.3% Agricultural Banks, 1.2% Consumer Lenders, 0.5% Credit Card Lenders, 3.4%

Mortgage Lenders, 10.2%

Commercial Lenders, 39.4%

Source: Federal Deposit Insurance Corporation, July 2008


Industry Report - Banking - November 2008

Industry Profile - United States

extended by banks to companies and consumers still grew at double-digit rates earlier this year but, by mid-June, bank credit declined at an annualized pace of more than 6%. Banks, fighting for their financial life and shocked by their multibillion-dollar losses on real-estate, scaled back loans to American business, depriving even healthy firms of money for hiring and expansion. According to Federal Reserve data, two vital forms of credit used by companies short-term commercial paper not backed by collateral and commercial and industrial (C&I) loans collectively fell almost 3% over the last year, from US$3.36 trillion to US$3.27 trillion. The figure was the largest annual drop since the credit tightening that began with the last recession in 2001. FDIC figures put assets held by the industry at the end of March 2008 at US$13.37 trillion, an increase from US$13.03 trillion from the first quarter of 2007 and US$11.86 trillion from the first quarter of 2006. Large financial banks, which hold more than US$15 billion in assets, continue to dominate and remain the market share leaders. The total assets of the nations three banking titans Citigroup, BofA and JPMorgan Chase total US$5.59 trillion. Citigroup, which previously ranked number one, even lost to fellow rivals BofA and JPMorgan & Chase, revealing major surprises and the most noticeable change in the breakup of the US domination. Statistics from FDIC show that the number of banking institutions dropped from 15,158 in 1990 to 8,494 in the first quarter of 2008. The total comprises 7,240 commercial banks and 1,254 savings banks or thrifts. There was a 55.4% drop in the number of thrifts from 1990 to March 2008 due mostly to acquisitions by, or conversions to, commercial banks or other savings banks, while the number of commercial banks fell by 41.3% to 7,240. Thrifts that
Table 8: Size of US Banking Industry (as of March 2008)

tend to be small were originally established to promote personal savings through saving accounts and home ownership but now provide a range of services similar to many commercial banks. Industry Focus Banks Latest Efforts to Raise New Capital Maimed by self-inflicted wounds and lost money from wrong-way bets on mortgage-backed securities and other risky investments, the nations banks are in need of new capital. The enormous losses on bad loans have shrunk the capital of banks, threatening to leave them in a dangerous state and further hampering their ability to continue to make new loans. This has implications for the broader economy. Since the credit crunch began, US banks large or small have estimated to raise more than US$120 billion while all global financial services companies have raised over US$300 billion. Even further efforts to repair balance sheets and raise capital are likely as conditions worsen and more banks announce grim results and are forced to take further losses. To ensure that banks have enough money to repay depositors and investors and to continue making loans to consumers and businesses to provide credit that fuel the economy, banks were forced to increase their capital levels through several methods and diverse sources including slashing dividends, new stock offerings and raising billions of dollars from large shareholders, private-equity firms and other institutional investors that are willing to plunge billions of dollars into the foundering sector. Both methods of cutting dividends and issuing more shares will eventually erode shareholder value because profit gets split among more shares.

First Quarter 2008 Number of FDIC-Insured Total Assets (US$ billion) Total Loans (US$ billion) First Quarter 2007 Number of FDIC-Insured Total Assets (US$ billion) Total Loans (US$ billion)

All Institutions 8,494 13,369 7,968 All Institutions 8,649 11,982 7,278

Commercial Banks 7,240 11,495 6,666 Commercial Banks 7,379 10,135 5,972

Savings Institutions 1,254 1,875 1,301 Savings Institutions 1,270 1,847 1,306

Source: Federal Deposit Insurance Corporation, July 2008


Industry Report - Banking - November 2008

Industry Profile - United States

Federal regulators and the US Government have been pressuring banks to increase their capital levels and not hesitate to curb their dividend and share-repurchase programs to strengthen their balance sheets. With credit losses clearly on the rise in a number of different categories of assets, capital and higher loan loss reserves are the best buffer. For now, before further credit problems make raising capital even more costly and difficult, regulators main emphasis is to see banks restore their balance sheets in a proactive manner. Without banks able and willing to extend loans, the nations economy could weaken further and negatively affect economic expansion. The fact that big banks such as Citigroup, Wells Fargo, Wachovia and investment giant Merrill Lynch are running out to raise capital just proves how bad the situation really is and that capital cushions are shrinking. After coming up with US$35 billion since last year, Citigroup also sold US$6 billion in preferred stock in April hoping to offset mounting losses that the bank has taken. The New Yorkbased bank planned to sell close to US$400 billion in assets over the next two to three years. Fellow rivals BofA and JPMorgan & Chase followed suit and issued US$4 billion and US$6 billion of preferred shares, respectively. The US housing crisis that continued to devastate the nations banking sector has led tarnished Wall Street and forced Merrill Lynch to dump billions of dollars of mortgage debt at a steep loss and shed assets to raise US$805 billion in capital. Fundraising at the worlds largest brokerage included selling 20% stake in financial news and data group Bloomberg Lp for US$4.4 billion, and its controlling interest in Financial Data Services for at least US$3.5 billion. Merrill also plans to raise US$8.5 billion selling new common stock to bolster its capital position. Temasek Holdings, a Singapore state-owned investment firm, committed to buy a US$3.4 billion chunk of the new shares. The move rocked the confidence in the banking sector, renewing fears that the credit crisis had more to run. Policy and Regulatory Environment The lax risk management at banks that contributed to credit turmoil has driven regulators to push for improved disclosure by banks to boost transparency and greater market discipline. In the first quarter, banking and mortgage bankers group such as the Arlington, Virginia-based trade group Consumer Bankers Association (CBA), and the Mortgage Bankers Association (MBA) spent US$768,000 and US$1 million respectively lobbying on issues and legislation related to mortgage lending, credit reporting, credit card fees, bankruptcy, housing policy and other issues. In a war that aims to crack down on what they say are unfair, abusive and shady lending practices, the Federal Reserve unanimously approved a final mortgage lending rule on July 14 to better protect consumers and facilitate responsible lending. The final rule, which modifies Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA), primarily follows a proposal issued by the Federal Reserve Board in December 2007. Although the proposals will not help the millions of homeowner defaulters, the Fed aims to prevent another catastrophe and has vowed to vigorously enforce the new rules, which take effect on October 1, 2009. Dubious lending practices, particularly those involving subprime loans made to borrowers with poor credit histories, have figured prominently in the housing crisis, contributing to an economic downturn and propelling delinquencies and foreclosures to record highs. Lax lending during the heady days of the housing boom only ended up burning a massive hole among the riskiest subprime borrowers in addition to the rapid rise of rates of mortgage delinquencies and foreclosures that imposed huge costs on borrowers, their communities and the national economy. Lenders that aggressively sold deceptive loans to lure borrowers with promises of low initial interest rates into loans they could not even afford contributed to the housing slump when those risky subprime loans turned sour. The proposed new rule, as expected, would among other things, prohibit lenders from making loans without considering the borrowers ability to repay a home loan from sources other than the homes value. Lenders will have to make sure that risky borrowers set aside money to pay taxes and insurance. The plan would also restrict lenders from penalizing risky borrowers who settle their loans early and bans prepayment penalties if the loan payment amount can change during the initial four years of the mortgage. Finally, the rule requires all mortgage advertisements to include information about rates, monthly payments and other details.


