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WWW.IBISWORLD.

CA Commercial Banking in CanadaSeptember 2017   1

Cheque yourself: Revenue will improve despite


low interest rates
This report was provided to
University of Waterloo (2128943596)
by IBISWorld on 09 May 2018 in accordance with their licence agreement with IBISWorld

IBISWorld Industry Report 52211CA


Commercial Banking in Canada
September 2017 Mario Ismailanji

2 About this Industry 14 International Trade 28 Technology & Systems


2 Industry Definition 15 Business Locations 28 Revenue Volatility
2 Main Activities 29 Regulation & Policy
2 Similar Industries 17 Competitive Landscape 30 Industry Assistance
2 Additional Resources 17 Market Share Concentration
17 Key Success Factors 31 Key Statistics
3 Industry at a Glance 17 Cost Structure Benchmarks 31 Industry Data
19 Basis of Competition 31 Annual Change
4 Industry Performance 19 Barriers to Entry 31 Key Ratios
4 Executive Summary 20 Industry Globalization
4 Key External Drivers 32 Jargon & Glossary
6 Current Performance 21 Major Companies
8 Industry Outlook 21 Royal Bank of Canada
10 Industry Life Cycle 22 Toronto-Dominion Bank
23 Scotiabank
12 Products & Markets 24 Canadian Imperial Bank of Commerce
12 Supply Chain 25 Bank of Montreal
12 Products & Services
13 Demand Determinants 27 Operating Conditions
14 Major Markets 27 Capital Intensity

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   2

About this Industry

Industry Definition Operators in this industry provide which are used as a source of funding
financial services to retail and business for the loans. Banks in this industry
clients in the form of commercial, include those that are regulated by the
industrial and consumer loans. Banks Office of the Superintendent of
also accept deposits from customers, Financial Institutions.

Main Activities The primary activities of this industry are


Providing home equity loans and lines of credit
Providing automobile loans
Providing real estate secured lending
Providing personal deposit products
Providing business banking services

The major products and services in this industry are


Business loans
Consumer loans
Mortgage loans
Other

Similar Industries 23611bCA Apartment & Condominium Construction in Canada


Operators in this industry construct new multifamily residential units, including high-rise apartments,
townhouses, condominiums and medium- to high-density units.

52213CA Credit Unions in Canada


Operators in this industry are member owned and provide banking services, mainly deposit taking and
lending, to these same members.

52239CA Loan Administration, Check Cashing & Other Services in Canada


Operators in this industry service loans, most notably mortgages.

52421CA Insurance Brokers & Agencies in Canada


Operators in this industry primarily act as agents or brokers in selling annuities and insurance policies.

Additional Resources For additional information on this industry


www.bankofcanada.ca
Bank of Canada
www.cba.ca
Canadian Bankers Association
www.theglobeandmail.com
The Globe and Mail

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Industry at a Glance
Commercial Banking in 2017

Key Statistics Revenue Annual Growth 12-17 Annual Growth 17-22


Snapshot
$61.4bn 3.5% 4.4%
Profit Wages Businesses

$20.9bn $16.8bn 87
Revenue vs. employment growth Overnight rate
Market Share
Royal Bank of 10 2.5
Canada 
2.0
24.1% 5

Toronto-Dominion 1.5
% change

0
Bank 

%
1.0
21.6%
-5
0.5
Scotiabank 
15.3% -10 0.0
Year 09 11 13 15 17 19 21 23 Year 09 11 13 15 17 19 21 23
Canadian Imperial Revenue Employment
Bank of Commerce SOURCE: IBISWORLD

14.9% Products and services segmentation (2017)


Bank of Montreal
12.4% 12.4%
Business loans

p. 21

Key External Drivers 15.2%


Overnight rate Mortgage loans

Corporate profit
Aggregate household debt
Regulation for
the Commercial
Banking industry
57.2%Other
Consumer 15.2%
Consumer loans
Confidence Index
p. 4
SOURCE: IBISWORLD

Industry Structure Life Cycle Stage Mature Regulation Level Heavy


Revenue Volatility Low Technology Change Medium
Capital Intensity Low Barriers to Entry High
Industry Assistance Low Industry Globalization Low
Concentration Level High Competition Level High

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 31

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   4

Industry Performance
Executive Summary   |   Key External Drivers   |   Current Performance
Industry Outlook   |   Life Cycle Stage

