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A Tale of Two Banking Sectors: Canada vs. U.S.

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A Tale of Two Banking Sectors: Canada vs. U.S.

A Tale of Two Banking Sectors: Canada vs. U.S.

Regardless of which side of the 49th parallel you are on, banking sectors play a crucial role in both the financial system and the economy.

But while banks on each side of the border perform many similar functions, and have comparable economic impacts, the fact is that the U.S. and Canadian banking systems are very different.

Comparing Canadian and U.S. Banks

Today’s infographic comes to us from RBC Global Asset Management and it compares Canadian and U.S. banks directly based on a variety of factors.

The histories of both banking sectors are contrasted, but subjects such as the regulatory environments, market forces, the number and size of banks, and post-crisis landscapes are also compared. An outlook for investors on both sectors is also provided.

The end result is an interesting depiction of two banking sectors that are related in many ways, but that also have distinct differences and ways of doing business.

General Differences:
Historically, the Canadian banking system favors a limited quantity of banks, and many branches. It also carries the British influence of valuing stability over experimentation. Meanwhile, U.S. banking is more decentralized and localized, and more open to experimentation. This has led to trial and error, but also the world’s largest bank system.

Regulatory Focuses
Canada’s banking system tends to promote safety and soundness, while the American system keys in on privacy, anti-money laundering, banking access, and consumer protection measures.

Market Environment
The Canadian market is worth C$142 billion (US$111 billion) per year, while the U.S. market is over 10x bigger at US$1.4 trillion. Interestingly, these market sizes explain why Canadian banks often seek growth opportunities in the U.S. market, while U.S. banks just focus on the massive domestic sector for growth.

Number of Banks
There are 85 banks in Canada, and 4,938 in the United States.

Market Share
Canada’s five biggest banks hold a whopping 89% of market share, while America’s five biggest banks only hold 35% of market share.

Biggest Banks
Canada’s “Big Five” Banks:
RBC: C$142 billion
TD: C$130 billion
Scotia: C$93 billion
BMO: C$62 billion
CIBC: C$49 billion

The Biggest Four Banks in the U.S.:
JPMorgan Chase: US$377 billion
Bank of America: US$310 billion
Wells Fargo: US$260 billion
Citigroup: US$179 billion

In Canada, there are no other institutions worth over C$25 billion, but in the States there are eight that are worth between US$50-$100 billion.

Outlook for Investors

Not only are the two banking environments quite different in terms of character – but Canadian and U.S. banks are at different points in their market cycles, as well.

Post-2008 Reaction
Banks in Canada were minimally impacted by the Financial Crisis, and have been permitted to use lower risk weights than U.S. Banks. As a result, they’ve been able to hold less capital for each loan (i.e. higher leverage)

Banks in the U.S. have spent the past number of years building capital. Regulators required U.S. banks to be conservative in their approach post-crisis. As a result, U.S. banks have lower leverage than Canadian peers.

Leverage (Asset/Equity)
Canada’s “Big Five”:
18.3

Five Biggest U.S. Banks:
9.3

Dividend Yield
Canadian Banks: 3.9%
S&P/TSX Composite: 2.9%

Top 15 U.S. Banks: 2.5%
S&P 500: 2.1%

Which Sector Should Investors Choose?

There are compelling reasons to consider the financial institutions of either country:

Canada

  1. Canadian banks have a proven track-record of delivering steady dividends that have grown over time.
  2. Canadian banks have a strong global reputation for reliability and safety due to Canada’s sound regulatory framework and their relatively risk-averse approach.
  3. Canadian bank stocks can also be a good source of consistent income, with dividends that pay higher than the market. Canadians also doubly benefit, since to the Canadian dividend tax credit.

United States

  1. U.S. banks have significantly improved their balance sheets and capital structure over the past decade to be better positioned for future market cycles.
  2. Stronger U.S. economic growth combined with changing monetary policy creates a positive environment for U.S. banks to benefit from increased business and consumer demand and wider interest rate spreads.
  3. Recent tax cuts and deregulation are likely to benefit U.S. banks, as savings stand to contribute to earnings per share, and potentially lead to higher dividend payouts along with share buybacks.