Industry Report - Banking - November 2008

Industry Profile
Industry Size and Value As a major industry in Canada, banking plays a key role in the countrys economic growth and financial system. Canadian banks, also called chartered banks, are essential contributors to economic growth and remain important in facilitating the well-being of the country. Engaged in various businesses and providing myriad products and services, Canadian banks have diverse revenue streams. This variety helps make a secure, stable and reliable banking sector that contributes significantly to Canadians and the economy. In fact, the banking sector generates C$39.8 billion (US$37.56 billion) of gross domestic product (GDP), representing about 3.3% of total Canadian GDP directly. As one of the Canadas largest employers, banks and their subsidiaries employed 257,000 Canadians and paid C$20.6 billion (US$19.44 billion) in salaries and benefits in 2007, according to a report released by the Canadian Bankers Association (CBA). Industry employment has grown by 16.1% over the last ten years. More than 71,000 employees work in other countries for Canadian banks. However, difficult economic conditions and depressed results among the banks capital markets divisions in the second quarter forced banks to explore layoff options to cut costs. Widespread pressure on capital markets operations translated into to 150 job cuts in BMOs securities business, while CIBC slashed 100 people from its capital markets division in June. While core activities among US banks and Canadian banks are similar, Canadian banks are much smaller in real terms than those in the US. There are 7,240 domestic commercial banks in the US versus Canada 20 banks. As of January 31, 2007, the banking industry comprised 73 banks 20 domestic banks, 24 foreign bank subsidiaries, 22 full service foreign bank branches and seven foreign bank lending branches in Canada, according to the Office of the Superintendent of Financial Institutions (OSFI). In total, these institutions managed over C$2.6 trillion (US$2.45 trillion) in assets, accounting for over 70% of the total assets of the Canadian financial services market. The six largest domestic banks continue to dominate the banking system and together control about 90% of the nations total assets.
Table 9: Size of Canadian Banking Industry

Contribution to total Canadian GDP Domestic banks Foreign bank subsidiaries Full service foreign bank branches Foreign bank lending branches Total Banks Total Employees Total Assets Total ABMs Total ABMs transaction logged on Credit Cards in circulation

3.3% 20 24 22 7 73 257,000 C$2.6 trillion 16,424 1.01 billion 64.1 million

Source: Canadian Bankers Association, 2008

Canadian banks continue to provide reliable, secure, affordable and greater flexibility and accessibility to their consumers, who have enormous appetites for choice and convenience in managing their financial affairs. With its vast network of electronic and branch access points among the most extensive in the world, 96% of Canadians have an account with a bank and the country now has the highest number of Automated Business Machines (ABMs) per capita in the world (1,631 ABMs per one million inhabitants). Along with branch services, internet banking and phone banking services, Canadas banks invest heavily in the ABM network to provide their customers with 24/7 access to banking services. In 1982, there were only 965 ABMs that could only be used by customers of the bank operating the machine but in 2007, the number of cash dispensing ABMs has snowballed to 16,424, statistics from CBA shows. The number of banking ABM transactions logged in 2007 reached 1.01 billion in volume. The credit card market in Canada is highly competitive with over 550 institutions issuing Visa and MasterCard products through 23 principal issuers. As of May 2008, there were 64.1 million Visa and MasterCard cards in circulation throughout the country.


Industry Report - Banking - November 2008

Industry Profile - Canada

Industry Highlights On the Road to Customer-centricity Long before the credit crisis hit, the shift in focusing on customers was well underway. Particularly higher emphasis has been placed on customer service and placing customer at the center. Canadian banks are going back to basics and touting their commitment to become more customercentric and more service-oriented, believing there is space in the market to differentiate themselves from the rest by providing better customer service. Aware of their customers attitudes towards their banks and the impact perceptions have on profitability, Canadian banks may discover new opportunities to earn market share, attract new customers and improve customer retention by rendering genuine value-added and personalized services. While focusing their attention on renewing core banking systems and embedding customer centricity into core banking, branch platforms and system renewal strategies, Canadian banks are increasingly rolling out analytical tools and building attrition models to retain existing customers and acquire new ones. TD Canada Trust was ranked the highest in customer satisfaction according to a customer satisfaction study released by J.D. Power and Associates, a global marketing information services firm, for the third consecutive year in August 2007. It achieved high scores in transaction experience, account setup and product offerings, account statements, facility and problem resolution. Rather than operating only during traditional banking hours, the bank opens longer hours, opening 50% longer than the other banks for customers. Meanwhile, BMO, struggling to keep pace with its domestic peer group and recently announcing 1,000 job cuts, made a big push to improve customer service at its Canadian branches by upgrading the branch network and revamping debit and credit card offering. BMO is now intent on changing some of the processes supporting staff in sales and customer service roles. Its effort have begun to show some results, with loan growth up 17% on last year in the first quarter of 2008 and retail deposit market share stabilizing to about 12%. Another bank raising its game and competitiveness in domestic retail banking was BNS. Striving to become the best Canadian-based international financial services group by building strong relationships with its customers, the bank rolled out a new customer-centric approach to banking in retail branches. The program includes building everything from scratch an industry-leading customer data warehouse, an essential tool for targeted marketing, cross-selling and customer retention activity. For BNS, the program aims to change the branch culture to focus on serving customers. The bank is planning to roll out its model in a phased approach throughout the Caribbean, Latin America and Mexico over the next few years. However, although banks are focusing on transforming their businesses to provide better customer service, the task is not that easy and requires rigorously managed incremental change. Satisfying customers demands comprehensive changes in strategies, business processes and underlying technologies. Policy and Regulatory Environment Fearful of what was coming out of the US in terms of rises in the number of defaults and foreclosures, the Canadian Government tightened the rules for government-guaranteed mortgages in July to prevent a similar housing market collapse scenario in Canada. The adjustments marked a measured approach by the Government to protect and strengthen the Canadian mortgage system and forestall any mortgage crisis. Days of zero down payments and a 40-year mortgage were over for Canadians starting from October 15, with consumers thinking about buying a home needing to produce a 5% down payment. Further, loans can no longer be amortized over 40 years, with the maximum length reduced to 35 years. The new rules also require a consistent minimum credit score requirement and introduce new loan documentation standards for those applying for a mortgage, making it tougher to borrow money to buy a home. A maximum 35-year term and higher down payment requirements mean some buyers will not be able to afford to pay as much. The new rules only apply to new mortgages that require government-backed mortgage insurance but will not affect mortgages that are already held by Canadians. Currently, mortgage insurance that protects mortgage lenders from losses if a borrower defaults is required on all loans where the down payment is less than 20% of