Executive Despite the low interest rates that Canada’s largest commercial banks,
Summary emerged as a result of the global financial which are commonly referred to as the
crisis, the Commercial Banking industry “Big Six.” Generally, the Big Six has noted
in Canada has performed well over the deposit volume growth and lower loan
five years to 2017. During this period, the loss allowances during the five-year
overnight rate, which is strongly period, to the benefit of industry revenue
correlated with interest rates charged by and profit, respectively. Yet, in an effort
commercial banks, reached historic lows, to counteract low interest rates and
before rising again in 2017. Since banks escalating regulation, the Big Six has
generate income from the difference continued to acquire smaller competitors,
between interest paid on deposits and a trend that is anticipated to continue in
the years to come.
Over the five years to 2022,
The big six are acquiring small competitors to projected increases in the overnight
rate and improvements in corporate
curb low interest rates and escalating regulation profit are anticipated to boost interest
income from lending products.
interest obtained from loan products, low However, the remarkable debt levels of
interest rates have tempered industry Canadian households make it
revenue in recent years. However, increasingly likely that a period of
aggregate debt has continued to climb as deleveraging will begin over the next
total household credit, for example, five years. Additionally, mounting
increased 4.6% from March 2014 to regulation and capital requirements
March 2015. Consequently, industry hold the potential to limit the
revenue is expected to grow an flexibility of industry operators and
annualized 3.5% during the five-year make them less competitive on a global
period to $61.4 billion, with anticipated scale. In sum, industry revenue is
growth of 3.3% in 2017 alone. forecast to increase at an annualized
Over the past five years, industry rate of 4.4% to $76.0 billion during the
trends have continued to be dictated by five-year period.

Key External Drivers Overnight rate profit tend to dictate demand for credit
The overnight rate is the interest rate at from this market segment. When
which major financial institutions can corporate profit increases, commercial
borrow and lend short-term funds to loan demand and transaction fees also
each other. Since commercial banks rise. Corporate profit is expected to
benefit from the difference between increase in 2017, representing a potential
interest paid on deposits and interest opportunity for the industry.
obtained from loans, increases in the
overnight rate tend to boost industry Aggregate household debt
profit margins. The overnight rate is Aggregate household debt is reflective of
expected to increase in 2017. demand for personal and consumer loans in
an economy. When demand for such loans
Corporate profit is high, banks generate more revenue
Corporate clients are anticipated to through interest on these loans and through
account for 20.2% of total industry origination fees. Aggregate household debt
revenue in 2017. Changes in corporate is expected to increase in 2017.

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Industry Performance

Key External Drivers Regulation for the Commercial increase in 2017, posing a potential
continued Banking industry threat to the industry.
The Office of the Superintendent of
Financial Institutions has put forth an Consumer Confidence Index
aggressive timeline for Canadian banks The Consumer Confidence Index (CCI)
to comply with Basel III requirements. measures consumer optimism about the
While Basel III will increase capital current macroeconomic environment and is
requirements and potentially improve strongly correlated with aggregate
the reputations of Canadian banks on a household debt levels. When the CCI
global scale, it will also temper lending increases, aggregate household debt tends to
and increase compliance costs, to the rise as well, to the benefit of industry
detriment of industry profit. Regulation interest income. The CCI is expected to
for the industry is anticipated to increase in 2017.

Overnight rate Corporate profit

2.5 180

2.0 160

1.5 140
$ billion
%

1.0 120

0.5 100

0.0 80
Year 09 11 13 15 17 19 21 23 Year 09 11 13 15 17 19 21 23

SOURCE: IBISWORLD

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Industry Performance

Current Despite the continued impact of the global


financial crisis, the Commercial Banking Industry revenue
Performance industry has fared relatively well over the
10
five years to 2017, primarily due to its
sound capital requirements and distance
5
from the subprime mortgage crisis in the
United States. Commercial banks earn

% change
most their revenue through the interest 0
spread between customer deposits and
lending products. Banks accept deposits -5
and place them into savings accounts and
products such as certificates of deposit, -10
from which funds cannot be withdrawn Year 09 11 13 15 17 19 21 23
for a specified period. Banks pay interest
on these funds to the depositor and loan SOURCE: IBISWORLD

them at higher interest rates in the form


of mortgages, auto loans, personal loans and revenue growth over the five years to
and small business loans. During the 2017. In general, aggregate increases in
five-year period, the overnight rate is domestic household credit, the continued
expected to increase in 2017, while proliferation of mobile and online
remaining near historic lows throughout lending and the introduction of ancillary
the five-year period. services have benefited the industry’s
Partially as a result of this low interest performance in recent years. However,
rate environment, demand for personal the Canadian economy lost steam in 2015
loans has remained elevated during the and the GDP of Canada contracted over
five-year period, particularly when the first two quarters of the year.
compared with the United States. Nevertheless, revenue is expected to grow
Consequently, the industry’s largest an annualized 3.5% to $61.4 billion over
banks, commonly referred to as the “Big the five years to 2017, including
Six,” have experienced moderate lending estimated growth of 3.3% in 2017 alone.

Big six trends The six largest commercial banks in inhibited interest income on lending
Canada are the Royal Bank of Canada, products for the Big Six in recent years.
Toronto-Dominion Bank, Canadian In an effort to counteract subdued
Imperial Bank of Commerce, interest income, rising competition and
Scotiabank, Bank of Montreal and mounting regulation, the Big Six has
National Bank of Canada. In 2017, these continued to acquire smaller competitors.
commercial banks are still expected to Acquisitions provide a means for industry
hold most of the industry’s total assets. operators to achieve economies of scale
Consequently, the performance of these and boost profit margins. The largest
six large banks typically dictates overall acquisitions over the five years to 2017
industry trends. In general, the include Scotiabank’s purchase of ING
industry’s major players have reported Direct for $3.1 billion and Royal Bank of
deposit volume growth and slight Canada’s acquisition of Ally Canada for
declines in allowances for loan losses $3.7 billion. During the five-year period,
during the five-year period. However, the number of industry establishments is
low interest rates have substantially anticipated to grow at an annualized rate

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Industry Performance

Big six trends of 1.2% to 8,213 branches, mirroring increase at an annualized rate of 1.8%
continued trends in the broader financial services over the same period, reaching 306,143
sector. Additionally, the number of workers in 2017, primarily due to rising
industry employees is expected to compliance-related labour needs.