Canadian and U.S. banks are similar in many ways – but their differing histories, competitive frameworks, and economic environments each provide unique exposure for investors.

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Banks

Where the World’s Banks Make the Most Money

Last year, the global banking industry cashed in an impressive $1.36 trillion in profits. Here’s where they made their money, and how it breaks down.

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Where the World’s Banks Make the Most Money

Profits in banking have been steadily on the rise since the financial crisis.

Just last year, the global banking industry cashed in an impressive $1.36 trillion in after-tax profits ⁠— the highest total in the sector seen in the last 20 years.

What are the drivers behind revenue and profits in the financial services sector, and where do the biggest opportunities exist in the future?

Following the Money

Today’s infographic comes to us from McKinsey & Company, and it leverages proprietary insights from their Panorama database.

Using data stemming from more than 60 countries, we’ve broken down historical banking profits by region, while also visualizing key ratios that help demonstrate why specific countries are more profitable for the industry.

Finally, we’ve also looked at the particular geographic regions that may present the biggest opportunities in the future, and why they are relevant today.

Banking Profits, by Region

Before we look at what’s driving banking profits, let’s start with a breakdown of annual after-tax profits by region over time.

Banking Profit by Year and Region ($B)

 2009201020112012201320142015201620172018
Global ($B)$388$530$635$703$859$963$1,070$1,065$1,144$1,356
United States$19$118$176$263$268$263$291$275$270$403
China$95$135$174$225$255$278$278$270$301$333
Western Europe$78$34$21-$70$28$95$154$159$186$198
Rest of World$196$243$265$285$309$327$348$361$387$421

In 2018, the United States accounted for $403 billion of after-tax profits in the banking sector ⁠— however, China sits in a very close second place, raking in $333 billion.

What’s Under the Hood?

While there’s no doubt that financial services can be profitable in almost any corner of the globe, what is less obvious is where this profit actually comes from.

The truth is that banking can vary greatly depending on location ⁠— and what drives value for banks in one country may be completely different from what drives value in another.

Let’s look at data and ratios from four very different places to get a sense of how financial services markets can vary.

CountryRARC/GDPLoans Penetration/GDPMargins (RBRC/Total Loans)Risk Cost Margin
Global Average5.1%124%5.0%0.8%
United States5.4%121%5.0%0.4%
China6.6%147%6.0%1.4%
Singapore13.0%316%4.6%0.4%
Finland3.4%133%2.8%0.2%

1. RARC / GDP (Revenues After Risk Costs / GDP)
This ratio shows compares a country’s banking revenues to overall economic production, giving a sense of how important banking is to the economy. Using this, you can see that banking is far more important to Singapore’s economy than others in the table.

2. Loans Penetration / GDP
Loans penetration can be further broken up into retail loans and wholesale loans. The difference can be immediately seen when looking at data on China and the United States:

CountryRetail LoansWholesale LoansLoan Penetration (Total)
United States73%48%121%
China34%113%147%

In America, banks make loans primarily to the retail sector. In China, there’s a higher penetration on a wholesale basis — usually loans being made to corporations or other such entities.

3. Margins (Revenues Before Risk Costs / Total Loans)
Margins made on lending is one way for bankers to gauge the potential of a market, and as you can see above, margins in the United States and China are both at (or above) the global average. Meanwhile, for comparison, Finland has margins that are closer to half of the global average.

4. Risk Cost Margin (Risk Cost / Total Loans)
Not surprisingly, China still holds higher risk cost margins than the global average. On the flipside, established markets like Singapore, Finland, and the U.S. all have risk margins below the global average.

Future Opportunities in Banking

While this data is useful at breaking down existing markets, it can also help to give us a sense of future opportunities as well.

Here are some of the geographic markets that have the potential to grow into key financial services markets in the future:

  1. Sub-Saharan Africa
    Despite having 16x the population of South Africa, the rest of Sub-Saharan Africa still generates fewer banking profits. With lower loan penetration rates and RARC/GDP ratios, there is significant potential to be found throughout the continent.
  2. India and Indonesia
    Compared to similar economies in Asia, both India and Indonesia present an interesting banking opportunity because of their high margins and low loan penetration rates.
  3. China
    While China has a high overall loan penetration rate, the retail loan category still holds much potential given the country’s population and growing middle class.