Industry Report - Banking - November 2008

Industry Profile - Canada

Table 10: Average Residential Price Forecast

Region British Columbia Alberta Saskatchewan Manitoba Ontario Quebec New Brunswick Nova Scotia Prince Edward Island Newfoundland & Labrador CANADA

2007 Average (C$) 439,123 356,235 174,405 169,189 299,544 208,240 136,603 180,989 133,457 149,258 307,265

2008 Forecast (C$) 485,900 373,000 208,400 187,800 312,400 218,000 142,800 189,100 141,000 159,200 323,500

% Change 10.7% 4.7% 19.5% 11.0% 4.3% 4.7% 4.5% 4.5% 5.7% 6.7% 5.3%

Source: Canadian Real Estate Association, May 2008

the purchase price of a home. The Governments federal housing agency, Canada Mortgage and Housing Corp (CMHC), is the largest provider of mortgage insurance in the country, but the Government backs private mortgage insurers. Some private firms could still offer mortgage insurance at no longer supported terms, but they will not have federal backing. Changes in the rules came after the BOC and Finance Minister Jim Flaherty expressed concern about the proliferation of looser mortgage conditions ushered in less than two years earlier. It suggested loans were feeding a bubble and encouraging people to buy homes they could not afford. Longer amortizations create greater affordability for housing but it comes at a big price. Lowering the monthly installments simply means that buyers can go into more debt, and more debt means more interest and less equity. Although fundamentals are still good and Canadas lending practices have tended to be more prudent than south of the border, the Canadian housing sector is cooling after six torrid years of growth. Even before the tighter rules, residential home sales in Canada are expected to fall by 11.5% to 460,900 this year from last years record of 520,747, the Canadian Real Estate Association (CREA), a major real estate organization forecasts. Except for Saskatchewan and Newfoundland and Labrador, the forecast sees falls in 2008 in all provinces with the biggest sales tumbles taking place in Alberta, where sales are poised to slide by almost 19%. Nevertheless, the US mortgage crisis has not filtered into

Canada and, although there are signs of cooling, it is not as dramatic as in the US. Canadas housing and mortgage markets are performing much better.


Industry Report - Banking - November 2008

Market Trends & Outlook

United States
Electronic Bank Crime on the Rise Frustration is obvious among banks as banking crime, ranging from fraud to phishing (sometimes referred to as carding or brand spoofing that captures personal data by sending out email messages) and identity theft, are mounting. More criminals now know how to turn stolen financial data into steady income, disrupting the peace and tranquility of the banks. Bank crime rarely involves traditional robberies but instead, money and data are stolen remotely via electronic and paper fraud at seemingly less risk to the criminal, who often cannot be spotted by security cameras. The act of stealing can even be done from the other side of the world, starting with a simple phone call by fast-talking criminals requesting information from individuals such as bank account balances. From there, the data is resold and reused, leading to crimes from simple credit card fraud to full-blown identity theft resulting in car loans or even equity loans. Two of the fastest-growing crimes in the US today are check fraud and identity theft. While the American Bankers Association (ABA) says check fraud grows by 25% each year, the cost of identity theft to banks and businesses is at US$53 billion a year, the Federal Trade Commission (FTC) reveals. A study, Measuring Identity Theft at Top Banks released by the FTC in February 2008, found that major banks and telecommunication firms are among the companies that suffer the most from identity theft. In terms of the sheer number of complaints, BofA topped the list of banks, followed closely by JPMorgan, Capital One (NYSE: COF) and Citibank, the consumer and corporate banking arm of Citigroup. Limping home mortgage lender, Countrywide already hit hard by the lending crisis, faced another crisis when it suffered insider data loss when an employee stole the confidential data of its customers throughout the country over a two-year period. The former employee was suspected of downloading the information from about 20,000 customers each week for two years and pocketing about US$70,000 from selling the data. Fraud is now shifting from a crime of profit to a crime of desperation, with mortgage lenders desperate to close sales and maintain their income. Three of the nations largest subprime mortgage lenders Countrywide Financial Corp, New Century Financial Corp and IndyMac Federal Bank have been probed by the authorities including the Federal Bureau of Investigation (FBI) for possible fraud. Over the past year, reports of mortgage fraud rose as the subprime mortgage market collapsed, and defaults and foreclosures skyrocketed. The FBI is looking at whether the banks were a sometimes a party to fraud in connection with loans made to homebuyers with poor credit. Since the subprime loan crisis erupted, the bureau has had 21 corporate fraud probes of investment banks, hedge funds and mortgage companies. In addition, it also has more than 1,400 pending mortgage fraud cases looking at individuals such as brokers, appraisers and borrowers. Foreclosures and Delinquencies Still Building An overstretching of buyers to get into homes they cannot afford and an overextending of credit by lax lenders who were willing to take risk led mortgage foreclosures to hit a record high at the end of 2007 in the US. A combination factors declining home values, weak housing sales, tighter lending criteria and slowing US economy has left a trail of destruction where financially strapped homeowners found themselves under water and were left with little option than to avoid foreclosure. Compared with 0.54% a year earlier, around 0.83% of US loans entered the foreclosure process in the last three months of 2007, a report by the MBA concludes. The report also shows that subprime adjustable-rate mortgages that entered the foreclosure process jumped to a record 5.29% in the same period. The grim news was a new blow to the US economy, which had been rocked by the subprime crisis. A US Foreclosure Market Report by California-based RealtyTrac, which publishes one of the largest national databases of preclosure, foreclosure, owner-sold, resale and new homes, shows a total of 2,203,295 filings consist of default notices, auction sale notices and bank repossessions in 2007, a surge of 75% from 2006. Separately, the Fed estimates the net wealth of US households dropped for the first time in five years over the same period as the value of real estate holdings and stocks deteriorated. While last year was a bad year for home foreclosures, 2008 so far has been worse. Driven higher by increasing housing despair, the foreclosure hammer has pounded even harder.