Continuing The Canadian economy emerged


profitability relatively unscathed from the global Demand for personal
financial crisis, much to the benefit of
domestic commercial banks. Although
loans has remained high
continued low interest rates have in recent years, bolstering
damaged interest income for commercial industry revenue and profit
banks, demand for personal loans has
remained high in recent years, bolstering
industry revenue. According to the Bank for loan losses and decreasing interest
of Canada, total household credit, which expenses, has improved the industry’s
includes consumer and residential profitability over the five years to 2017.
mortgage credit, increased 4.6% from Consequently, average industry profit is
March 2014 to March 2015. This trend, expected to remain strong at 34.0% of
combined with a slight dip in allowances industry revenue in 2017.

Industry services According to the Canadian Bankers’ Canadians primarily use online banking in
Association, 51.0% of Canadians 2017. This service has become more
primarily use online banking in 2017, popular in recent years, diverting some of
representing a decline from 55.0% in the demand for online banking. In an
2014. Consequently, online banking effort to differentiate itself from
consumers are anticipated to account for competitors, Royal Bank of Canada
40.7% of total industry revenue in 2017. introduced RBC Secure Cloud during the
Given the proliferation of online banking, current period, which is the first cloud-
this service has become less of a based mobile payments solution in
competitive advantage and more of a Canada. As the other members of the Big
required offering. Six are anticipated to introduce similar
Similarly, mobile banking is becoming services in the future, industry operators
increasingly commonplace. According to will find it necessary to look for alternative
the Canada Bankers’ Association, 17.0% of ways to gain a competitive advantage.

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Industry Performance

Industry The Commercial Banking industry in


Canada is expected to keep growing over
annualized rate of 5.6% over the five
years to 2022. As this variable tends to
Outlook the five years to 2022, largely due to trend with demand for commercial and
rising interest rates and corporate profit. industrial mortgages, overall industry
From 2017 to 2022, the overnight rate is revenue is anticipated to increase at an
projected to increase from 0.6% to 2.5%. annualized rate of 4.4% during the
Since industry operators predominately outlook period to $76.0 billion.
derive income from the difference However, not all trends are anticipated
between interest paid on deposits and to benefit industry operators in the years
interest obtained from loan products, to come, with rising consumer debt and
rising interest rates lift industry revenue escalating industry-specific legislation
substantially. Similarly, total corporate among potential threats to the
profit is forecast to increase at an industry’s performance.

Household debt Over the next five years, aggregate


household debt is forecast to increase an Canadians may become
annualized 2.6%. This continues a trend
of consumers taking on increased levels
more adamant about
of debt. Moreover, consumer reducing their debt over
deleveraging has yet to take hold. the next five years
According to surveys by
PricewaterhouseCoopers, a professional
services company, while most starts, for example, are projected to
respondents indicate an intention to decline an annualized 0.6% over the five
lower their debt, only some of these years to 2022. Therefore, Canadians may
individuals regarded themselves as very become more adamant about reducing
successful in achieving their goal. their debt during the outlook period.
Potential reasons for this reluctance to Consequently, rising interest income
reduce debt include optimism concerning caused by increases in the overnight rate
the state of the domestic economy. could be offset by falling demand for
Potential market corrections, however, residential mortgages, home equity loans
may result in Canadians going through and auto loans, to the detriment of
with deleveraging their finances. Housing industry revenue.

Mounting regulation Commercial banks in Canada will have to while also limiting the types of financial
comply with increasing government instruments a bank can use. As a result,
regulation over the five years to 2022, industry participants will find it
despite their strong financial positions. necessary to comply with more
On January 1, 2013, the Office of the complicated regulations, which will
Superintendent of Financial Institutions increase labour requirements.
(OSFI) stated that all Canadian banks Nonetheless, the number of industry
must start to follow Basel III regulations, enterprises is expected to increase
which focus on improving financial slightly at an annualized rate of 2.4% to
stability by making banks raise both the 98 banks over the five years to 2022,
quality and quantity of their capital base, while employment in this industry is

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Industry Performance

Mounting regulation expected to grow an annualized 3.5% to ratios is required beginning in 2016. By
continued 364,256 people during the same period. meeting these deadlines, commercial
The OSFI expected industry operators banks in Canada complied with the
to have exceeded a common equity Tier 1 requirements of Basel III far in advance
ratio of 7.0% by the first quarter of 2013. of the regulation’s deadline. While this
Moreover, by the first quarter of 2014, may benefit the industry’s ability to
Canadian commercial banks were counteract future financial crises and
expected to meet a total Tier 1 capital provide a boost to the reputation of
ratio of 8.5% and total capital ratio of Canadian banks on an international
10.5%. Additionally, the requirements are scale, industry operators will be further
tougher for the Big Six banks, given that constrained by higher capital
they have each been designated domestic requirements than their global peers.
systemically important financial This lack of flexibility has the potential to
institutions (D-SIFIs). As D-SIFIs, a 1.0% damage average industry profit over the
increase to their common equity Tier 1 next five years.

