ON THE RIGHT: New ways of banking emerging
WE MAY LOOK BACK at 2015 as the beginning of a new era for Canada’s banking sector. New CEOs have taken the helm at CIBC, RBC, Scotiabank and TD.
We have a new federal finance minister, a new Bank of Canada governor and new leaders at both the office of the Superintendent of Financial Institutions and Canada Mortgage and Housing Corporation. How will their experiences and responses shape the way Canada’s banks respond to a rapidly changing world of continued re-regulation and increasing customer expectations?
These new leaders have taken charge at a time when Canadian banks delivered another year of solid performance in 2014.
Yet they are also taking over at a point when the business of banking faces several major challenges. New competitors and new technologies threaten to disrupt the industry.
Evolving consumer behaviours and expectations are pressuring banks to change how they engage with and serve their customers. Data analytics has emerged as a powerful tool that can help banks transform vast amounts of data into business insight and better decisions. All of this is taking place against a backdrop of a sputtering economy, continuing consumer debt burdens, falling Canadian dollar and commodity prices, and further margin pressure.
Canadian banks bolstered their sound global position, with strong return on equity (ROE) in 2014.
However, the ROE gap is closing and global peers are catching up in this regard. In particular, core earnings growth combined with an improvement in credit loses, contributed to a 6.9 per cent increase in pre-tax earnings for the largest Australian banks. This compared to an overall flat pre-tax earnings growth for the Canadian big six.
ROE for United States (US) banks continues to lag behind. Depite better growth from an improving US economy, legal and operational costs from regulatory demands continue to be a drag on pre-tax earnings, which grew at 1.3 per cent for top US institutions. Five year average for total shareholder return continues to show improvement and growth compared to Canadian and Australian banks, which while still healthy, saw declines in these averages.
Productivity and efficiency reflected through earnings per full time employee equivalent (FTE), remained flat for Canadian banks. This has been driven by a combination of modest and slowing revenue growth, and continued challenges with the overall cost structure of the industry. This has been further exacerbated by increasing costs related to regulation and compliance.
In Canada and around the world, banks will soon find themselves facing an unprecedented level of disruption. New market entrants, from retailers to telecoms, to technology firms, are poised to move into the traditional banking space and seize profitable opportunities.
Payments will likely be the first major battleground, with Apple, Google, and Amazon already making waves with their mobile payment offerings and TransferWise, Ripple and Paypal in the wires and remittance domain.
Elsewhere, crowd sourced fund-raising companies like Kickstarter, and peer-to-peer lending companies like Funding Circle, are enabling a new generation of entrepreneurs to get their businesses off the ground without having to involve a bank.
These new market entrants are able to bring power of innovation to bear on very specific areas of traditional banking – and in so doing are discovering ways to shunt traditional banks aside.