Industry Report - Banking - November 2008

Market Trends & Outlook - United States

Table 11: Top Ten Foreclosures States (May 2008)

California Florida Arizona Michigan Ohio Georgia Texas Illinois Nevada New Jersey
12964 12764 12305 10245 10030 9877 8895 7441 37506






Source: Realtytrac, June 2008

In the second quarter, the skyrocketing rate of foreclosures continued to provide headaches for US lenders. As plunging home prices left borrowers owing more on mortgages than their properties were worth, US foreclosure filings more than doubled from a year earlier. One in every 171 households was foreclosed, representing an increase of 121% over the second quarter of 2007 and 14% from the previous quarter, Realtytrac says. The grim numbers were obvious especially in May where 261,255 homes received at least one foreclosure-related filing, surging by 48% from May 2007, the highest monthly rate since 2005. Two states California and Florida continue to display high levels of activity, with the most fallout and leading the nation in foreclosures. Together, they accounted for 109,014 of new filings in May while Arizona, Michigan and Ohio were next between 12,000 and 13,000. With this, there is no reason to believe the current wave of foreclosures will subside anytime soon, because more borrowers continue to fall behind on their payments. Although the Bush Administration has developed a number of plans to delay foreclosure proceedings, it has been criticized for not acting quickly enough to aid those affected. Mortgage Applications Slow With loan rates hovering near one-year highs exacerbating the housing markets difficulties, application volumes for

US home mortgages tumbled to their lowest pace in July since December 2000. The Mortgage Bankers Associations (MBA) index of applications to purchase a home or refinance a loan declined by 14.1% to 420.8 in the week ended July 25 from 489.6 the prior week. The Washingtonbased MBA, which has compiled a loan survey every week since 1990, believes that the culprit behind the drop has been refinance volumes, which plummeted by 22.9% to 1,074.4 during the week, also the lowest since the end of 2000. During the week, refinance applications accounted for 35.2% of all applications. US homeowners are discovering that they do not have enough equity to refinance their homes. Furthermore, tighter lending standards and plunging property values are keeping prospective buyers out of the market and may extend the three-year housing slump. In turn, falling house prices are making it difficult for homeowners to re-finance their mortgages. Banks in the US continue to tighten mortgage lending criteria and restrict loan approvals only to those with larger deposits, which could hamper home sales further. Mortgage lending choices have all but dried up and, as a result, fewer companies control more of the market, with rates and ultimately the housing market suffering as well. Following in the footsteps of so many mortgage-heavy banks, Wachovia Corp, which posted dismal results in the second quarter, is scaling back mortgage lending in 19 states. The bank that made an untimely expansion into the


Industry Report - Banking - November 2008

Market Trends & Outlook - United States

mortgage business by acquiring California-based Golden West Financial Corp in 2006 at the peak of the housing boom, decided to exit its wholesale mortgage lending business starting July 25. The credit crisis has hurt banks ability to support the market for mortgage-backed securities, causing rates that lenders charge to consumers to spike upward. In the fourth week of July, mortgage rates have soared in the US with 30-year fixed rate mortgage surging to the highest level in nearly a year. According to troubled home funding company Freddie Mac, US 30-year mortgage rates grew to an average of 6.63% from 6.26% the week before while 15-year mortgages averaged 6.18%, rose sharply from 5.10% in the third week. Mortgage rates are on the rise due to troubles at Fannie Mae and Freddie Mac, threatening to deal another blow to the already frail housing market. Market Outlook The US economy continues to tread water and the woes of US credit market coupled with housing slump, a strained banking system, spreading unemployment and rising oil prices are the undercurrents trying to pull it down in the second half of the year. At the same time, there is also fear that upside risks to the inflation outlook have intensified
Table 12: Quarter-to-Quarter Growth in real GDP Percent 6

lately. The barrel of inflation has run wild with US prices rising by 5.6% in the year to July, the fastest inflation rate for more than 17 years. Although economic growth picked up in the second quarter at an annual rate of 1.9% compared to the feeble 0.9% growth logged in the first quarter of 2008, thanks to the federal tax rebates that energized consumers, the rebound was not as robust as economists in the nation had hoped. The growth was less than the earlier forecast 2.4% pace. The revised data from the US Department of Commerce, however, indicates that it was a soft pace but enough to move it away from the path of recession. The arduous task of cleaning up the subprime mess could take a while, and the nations economy will require at least months to recover from its slowdown. In Washington, President Bush urged Americans not to lose faith as they brace the economy that falters on a cloudy future and problems at the banks deepen. Crucially, a healthy banking system is vital to the economy, but now economic weakness and a plunge in bank stocks have raised the prospect of more bank failures, probably within months, and the need for federal intervention. The weak economy is hurting consumer lending operations and mortgage losses may escalate among banks. The current

-2 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2008 2004 2005 2006 2007

Previously published


Advance estimate

Source: US Bureau of Economic Analysis, July 2008


Industry Report - Banking - November 2008

Market Trends & Outlook - United States

credit crunch is more acute than one that followed the savings and loan crisis in the early 1990s and could run into 2009, with the nervousness that follows threatening market stability, especially after the Government took over IndyMac on July 11. Within the next 18 months, as many as 200,000 US banking jobs are expected to be slashed, with more than half forecast to be in the mortgage lending sector. This is hardly a surprise with more banks expected to be on the brink. Around 22,000 jobs were cut during the first two months of 2008. In todays faltering economy, banks are expected to tighten lending standards for US households and businesses through to the end of the year and into 2009. The year-long credit crunch is far from easing and banks are hoarding more capital and making it harder to borrow. Tighter lending standards, which are typical in a weakening economy, create headwinds that will delay recovery, along with a worsening housing slump and elevated fuel prices, further dampening any hope of a quick end to the credit squeeze. The Fed, which took the nations lending pulse in July, revealed that lending has slowing. With loss and writedowns still ongoing, some banks will likely need to raise additional capital and slash dividends to cover losses and shore up their balance sheets. So far, US banks have raised about US$120 billion and may need to raise US$65 billion to cope with mounting losses. Insufficient capital to cover bad debts is making the banks even more wary of lending to one another. Indeed, things are going to get tougher before they get better. Fears over which banks might be allowed to fail next have completely rocked the confidence in the nations banking system.


Industry Report - Banking - November 2008

Market Trends & Outlook

Canada Leads Online Banking Adoption Rates As with banks around the world, the internet has created a momentous and sweeping change in the Canadian banking industry. It has reshaped the way customers carry out transactions, transforming traditional face-to-face human interaction at local branches to the concept of anywhere banking that allows customers to access their accounts by just a mouse-click away without stepping a foot inside a bank. The goal of most Canadian banks is to provide a true e-banking solution through secure online banking capabilities for their commercial and personal customers who now demand more convenience. This including access to real time account information, balance transfers, purchasing options and credit card payment. Online banking in Canada is a must for even the largest banks survival over the longer term and, due to well-developed banking system and fierce competition in the country, it is pivotal to meet the needs of online consumers in order to expand. Online banking continues to grow in popularity and is the service of choice to settle bills, check account balances and activity. A July report released by comScore, a global internet information provider, brought to light that Canadians are leading the way with online banking and rank first in online
Table 13: Top Online Banking Sites

banking adoption among the 37 global markets individually surveyed by the web metrics firm. Specifically, the survey found that 67.1% of Canadians did their banking online in April, far ahead from other English-speaking countries which had significantly lower penetration, including the UK (49.5%), US (44.4%) and Australia (41.7%). Typically very savvy internet users, Canadians also led the rest of the countries in online banking frequency, according to the survey, with an average of eight usage days and 10.5 online banking visits per visitor in April alone. On average, Canadians spend 46 minutes on banking sites, viewing approximately 121 pages per viewer. Out of nearly 24 million Canadian internet users, 15.5 million visited a banking site in April. Banks in Canada have been pushing their customers to embrace e-billing, which seems to be meeting with some success. RBC led the category with 4.6 million visitors, the most of any Canadian bank. The bank has added Web 2.0 tools to ensure that even the tech-shy can get something out of the web experience where a virtual host was used as a demo for online bill payments and interactive video session of loan packages that they offer. A close second, TD Bank had 4.5 million followed by BMO sites with 3 million visitors.