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Industry Performance
Life Cycle Stage Merger and acquisition activity has increased
Product groups are well established
and clearly segmented
There is wholehearted market acceptance
of commercial banking services

20 Maturity Quality Growth


% Growth in share of economy

Key Features of a Mature Industry


Company High growth in economic
consolidation; importance; weaker companies Revenue grows at same pace as economy
level of economic close down; developed Company numbers stabilize; M&A stage
importance stable technology and markets Established technology & processes
Total market acceptance of product & brand
15 Rationalization of low margin products & brands

10

Quantity Growth
Many new companies;
minor growth in economic
importance; substantial
5 technology change

Commercial Banking

0 Credit Unions Loan Administration, Check Cashing & Other Services


Dairy Farms Apartment & Condominium Construction

Mineral & Phosphate Mining


-5 Decline
Shrinking economic
importance

-10
-10 -5 0 5 10 15 20
% Growth in number of establishments
SOURCE: WWW.IBISWORLD.COM

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   11

Industry Performance

Industry Life Cycle The Commercial Banking industry in 10 years to 2022, the number of industry
Canada is in the mature stage of its establishments is forecast to grow at a
economic life cycle. This stage is rate of 1.9% to 9,283 locations. The
Thisindustry characterized by increasing merger and largest acquisitions in recent years
is M
 ature acquisition activity, slowing product include Royal Bank of Canada’s
development and the wholehearted acquisition of Ally Canada for $3.7 billion
market acceptance of the industry’s and Scotiabank’s purchase of ING Direct
services. Industry value added, which for $3.1 billion.
measures an industry’s contribution to the In recent years, industry-specific
overall economy, is expected to increase at product development has slowed. While
an annualized rate of 4.0% over the 10 new sources of industry revenue are
years to 2022. In contrast, Canadian GDP expected in the years to come,
is projected to grow at an annualized rate commercial and industrial mortgages,
of 1.9% during the same period. residential mortgages, home equity loans
In an effort to combat low interest and vehicle loans are expected to
rates and mounting regulation, industry continue to dominate the industry’s
operators have merged or acquired income. Similarly, the markets for these
competitors to expand their client bases. principal products have remained
Acquisitions tend to boost an operator’s constant in recent years, which is highly
profitability, as unit costs are inversely indicative of an industry in the mature
related to scale. Consequently, over the stage of its economic life cycle.

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   12

Products & Markets


Supply Chain  |   Products & Services  |   Demand Determinants
Major Markets  |   International Trade  |   Business Locations

Supply Chain KEY BUYING INDUSTRIES


11212CA Dairy Farms in Canada
Dairy farms require financing from commercial banks for new equipment and land purchases.
21239CA Mineral & Phosphate Mining in Canada
Mineral and phosphate mines require financing from commercial banks for capital
expenditures.
23799CA Heavy Engineering Construction in Canada
Heavy industrial facilities construction requires financing from commercial banks for capital
expenditures.
9901CA Consumers in Canada
Consumers use commercial banks for financing large purchases and managing their day-to-
day spending.

KEY SELLING INDUSTRIES


53112CA Commercial Leasing in Canada
Commercial banks require rental properties for many of their branch and retail networks.
9901CA Consumers in Canada
Consumers in Canada, in addition to relying on the industry’s lending products, also represent
a crucial source of funds for commercial banks in the form of deposits.

Products & Services Products and services segmentation (2017)

12.4%
Business loans

15.2%
Mortgage loans

15.2%
57.2%Other
Consumer loans

Total $61.4bn SOURCE: IBISWORLD

Mortgage loans made available to customers through a


Mortgage loans are expected to generate commercial bank’s branch network, as
15.2% of industry revenue in 2017, well as through various partnerships
similar to their share in 2012. Most of with mortgage brokers. Banks finance
these loans are residential mortgages the purchasing of structures in exchange
often taken out by families to secure for repayment of the principal amount
homes, while the some of these loans are along with interest. Furthermore, the
taken out for nonresidential structures structures are often tied to the loan as
such as office buildings and retail collateral. Typically, these loans are
storefronts. Mortgage products are available in either 15- or 30-year

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   13

Products & Markets

Products & Services instalments and have fixed or variable segment’s share of revenue declining over
continued interest rates. the coming years.