A Changing Landscape in Banking

As banks shift focus to face new market challenges, the next chapter of banking may be even more interesting than the last.

Add in the high stakes around digital transformation, aging populations, and new service opportunities, and the distance between winners and losers could lengthen even more.

Where will the money in banking be in the future?

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Why Anti-Money Laundering Should Be a Top Priority for Financial Institutions

Anti-money laundering cost financial institutions about $25.3B in 2018. How can organizations improve their processes & gain a competitive advantage?

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anti-money laundering

Why AML Should be a Top Priority for Financial Institutions

The to-do list for any financial executive is surely daunting. From navigating technology changes to managing talent effectively, there’s many initiatives competing for attention.

One issue that’s been in the headlines for many years is anti-money laundering (AML). When criminals are able to successfully hide the illicit origins of their cash, both the financial institution and society suffer. So, what makes AML more important now than it has been in the past?

Rising up the Priority Ladder

Today’s infographic from McKinsey & Company explains the factors which have brought anti-money laundering urgently to the forefront in recent years.

1. Regulatory Action

Enforcement actions related to AML have been on the rise. Since 2009, regulators have levied approximately $32 billion in AML-related fines globally.

2. Threat Evolution
Criminals are using more sophisticated means to remain undetected, including globally-coordinated technology, insider information, and e-commerce schemes.

3. Reputational Risk

AML incidents put a financial institution’s reputation on the line. There’s a lot at stake: today, the average value of each of the top 10 bank brands is $45B.

4. Rising Costs

Most AML activities require significant manual effort, making them inefficient and difficult to scale. In 2018, it cost U.S. financial services firms about $25.3B to manage money laundering risk.

5. Poor Customer Experience

Compliance staff must have multiple touch points with a customer to gather and verify information. Perhaps not surprisingly, one in three financial institutions have lost potential customers due to inefficient or slow onboarding processes.

It’s no wonder anti-money laundering has now become a top priority for many CEOs in the financial industry.

A Wave of Innovation

In the last five years, there has been an explosion of “RegTech” startups—companies that address regulatory requirements using technology.

Global RegTech Investments, 2014-2018

YearAmount Invested (USD)
2014$923M
2015$1,110M
2016$1,150M
2017$1,868M
2018$4,485M

Over 60% of these are focused on solving Know Your Customer (KYC) and AML issues. What does this technology look like in practice?

Customer onboarding

A hypothetical U.S. retail firm, ABC Electronics, applies online to open an account at AML Innovators Bank. Their information is verified and screened using a fully automated process.

If they are determined to be a lower-risk client, they will be fast-tracked through the approval process with decisioning in six hours or less. For high-risk clients, decisioning occurs within about 72 hours.

Transaction Monitoring

ABC Electronics requests to send multiple international wire payments to various beneficiaries. Each transaction is automatically screened based on various factors:

  • A same name or subsidiary transfer carries the lowest risk
  • Transfers to a known, similar industry in a high-risk jurisdiction carry medium risk
  • Transfers to an unknown industry in a high-risk jurisdiction carry high risk

These transaction scores, combined with algorithms that track a client’s expected vs. actual transaction behavior, will update ABC Electronics’ risk rating in real time.

Management oversight

As risk updates occur, ABC Electronics’ rating is integrated into AML Innovator Bank’s overall portfolio risk.

Senior risk management teams will be able to view a heat map that highlights the highest risk areas of the business.

Structural Change, Big Gains

Just as financial crimes continue to evolve, so do AML schemes.

How can organizations stay ahead of the game? They can focus on actively managing risk, deliberately investing in technology and analytics, and prioritizing areas where RegTechs will have the highest near-term impact.

By investing in AML, financial institutions create competitive advantages:

  • Improved efficiency
  • Superior customer experience
  • Scalability
  • Readiness to adapt to new regulations
  • Reduced reputational risk
  • Ability to attract top talent

With such benefits on the table, one thing is clear: Anti-money laundering efforts are more important now than they have ever been.

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