Banks RBC Financial Group TD Bank Financial Group Bank of Montreal Sites Canadian Imperial Bank of Commerce Desjardins Group Scotiabank Group PC Financial National Bank of Canada ING Group Banking Total Internet: Total Audience

Total Unique Visitors (000) April 2007 4,646 4,459 2,474 2,807 2,870 2,642 1,150 923 901 15,138 23,026 April 2008 4,564 4,527 3,020 2,873 2,722 2,348 1,039 972 817 15,468 23,947 % Change -2 2 22 2 -5 -11 -10 6 -9 2 4
Source: comScore, July 2008


Industry Report - Banking - November 2008

Market Trends & Outlook - Canada

Table 14: Movement of the Key Interest Rates



3.00 % 2.00 1.00 0.00 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08

Source: Bank of Canada, August 2008

TD Canada, named Best Consumer Internet Bank in Canada for the fourth year in a row in September 2007 by Global Finance, an international finance magazine, has registered more than one billion transactions and enquiries done in the last twelve months through its EasyWeb online banking service. Among those banks in the top ten, BMO sites experienced the greatest rise in visitations over the past year, up by 22%. Inflation in Canada Remains High Canada was spooked by a scary surge in its inflation rate in July where an annual rate at 3.4% was clocked, the highest level since March 2003. Figures released by Statistics Canada show that Julys consumer price index climbed 3.4% from July 2007, up by 0.3% from June 2008, with higher high gasoline and food prices the primary culprits. The biggest contributor to the quickening rate of the inflation in July was gas prices, which were 28.6% higher across the country during the month compared to a year earlier, driven by higher world prices for oil. The rapidly high oil prices in recent months can be partly attributed to market speculators, which often take advantage of geopolitical, economical and natural factors to bet on energy prices. This causes the nasty side effect of crimping growth and pushing up inflation, almost similar to a mini-version of what central banks faced in the 1970s when oil prices hit the roof.

Canadians and fellow investors have been warned to brace and position themselves for a material acceleration in inflation and higher borrowing costs of in 2009. Apart from concerns the economy is slumping deeper than previously thought, inflation is expected to peak at 4.3% early next year, rising beyond the BOCs 1% to 3% target range. The central bank, which has repeatedly trimmed its growth forecasts this year, is now projecting that the countrys economy will grow just 1% this year, the weakest since 1992 when Canada had its last recession. Among the provinces, Prince Edward Island faces the higher inflation, with the highest consumer price increases of 5.3%, with Newfoundland and Labrador and Nova Scotia just behind at 4.2%. BOC started the inflation war on an offensive mode, spooked by skyrocketing energy prices. Despite expectations the economy this year would grow at its slowest pace since 1992, the banks key interest rates was kept unchanged at 3.0% for the second straight time on July 15, ignoring widespread calls for the central bank to cut rates. Between December 2007 and April 2008, the central bank cut interest rates four times to fend off an export slump before pausing in June and again on July 15. The decision to leave its policy-setting interest rate unchanged came as indicators showed inflation in the coming months could be worse than previously expected. The BOCs governor Mark Carney thought it was important to balance worries about economic weakness against concerns about inflation.


Industry Report - Banking - November 2008

Market Trends & Outlook - Canada

The commercial banks prime lending rate, seen as a benchmark for setting loans, was at 4.75%. Market Outlook The pain is not over for the Canadian banking sector as it draws the curtain on a bleak first half of 2008. Although Canadian banks are well capitalized and have options in terms of how they deploy their consumer capital, the immediate outlook for the sector continues to be cloudy. The US subprime mortgage crisis and the ensuing credit crunch have affected much of the world, and Canada is no exception. Several factors paint a picture of an economy that may perform even worse in the next few months. These include further turmoil in the financial markets, protracted weakness in the US, sharp increases in commodity prices (particularly oil), weaker labor prospects, slowing domestic demand, tighter lending restrictions and higher borrowing costs. The rest of 2008 should be another difficult period as credit risks, capital market pressures combined with marketplace uncertainty, continues to be a challenge for domestic banks. The lingering turmoil in the credit markets is likely to clip earnings of the Canadian banks. Over the last four years, banks have averaged an earnings increase of around 16% a year, but this is expected to fall by approximately 8% during this calendar year. The cost of credit is already on the up, with debt levels of Canadian households rising faster than their wealth due to the slowdown in the economy and a slumping housing market. Furthermore, challenges at home such as falling commodity prices could yet have a detrimental impact on the nations economy. Not only must banks face the credit crunch for the rest of the year, they must also contend with a strong Canadian dollar and surging personal bankruptcies. The cumulative number of consumer bankruptcies went up by 3.8% during the year ending June 2008, with Ontario and Quebec leading the pack, according to CIBCs World Markets in its quarterly review of Canadian credit markets. Many banks are being forced to reassess their business strategies and product roadmaps to cope with an increasingly hostile market environment to better leverage its domestic banking by redoubling their efforts to focus on client service, and product development and innovation. Canadian banks need to become more focused, execute efficiently, invest in a few carefully chosen areas and manage risk better than ever before to ensure continuity success and survival.


Industry Report - Banking - November 2008

Currency Conversion Table

Currency exchange rates, as of October 1, 2008

Currency Unit United States Dollars (US$) Canadian Dollars (C$)

Units per US$ 1 1.0597

US$ per Unit 1 0.943663

Source: Federal Reserve Bank of New York


Industry Report - Banking - November 2008

The Scope Of This Report

This report examines the banking industry in the United States and Canada, discussing the current environment, the sectors recent performance and leading companies stock price movements and financial results. The report also profiles the industry, the policy and regulatory environment and investment in the sector and outlines key market trends and the market outlook. Research analysts draw on a range of credible industry and company data sources as well as news and information services to research and analyze the current trading environment, industry landscape and market trends and outlook for a particular sector. Primary sources are used, unless otherwise indicated, and include company data, e.g. annual reports and company financial results; macroeconomic and trade data; data and information from global and country regulatory, industry and trade bodies; government data; and reports from industry organizations and private research organizations. Industries covered by this industry reports are defined by standard industry classification systems and leading companies are identified on this basis. The following SIC codes are relevant to the industry: 6021 (National Commercial Banks); 6022 (State Commercial Banks); and 6029 (Commercial Banks).