Consumer loans Business loans


Consumer lending is anticipated to Business loans are anticipated to account
generate 15.2% of industry revenue in for 12.4% of industry revenue in 2017.
2017. Principal products in this segment Businesses often must open lines of
include home equity loans and lines of credit to finance business projects to
credit and auto loans. Automotive obtain the necessary capital and to also
financing, in particular, has risen in reduce the risk involved in getting
popularity among commercial banks in involved in business projects. The
recent years, highlighted by Royal Bank number of business loans has remained
of Canada’s 2013 acquisition of Ally stable over the five-year period, providing
Financial’s automotive financing division. industry operators with a steady source
Given the solid performance of of revenue.
Canada’s economy during and after the
global financial crisis, consumers have Other
been willing to increase their debt as a Other sources of revenue for industry
proportion of disposable income over the operators include commissions on
five-year period, especially in the miscellaneous on the sale of mutual funds
beginning of the period. Consequently, and other security products, personal and
this segment’s share of revenue has commercial deposit account fees, as well
increased slightly from 2012 to 2017. Yet, as a range of other branch services. In
consumers have been more hesitant to 2017, other products are anticipated to
take on increased debt later in the period. account for a significant portion of
As a result, deleveraging is forecast over industry revenue, as industry operators
the five years to 2022, resulting in this engage in a wide variety of activity.

Demand Demand for commercial banking depends interested in expansion and replacement
Determinants on several factors, which include the level of equipment.
of consumer confidence, interest rates, Following the recession, the Canadian
corporate profit, regulatory changes and government passed new regulations that
external competition. The level of require commercial banks to have higher
consumer confidence is important because capital reserve levels, limiting lending
it measures how willing Canadians are to capacity. Furthermore, these regulations
borrow large sums of money from require more internal and external
commercial banks. When consumer oversight, which increases costs for banks
confidence is high, Canadians demand and constrains margins. The level of
additional loans, to the benefit of industry external competition from regional
interest income. Interest rates also play a banks, credit unions and online
key role in demand for lending. Interest companies offering depository solutions
rates, as measured by the overnight rate, also affects demand for commercial
plummeted following the global financial banks. As these companies develop their
crisis. Lower interest rates and higher products and services, they put pressure
corporate profit tend to boost business on commercial banks to innovate to
lending because companies are more retain clients.

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   14

Products & Markets

Major Markets Major market segmentation (2017)


3.1%
Other personal
9.6% clients
Branch banking consumers

12.8%
ATM banking users
40.7%
Online banking consumers

13.6%
Mobile banking consumers

20.2%
Corporate clients
Total $61.4bn SOURCE: IBISWORLD

Personal clients account for 13.6% of industry revenue in


Personal clients are anticipated to 2017 and ATM banking users are
account for 79.8% of total industry estimated to account for 12.8%, with the
revenue in 2017. This market relies on a remaining personal client revenue
range of products offered by commercial generated from miscellaneous banking
banks, including home equity loans and services. In aggregate, personal clients
lines of credit, auto loans, money market have grown slightly as a share of industry
savings accounts, certificates of deposit, revenue over the five-year period, as
mortgage products and more. According commercial loan growth has
to the most recent data available from the underperformed personal loan
Canadian Bankers Association, 51.0% of originations in recent years.
Canadians primarily use online banking
for bill payment. Alternatively, 12.0% Corporate clients
primarily pay in branch locations, with Corporate clients are expected to account
the remaining consumers relying on for the remaining 20.2% of industry
mobile banking (17.0%), ATMs (16.0%) revenue in 2017. This market primarily
and other methods such as preauthorized relies on commercial and industrial
bank account payments. mortgages, as well as other deposit and
Consequently, online banking loan products and lines of credit.
consumers are anticipated to account for Corporate clients have declined slightly as
40.7% of industry revenue in 2017, while a share of revenue over the past five years,
branch banking consumers are expected largely because personal loan originations
to account for 9.6%. Furthermore, mobile exceeded commercial and industrial
banking consumers are expected to mortgage growth in recent years.

International Trade Given the service-based nature of the products and services on an
industry, exports and imports are not international basis. For more
applicable. However, many industry information on the industry’s
operators, including the “Big Six” international trends, refer to the
banks, offer commercial banking Globalization section of this report.

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   15

Products & Markets

Business Locations 2017

Establishments (%)
Less than 5%
5% to less than 20%
20% to less than 40%
40% or more

NT
YT NU
NORTHERN TERRITORIES
0.4

BC AB SK MB
12.9 11.3 3.7 3.1

QC NL
1.6
ON 18.7
41.9

PE
NB 0.4
3.1 NS
3.0

SOURCE: IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   16

Products & Markets

Business Locations Ontario


Distribution of establishments vs. population
The distribution of industry
establishments closely follows the
50
distribution of the domestic population.
For example, Ontario is anticipated to 40
account for 41.9% of industry
establishments and 38.3% of the 30
Canadian population in 2017. To take

%
advantage of this large population base, 20

some of the industry’s largest players


10
focus on the province for revenue. As a
result, Royal Bank of Canada, Toronto- 0
Dominion Bank, Canadian Imperial Bank

Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland
NW Territories
Nova Scotia
Ontario
Prince Edward Island
Quebec
Saskatchewan
of Commerce and Scotiabank are all
headquartered in Toronto.

Quebec
Establishments
Similarly, Quebec is home to a significant
Population
share of the industry’s establishments SOURCE: IBISWORLD

due to its substantial population. In 2017,


Quebec is expected to represent 18.7% of remaining two members of the “Big Six”
industry establishments and 23.2% of the are headquartered in Montreal to be
domestic population. Consequently, the geographically close to potential clients.

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WWW.IBISWORLD.CA Commercial Banking in Canada September 2017   17

Competitive Landscape
Market Share Concentration  |   Key Success Factors  |   Cost Structure Benchmarks
Basis of Competition  |   Barriers to Entry  |   Industry Globalization

Market Share The Commercial Banking industry in top six banks are anticipated to hold over
Concentration Canada operates with a high level of 90.0% of the industry’s total assets.
market share concentration. The top four Merger and acquisition activity
companies account for an estimated continues to intensify in the industry, as
Level
75.9% of industry revenue in 2017, large Canadian banks acquire their smaller
Concentration in representing an increase from 2012’s competitors in an effort to counteract
this industry is H
 igh market concentration. Industry trends mounting regulations and the current low
are typically dictated by the performance interest rate environment. Strong profit
of the “Big Six” banks: Royal Bank of margins, however, have continued to entice
Canada, Toronto-Dominion Bank, new market entrants. Consequently, the
Canadian Imperial Bank of Commerce, number of industry enterprises has
Scotiabank, Bank of Montreal and increased an annualized 1.7% to 87
National Bank of Canada. In 2017, these enterprises over the five years to 2017.

Key Success Factors Having a good reputation slowing interest income by introducing
A positive reputation surrounding a new services. These products may include
commercial bank’s financial stability is new insurance products, warranty
IBISWorld identifies crucial to attract new customers and protection services, digital wallets and
250 Key Success retain existing clients. mobile payment systems.
Factors for a
business. The most Superior financial management Economies of scale
and debt management As unit costs tend to decrease with size,
important for this
Commercial banks need solid processes banks have increasingly attempted to
industry are: for managing interest rate, foreign merge with or acquire competitors to
exchange and operational risk. boost profit margins.
Commercial banks must maintain a
rigorous and conservative risk- Easy access for clients
management approach. Having a strong branch presence
throughout Canada makes it more
Ability to raise revenue from appealing for customers to conduct
additional sources business with a particular bank and
In this low interest rate environment, creates more opportunities for banks to
commercial banks may need to offset cross-sell their products.

Cost Structure Profit Wages


Benchmarks Industry profit, defined as earnings In 2017, wages are anticipated to account
before interest and taxes, is expected to for 27.4% of industry revenue.
increase slightly over the five years to Commercial banks require a myriad of
2017, increasing from 33.5% in 2012 to skilled employees, including credit
an estimated 34.0% in 2017. The solid analysts and customer service
performance of the Canadian economy representatives. Consequently, labour
after the global financial crisis has kept costs, which include salaries, variable
the loan default rate relatively low, to the compensation, benefits and retention
benefit of industry profit margins. compensation and share-based

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WWW.IBISWORLD.CA Commercial Banking in Canada September 2017   18

Competitive Landscape

Cost Structure compensation, account for the largest expenses are anticipated to account for
Benchmarks cost category for industry operators. the majority of the industry’s other costs.
Wages are expected to continue to make Interest paid on deposits represent a
continued
up the most significant cost, as the nature crucial cost category for commercial
of the industry’s product offerings is banks, as industry operators rely on
service-oriented. customer deposits for their lending and
interest income. Deposits made by
Other investors, trading liabilities and
Other expenses for industry operators subordinated notes also incur interest
include professional fees, data processing costs. Compared with their international
expenses and telecommunication fees. In counterparts, Canadian commercial
addition, marketing and depreciation banks fared well during and after the
costs are anticipated to account for 3.1% global financial crisis. Consequently, low
and 2.3% of total industry revenue, defaults among Canadian mortgages have
respectively, in 2017. Moreover, kept this cost item’s share of revenue low
purchases are expected to account for in recent years. In 2017, interest expenses
5.0% of revenue and rent and utilities are are estimated to account for 17.2% of
expected to account for 2.4%. Interest total revenue.

Sector vs. Industry Costs

Average Costs of
all Industries in Industry Costs
sector (2017) (2017)
100 n Profit
16.0 n Wages
n Purchases
80
34.0 n Depreciation
15.9 n Marketing
n Rent & Utilities
n Other
Percentage of revenue

60
20.4
27.4
1.8 1.4
1.4
40
5.0
3.1 2.3
2.4
20 43.1
25.8
0
SOURCE: IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in Canada September 2017   19

Competitive Landscape

Basis of Competition Internal competition banks with the opportunity to offset low
The Commercial Banking industry in interest income. Moreover, the provision
Canada is highly competitive, despite the of a range of services tends to increase a
Level & Trend dominance of the “Big Six”. The most bank’s retention rate.
 ompetition
C in important components of internal
this industry is competition are price and range of External competition
Highand the trend service offerings. Price, as a basis of Insurance companies, asset management
competition, refers to both the interest organizations and other financial
is I ncreasing
paid on deposits and interest garnered institutions represent key external
from lending products. Higher deposit competitors for industry operators.
interest rates and lower mortgage rates Additionally, given the increasing
tend to provide a bank with a competitive accessibility of online and mobile
advantage, yet this strategy also reduces a banking, the potential for international
bank’s profit margins. commercial banks that have not
In addition, providing a diverse range traditionally operated in Canada to enter
of product and service offerings tends to the industry has increased in recent
increase a bank’s competitiveness. years. Moreover, technology companies,
Mobile payment systems and other new including large telecommunications
offerings permit industry operators to companies, have the potential to enter
raise revenue from additional sources. the industry’s space by tying together a
This flexibility provides commercial range of diverse services.