Industry Report - Banking - November 2008

Key References
Organization for Economic Cooperation and Development (OECD) The OECDs 30 member countries share a commitment to democratic government and the market economy. The OECD plays a prominent role in fostering good governance in the public service and in corporate activity. International Monetary Fund (IMF) The IMF is an international organization of 184 member countries established to promote international monetary cooperation, exchange stability, orderly exchange arrangements; it also aims to foster economic growth and high levels of employment and to provide temporary financial assistance to countries to help ease balance of payments adjustment.

United States
American Bankers Association (ABA) The ABA represents banks of all sizes on issues of national importance for financial institutions and their customers in the US. The ABA, founded in 1875, brings together all categories of banking institutions, including community, regional and more money center banks and holding companies, as well as savings associations, trust companies and savings banks. Bureau of Economic Analysis (BEA) BEA produces economic accounts statistics that enable government and business decision-makers, researchers, and the American public to follow and understand the performance of the nations economy. Bureau of Labor Statistics The Bureau of Labor Statistics is the principal fact-finding agency for the US Federal Government in the broad field of labor economics and statistics. Federal Deposit Insurance Corporation (FDIC) The Federal Deposit Insurance Corporation preserves and promotes public confidence in the US financial system by insuring deposits in banks and thrifts institutions. Federal Reserve The Federal Reserve, the central bank of the US, was founded by Congress in 1913 to provide the nation with a safer more flexible and more stable monetary and financial system. Office of the Comptroller of the Currency, Administrator of National Banks (OCC) The OCC charters, regulates, and supervises all national banks.


Industry Report - Banking - November 2008

Mortgage Bankers Association (MBA) The Mortgage Bankers Association is the industrys voice on legislative and regulatory issues, and aims to foster open and fair standards and practices for the industry. It seeks to create an environment that enables its members to invest in communities and achieve their business objectives. National Credit Union Administration (NCUA) An independent federal agency that charters and supervises federal credit unions. National Association of Realtors (NAR) The voice for real estate, with more than 1.3 million members.

Bank of Canada The Bank of Canada is Canadas central bank. The banks responsibilities focus on the goals of low and stable inflation, a safe and secure currency, financial stability, and the efficient management of government funds and public debt. Canadian Bankers Association (CBA) The Canadian Bankers Association is a professional industry association that provides its members the chartered banks of Canada with information, research and operational support and contributes to the development of public policy on financial services. Canada Mortgage and Housing Corporation Canadas national housing agency. Canadian Payments Association (CPA) A non-profit association created in 1980 to establish and operate a national system for the clearing and settlement of payments within Canada. Canadian Real Estate Association (CREA) One of Canadas largest single-industry trade associations, representing more than 92,000 real estate agents/brokers and salespeople. Department of Finance Canada The Department of Finance Canada plans and prepares the Federal Governments budget, analyzes and designs tax policies, and develops rules and regulations for Canadas banks and other financial institutions. Export Development Canada (EDC) Canadas export credit agency


Industry Report - Banking - November 2008

Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) Canadas financial intelligence unit and a specialized agency that collects, analyzes and discloses financial information and intelligence on suspected money laundering and the financing of terrorist activities. Office of the Superintendent of Financial Institutions (OSFI) An independent agency of the Government of Canada which is also the primary regulator of federally-regulated banks, insurance companies, and pension plans in Canada. Statistics Canada Statistics Canada reports on the state of the Canadian economy, publishing statistics on health, literacy and crime that help monitor changes in Canadian society and industry.


Comparative Company Data | UNITED STATES

Industry Report - Banking - November 2008

Company Name Citigroup Inc Bank of America Corp JPMorgan Chase & Co Wachovia Corp Wells Fargo & Co US Bancorp Suntrust Banks Inc National City Corp BB&T Corp Fifth Third Bancorp Company Name Citigroup Inc Bank of America Corp JPMorgan Chase & Co Wachovia Corp Wells Fargo & Co US Bancorp Suntrust Banks Inc National City Corp BB&T Corp Fifth Third Bancorp Company Name Citigroup Inc Bank of America Corp JPMorgan Chase & Co Wachovia Corp Wells Fargo & Co US Bancorp Suntrust Banks Inc National City Corp BB&T Corp Fifth Third Bancorp Company Name Citigroup Inc Bank of America Corp JPMorgan Chase & Co Wachovia Corp Wells Fargo & Co US Bancorp Suntrust Banks Inc National City Corp BB&T Corp Fifth Third Bancorp Company Name Citigroup Inc Bank of America Corp JPMorgan Chase & Co Wachovia Corp Wells Fargo & Co US Bancorp Suntrust Banks Inc National City Corp BB&T Corp Fifth Third Bancorp

Country Code United States United States United States United States United States United States United States United States United States United States Total Revenue - FYE - 1 $159,229,000,000 $119,190,000,000 $116,353,000,000 $55,528,000,000 $53,593,000,000 $20,308,000,000 $13,464,604,000 $11,791,256,000 $10,668,000,000 $8,494,000,000 Net Income - FYE - 1 $3,617,000,000 $14,982,000,000 $15,365,000,000 $6,312,000,000 $8,057,000,000 $4,324,000,000 $1,634,015,000 $313,975,000 $1,734,000,000 $1,076,000,000 Total Current Assets FYE - 1 $977,981,000,000 $380,582,000,000 $822,923,000,000 $109,473,000,000 $39,190,000,000 $8,884,000,000 $16,183,398,000 $14,364,325,000 $4,334,000,000 $3,451,000,000

Ticker C BAC JPM WB WFC USB STI NCC BBT FITB Total Revenue - FYE - 2 $146,558,000,000 $116,574,000,000 $99,864,000,000 $46,930,000,000 $47,979,000,000 $19,109,000,000 $13,260,392,000 $12,952,727,000 $9,414,000,000 $7,967,000,000 Net Income - FYE - 2 $21,538,000,000 $21,133,000,000 $14,444,000,000 $7,791,000,000 $8,420,000,000 $4,751,000,000 $2,117,471,000 $2,299,836,000 $1,528,000,000 $1,188,000,000 Total Current Assets FYE - 2 $790,223,000,000 $362,350,000,000 $656,800,000,000 $97,782,000,000 $36,908,000,000 $8,639,000,000 $8,101,252,000 $18,899,102,000 $5,012,000,000 $3,733,000,000

Exchange NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE Total Revenue - FYE - 3 $120,318,000,000 $85,064,000,000 $79,768,000,000 $36,012,000,000 $40,407,000,000 $16,596,000,000 $10,886,353,000 $11,036,138,000 $7,832,000,000 $7,369,000,000 Net Income - FYE - 3 $24,589,000,000 $16,465,000,000 $8,483,000,000 $6,643,000,000 $7,671,000,000 $4,489,000,000 $1,987,239,000 $1,985,229,000 $1,654,000,000 $1,549,000,000 Total Current Assets FYE - 3 $611,384,000,000 $355,003,000,000 $617,454,000,000 $94,066,000,000 $45,597,000,000 $8,004,000,000 $9,128,670,000 $13,992,175,000 $3,589,000,000 $3,353,000,000 Profit Margin (Most Recent Yr) 2.27 12.57 13.21 11.37 15.03 21.29 12.14 2.66 16.25 12.67