Barriers to Entry The Commercial Banking industry in


Canada has high barriers to entry. An Barriers to Entry checklist

Level & Trend organization must receive prior approval Competition High
from the Office of the Superintendent of Concentration High
 arriers to Entry
B Financial Institutions (OSFI) to initiate Life Cycle Stage Mature
in this industry are operations. The organization is then Capital Intensity Low
Highand S teady subject to ongoing supervision and regular Technology Change Medium
inspections by the OSFI and provincial Regulation & Policy Heavy
governments. Depending on what Industry Assistance Low
designation a bank receives from the OSFI,
it may be restricted in its range of activities SOURCE: IBISWORLD

and acquisitions of competing banks.


Perhaps the largest barrier to entry for total capital ratio of 10.5%. In addition to
potential operators is obtaining and these regulatory requirements, new
maintaining sufficient capital levels for entrants must invest heavily in their
operations. By the first quarter of 2014, distribution networks in an effort to
commercial banks were expected to meet compete with the industry’s “Big Six,”
a total Tier 1 capital ratio of 8.5% and resulting in additional barriers to entry.

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WWW.IBISWORLD.CA Commercial Banking in Canada September 2017   20

Competitive Landscape

Industry The level of globalization in the owned and are expected to hold most of
Globalization Commercial Banking industry is low. the industry’s total assets in 2017. While
Given the service-based nature of the the largest banks in the industry each
Level & Trend industry, exports and imports are not have an international presence, the
applicable. Moreover, the “Big Six” majority of their revenue is still
 lobalization
G in this banks in Canada are all domestically generated in Canada.
industry is L owand
the trend is S  teady

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   21

Major Companies
Royal Bank of Canada | Toronto-Dominion Bank | Scotiabank
Canadian Imperial Bank of Commerce | Bank of Montreal | Other Companies

Major players Canadian Imperial Bank of Commerce 14.9%


(Market share) Toronto-Dominion Bank 21.6%

11.7%
Other
Scotiabank 15.3%
Bank of Montreal 12.4% Royal Bank of Canada 24.1%
SOURCE: IBISWORLD

Player Performance Royal Bank of Canada (RBC) is Canada’s these operations contributing to an
largest bank by assets. Headquartered in estimated 36.7% of the company’s total
Toronto and founded in 1901, RBC provides earnings in 2017. RBC’s personal and
Royal Bank of individuals and corporations with a diverse commercial banking segment provides
Canada range of financial services, including personal banking, business banking, auto
Market share: 24.1% commercial banking and wealth financing and retail investment to 13.0
management services. The company million individuals, businesses and
maintains operations in 38 countries, with institutional clients throughout Canada,
Canada representing an estimated 62.0% of the Caribbean and the United States.
the company’s total revenue in 2016 (latest On February 1, 2013, RBC completed the
available data) and serves its 16.0 million acquisition of Ally Canada for a total of $3.7
clients through a network of 80,000 billion. Ally Canada provides financial
employees. In 2016, total revenue for the services directly to auto dealers, while also
company amounted to $38.4 billion, while offering consumer financing for individuals
net income amounted to $10.5 billion. through automobile dealerships. This
RBC currently operates through five acquisition increased the scale of the
business segments: personal and company’s consumer and commercial auto
commercial banking, wealth management, financing operations. Additionally, RBC
insurance, investor and treasury services announced on January 22, 2015, that it
and capital markets. The company’s agreed to purchase City National Corp for
personal and commercial banking $5.4 billion. City National Corp. is a
segment is relevant to this industry, with US-based retail and commercial lender that

Royal Bank of Canada (industry-relevant operations) - financial


performance*
Revenue Net income
Year ($ million) (% change) ($ million) (% change)
2012 11,815.0 N/C 4,085.0 N/C
2013 12,220.0 3.4 4,414.0 8.1
2014 12,869.0 5.3 4,642.0 5.2
2015 13,379.0 4.0 4,877.0 5.1
2016 13,833.0 3.4 5,002.0 2.6
2017 14,821.4 7.1 5,791.2 15.8

*Estimates
SOURCE: ANNUAL REPORT AND IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   22

Major Companies

Player Performance is expanded RBC’s business capabilities the domestic market compared with
continued and is expected to generate potential other geographic segments such as the
synergies between business lines. However, United States. However, increased
CEO David McKay has frozen plans for consolidation and control of the
further US acquisitions due to the industry’s assets by the “Big Six” have
uncertain political climate. As a result, the resulted in growth in Canada as well.
company is expected to focus on organic Therefore, IBISWorld projects industry-
growth of current business lines and specific revenue to increase at an
expansion in the domestic market. annualized rate of 4.6% to $14.8 billion.
Moreover, industry-specific net income
Financial performance is projected to increase at a 7.2%
Over the five years to 2017, the company annualized rate over the same period to
experienced slightly slower growth in $5.8 billion.