Primary SIC 6021 6021 6021 6021 6021 6021 6021 6021 6021 6022 EBITDA - FYE - 1 $4,491,000,000 $23,768,000,000 $26,626,000,000 $10,642,000,000 $13,159,000,000 $6,826,000,000 $3,086,691,000 $830,079,000 $2,974,000,000 $1,904,000,000 EPS - FYE - 1 $0.73 $3.35 $4.51 $3.31 $2.41 $2.46 $4.59 $0.51 $3.17 $2.00 Long-Term Debt FYE - 1 $427,112,000,000 $197,508,000,000 $199,010,000,000 $161,007,000,000 $99,393,000,000 $43,440,000,000 $22,956,508,000 $27,892,136,000 $18,693,000,000 $12,857,000,000 Date FYE - 1 31-Dec-07 31-Dec-07 31-Dec-07 31-Dec-07 31-Dec-07 31-Dec-07 31-Dec-07 31-Dec-07 31-Dec-07 31-Dec-07 6211 6022 6712 6141 6162 6712 6022 6712 6311 6712 EBITDA - FYE - 2 $32,429,000,000 $34,842,000,000 $23,463,000,000 $13,156,000,000 $15,871,000,000 $7,451,000,000 $3,815,662,000 $4,083,549,000 $2,891,000,000 $2,026,000,000 EPS - FYE - 2 $4.39 $4.66 $4.16 $4.72 $2.50 $2.64 $5.87 $3.77 $2.84 $2.14 Long-Term Debt FYE - 2 $288,494,000,000 $146,000,000,000 $145,630,000,000 $138,594,000,000 $87,145,000,000 $37,602,000,000 $18,992,905,000 $26,355,676,000 $15,904,000,000 $12,558,000,000 Date FYE - 2 31-Dec-06 31-Dec-06 31-Dec-06 31-Dec-06 31-Dec-06 31-Dec-06 31-Dec-06 31-Dec-06 31-Dec-06 31-Dec-06 8742 6211 6311 6211 6282 6371 6159

Other SICs 6331 6091 6099 6211 6141 6162 6162 6211 6162 6153 6282 6159 6221 6712 6712






EBITDA - FYE - 3 $32,025,000,000 $26,248,000,000 $16,157,000,000 $10,911,000,000 $15,709,000,000 $7,260,000,000 $3,658,669,000 $3,425,145,000 $2,885,000,000 $2,613,000,000 EPS - FYE - 3 $4.84 $4.10 $2.43 $4.27 $2.27 $2.45 $5.53 $3.13 $3.02 $2.79 Long-Term Debt FYE - 3 $217,499,000,000 $100,848,000,000 $119,886,000,000 $48,971,000,000 $79,668,000,000 $37,069,000,000 $20,779,249,000 $30,969,616,000 $13,119,000,000 $15,227,000,000 Date FYE - 3 31-Dec-05 31-Dec-05 31-Dec-05 31-Dec-05 31-Dec-05 31-Dec-05 31-Dec-05 31-Dec-05 31-Dec-05 31-Dec-05

Return on Equity (Most Recent Yr) 3.18 10.21 12.47 8.21 16.92 20.55 9.05 2.34 13.73 11.75

NB: Some baking institutions were negotiating merger or acqusition deals at the time of going to press. The ranked institutions were those as of December 2007.

Notes to Comparative Data

- All figures are in United States dollars. - All figures are as reported by the company. - N/A = Data Not Available. - Companies ranked by total revenue for the full year most recently reported.

- Total Revenue = All revenues, including net sales, operating revenues, interest income, royalties, excise taxes etc. - EBITDA = Earnings before interest, taxes, depreciation and amortization. - EPS Cont Operations = Earnings Per Share as reported by company excluding extraordinary items. - Total Current Assets = All assets expected to be realized within the next year, includes cash, accounts receivable and inventories. - Long Term Debt = Debt due to be paid at a date more than one year in the future. - Return on Equity = The companys earnings divided by its equity (book value). - Profit Margin = The companys net income as a percent of revenues.


Comparative Company Data | CANADA

Industry Report - Banking - November 2008

Company Name Royal Bank of Canada Bank of Nova Scotia Halifax Toronto Dominion Bank Canadian Imperial Bank of Commerce Sun Life Financial Inc Bank of Montreal National Bank of Canada IGM Financial Inc Laurentian Bank of Canada Canadian Western Bank Company Name Royal Bank of Canada Bank of Nova Scotia Halifax Toronto Dominion Bank Canadian Imperial Bank of Commerce Sun Life Financial Inc Bank of Montreal National Bank of Canada IGM Financial Inc Laurentian Bank of Canada Canadian Western Bank Company Name Royal Bank of Canada Bank of Nova Scotia Halifax Toronto Dominion Bank Canadian Imperial Bank of Commerce Sun Life Financial Inc Bank of Montreal National Bank of Canada IGM Financial Inc Laurentian Bank of Canada Canadian Western Bank Company Name Royal Bank of Canada Bank of Nova Scotia Halifax Toronto Dominion Bank Canadian Imperial Bank of Commerce Sun Life Financial Inc Bank of Montreal National Bank of Canada IGM Financial Inc Laurentian Bank of Canada Canadian Western Bank Company Name Royal Bank of Canada Bank of Nova Scotia Halifax Toronto Dominion Bank Canadian Imperial Bank of Commerce Sun Life Financial Inc Bank of Montreal National Bank of Canada IGM Financial Inc Laurentian Bank of Canada Canadian Western Bank

Country Code Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Total Revenue - FYE - 1 $43,346,760,562 $27,731,978,632 $26,453,833,176 $24,439,022,605 $21,600,556,472 $21,348,597,014 $7,456,897,876 $2,951,478,301 $1,136,829,581 $589,036,167 Net Income - FYE - 1 $5,763,197,739 $4,244,744,147 $4,194,373,883 $3,458,758,148 $2,334,589,122 $2,236,229,858 $567,714,854 $896,252,842 $99,213,680 $101,036,454 Total Current Assets FYE - 1 $84,391,180,294 $30,636,663,873 $46,365,828,278 $50,125,758,631 N/A $24,020,319,783 $9,752,942,423 $2,477,835,025 $932,693,591 $488,937,859

Ticker RY BNS TD BCM SLF BMO NA IGM LB CWB Total Revenue - FYE - 2 $32,111,358,575 $20,028,507,795 $19,946,547,884 $17,982,182,628 $28,277,354,100 $16,171,937,639 $5,730,957,684 $3,032,533,451 $894,939,866 $376,344,766 Net Income - FYE - 2 $4,212,026,726 $3,188,418,708 $4,100,668,151 $2,357,238,307 $2,496,259,200 $2,372,383,073 $775,946,548 $904,300,167 $62,656,570 $64,148,775 Total Current Assets FYE - 2 $66,174,610,245 $20,824,944,321 $37,187,527,840 $33,216,035,635 N/A $17,468,151,448 $16,455,233,853 $2,278,051,916 $866,080,178 $441,363,029

Exchange TSX TSX TSX TSX TSX TSX TSX TSX TSX TSX Total Revenue - FYE - 3 $24,905,456,501 $15,544,288,049 $15,879,221,159 $15,955,535,033 $18,801,076,048 $12,902,132,171 $4,507,606,113 $2,013,734,379 $771,912,284 $268,222,914 Net Income - FYE - 3 $2,871,945,430 $2,721,013,547 $1,890,040,261 ($27,133,822) $1,609,217,021 $2,031,644,892 $724,981,796 $585,380,141 $55,354,692 $46,119,865 Total Current Assets FYE - 3 $45,119,305,661 $17,386,844,122 $33,741,755,092 $25,748,300,835 N/A $17,569,997,418 $14,700,595,784 $1,508,907,730 $700,053,445 $248,536,479 Profit Margin (Most Recent Yr) 13.30 15.31 15.86 14.15 10.81 10.47 7.61 30.37 8.73 17.15

Primary SIC 6029 6021 6029 6029 6311 6029 6021 6282 6021 6029 EBITDA - FYE - 1 $7,928,069,723 $5,764,247,120 $5,794,679,154 $4,306,657,597 $3,225,606,979 $2,970,796,213 $803,825,468 $1,715,718,091 $152,294,494 $153,718,503 EPS - FYE - 1 $4.45 $4.24 $5.80 $9.76 $3.98 $4.39 $3.41 $3.38 $3.66 $1.62 Long-Term Debt FYE - 1 $6,542,887,455 $1,794,440,665 $9,915,596,401 $5,798,876,676 $4,903,656,628 $3,616,165,224 $1,684,255,712 $1,223,365,479 $157,407,076 $409,258,397 Date FYE - 1 31-Oct-07 31-Oct-07 31-Oct-07 31-Oct-07 31-Dec-07 31-Oct-07 31-Oct-07 31-Dec-07 31-Oct-07 31-Oct-07 EBITDA - FYE - 2 $5,955,456,570 $4,257,461,024 $5,679,287,305 $3,162,583,519 $2,641,796,700 $3,438,752,784 $1,112,694,878 $1,768,223,574 $103,505,568 $101,507,350 EPS - FYE - 2 $3.25 $3.20 $5.69 $6.68 $4.21 $4.68 $4.65 $3.41 $2.21 $1.04 Long-Term Debt FYE - 2 $6,327,839,644 $2,023,162,584 $6,146,993,318 $4,984,409,800 $5,759,792,100 $2,428,507,795 $1,290,868,597 $1,397,160,000 $133,630,290 $176,504,232 Date FYE - 2 31-Oct-06 31-Oct-06 31-Oct-06 31-Oct-06 31-Dec-06 31-Oct-06 31-Oct-06 31-Dec-06 31-Oct-06 31-Oct-06 6081 6282 6211 6162 6099 6211 6311 6411 8741 6211 6162 6321 6282

Other SICs 6082 6411

6512 6331 6371

6282 6799 6399




EBITDA - FYE - 3 $4,380,416,325 $3,670,697,303 $3,330,676,601 $977,665,510 $1,917,164,201 $3,221,293,383 $1,046,347,995 $1,156,665,908 $93,118,188 $73,540,288 EPS - FYE - 3 $2.21 $2.70 $2.73 ($0.39) $2.69 $4.01 $4.22 $2.21 $1.92 $0.76 Long-Term Debt FYE - 3 $6,925,060,031 $2,202,079,209 $4,356,674,231 $4,326,148,681 $3,386,561,193 $2,093,543,923 $934,420,981 $1,050,803,274 $127,189,789 $108,642,126 Date FYE - 3 31-Oct-05 31-Oct-05 31-Oct-05 31-Oct-05 31-Dec-05 31-Oct-05 31-Oct-05 31-Dec-05 31-Oct-05 31-Oct-05

Return on Equity (Most Recent Yr) 22.47 21.51 18.67 24.43 13.30 13.93 11.67 21.12 9.41 16.17

Notes to Comparative Data

- All figures are in United States dollars. - All figures are as reported by the company. - N/A = Data Not Available. - Companies ranked by total revenue for the full year most recently reported.

- Total Revenue = All revenues, including net sales, operating revenues, interest income, royalties, excise taxes etc. - EBITDA = Earnings before interest, taxes, depreciation and amortization. - EPS Cont Operations = Earnings Per Share as reported by company excluding extraordinary items. - Total Current Assets = All assets expected to be realized within the next year, includes cash, accounts receivable and inventories. - Long Term Debt = Debt due to be paid at a date more than one year in the future. - Return on Equity = The companys earnings divided by its equity (book value). - Profit Margin = The companys net income as a percent of revenues.



Industry Report - Banking - November 2008


Industry Report - Banking - November 2008

Industry Reports Coverage 2008

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North America
Automotive Aviation Banking Biotechnology Chemicals Electricity Food & Beverage Healthcare Heavy Construction Hospitality & Tourism Insurance IT & Technology Media Medical Instruments & Equipment Metal Works Mining Oil & Gas Pharmaceuticals Precious Metals Property & Development Retailing Telecommunications

Automotive Aviation Banking Biotechnology Chemicals Food & Beverage Insurance IT & Technology Media Oil & Gas Pharmaceuticals Property & Development Telecommunications

Automotive Aviation Banking Biotechnology Chemicals Food & Beverage Heavy Construction Insurance IT & Technology Media Oil & Gas Pharmaceuticals Property & Development Telecommunications

Latin America
Automotive Banking Chemicals Food and Beverage Insurance Metal Works - Iron and Steel Mining Oil & Gas Property Textiles
34 30

Industry Report - Banking - November 2008

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Mergents Products & Services

Online Products


Print Products















Mergents Administrative Offices

NEW YORK, NY 10010, 60 MADISON AVE, 6TH FLOOR - TEL: (800) 342-5647 OR (704) 559-7601 FORT MILL, SC 29715, 580 KINGSLEY PARK DRIVE - TEL: (800) 342-5647 OR (704) 559-7601

Industry Report - Banking - November 2008

Adding Value to Information Since 1900

Mergent, Inc., a leading provider of global business and financial information on publicly traded

companies, operates sales offices in key North American cities as well as London, Tokyo and Sydney. Mergents products date back to 1900 and contain information on more than 15,000 US public companies, 20,000 non-US public companies in 100 countries, and 20,000 US municipal entities, as well as extensive corporate and municipal bond, UIT and dividend information. More than 200,000 professional and individual clients worldwide turn to Mergents products, which include Mergent Manuals, Mergent Handbooks and Investment Guides and its flagship Internet service, Mergent Online.