Player Performance Headquartered in Toronto and founded in operations accounting for an estimated
1852, Toronto-Dominion Bank (TD) is the 37.6% of the company’s total revenue
second-largest bank in Canada by assets. in 2017.
Toronto-Dominion TD provides a diverse range of financial TD has made several significant
Bank services to over 23.0 million customers. acquisitions in recent years. In 2013, TD
Market share: 21.6% The company employs an international obtained Target Corp.’s US credit card
network of more than 85,000 employees portfolio and Epoch Investment Partners
and generates an estimated 65.0% of its Inc. Other significant recent events
total revenue in Canada. In 2016, total include the 2014 acquisition of certain
revenue for TD reached $34.3 billion. credit accounts from the Canadian
TD currently operates through three Imperial Bank of Commerce and the 2013
business segments: Canadian retail, sale of TD Waterhouse Institutional
US retail and wholesale banking. The Services. On October 24, 2016, TD Bank
company’s Canadian retail segment is announced an agreement to acquire
relevant to this industry, with these Scottrade Bank, a federal savings bank.

Toronto-Dominion Bank (industry-relevant operations) - financial


performance*
Revenue Net income
Year ($ million) (% change) ($ million) (% change)
2012 10,688.0 N/C 3,304.0 N/C
2013 11,040.0 3.3 3,654.0 10.6
2014 11,884.0 7.6 3,246.2 -11.2
2015 12,316.0 3.6 3,715.1 14.4
2016 12,611.0 2.4 3,736.7 0.6
2017 13,243.2 5.0 4,007.2 7.2

*Estimates
SOURCE: ANNUAL REPORT AND IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   23

Major Companies

Player Performance Financial performance industry-specific net income is


continued Over the five years to 2017, TD’s anticipated to grow at an annualized rate
industry-specific revenue is expected to of 3.9% during the five-year period.
increase at an annualized rate of 4.4% to Moreover, the company has continued to
$13.2 billion. This relatively strong expand its distribution network as a
growth in personal and commercial means to acquire customer accounts. For
banking revenue is a result of deposit example, TD has continued to invest
volume growth in recent years. The heavily in mobile and online banking,
company cites low interest rates as a which are expected to grow in popularity
threat to its profit margins, yet TD’s over the coming years.

Player Performance Founded in 1832 and headquartered in segment provides financial advisory and
Toronto, Scotiabank is a leading financial banking services to personal and
services provider that also offers personal corporate customers located domestically.
Scotiabank banking, commercial banking, wealth In 2012, Scotiabank acquired ING
Market share: 15.3% management and investment banking Direct from ING Group N.V. for $3.1
services to over 21.0 million customers. billion. ING Direct had more than 1.8
The company provides these services in million clients, $30.0 billion in deposits
over 55 countries, relying on a team of over and $40.0 billion in total assets. Included
88,000 employees. In 2016, Scotiabank’s in the acquisition was a requirement to
total revenue reached $26.4 billion, while change the name of the subsidiary in
net income reached $7.4 billion. 2014. As a result, Scotiabank changed
Scotiabank currently operates through ING Direct’s name to Tangerine in the
four business segments: Canadian spring of 2014.
banking, international banking, global
wealth and insurance and global banking Financial performance
and markets. The company’s Canadian Over the five years to 2017,
banking segment is relevant to this Scotiabank’s industry-specific revenue
industry and is anticipated to account for is expected to increase at an annualized
34.4% of the company’s total revenue in rate of 8.9% to $9.4 billion. Industry-
2017. Scotiabank’s Canadian banking specific performance grew sharply in

Scotiabank (industry-relevant operations) - financial performance*


Revenue Net income
Year ($ million) (% change) ($ million) (% change)
2012 6,141.0 N/C 1,801.0 N/C
2016 6,973.0 13.5 2,151.0 19.4
2014 7,436.0 6.6 2,188.0 1.7
2015 8,095.0 8.9 2,381.9 8.9
2016 8,976.0 10.9 2,641.1 10.9
2017 9,403.0 4.8 2,783.7 5.4

*Estimates
SOURCE: ANNUAL REPORT AND IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   24

Major Companies

Player Performance 2013, growing 13.4% over the year. The Industry-specific net income is
continued ING Direct acquisition was a primary similarly projected to increase an
driver of this growth, as were the strong annualized 9.1% to $2.8 billion during
asset and deposit growth trends. the five-year period.

Player Performance Founded in 1867 and headquartered in management company located in the
Toronto, Canadian Imperial Bank of United States. The transaction was
Commerce (CIBC) is one of the largest completed on January 6, 2014 and,
Canadian Imperial banks in Canada by assets. Through a according to CIBC, the deal is anticipated
Bank of Commerce network of about 44,000 full-time to expand the company’s presence in the
Market share: 14.9% employees and 1,100 bank branches, US wealth management market, which is
CIBC provides a range of financial a direct component of the company’s
services to 11.0 million individual, growth strategy. Some potential synergies
corporate and institutional clients. In are anticipated to result from continued
2016, the company’s total revenue business development and expansion.
amounted to $15.0 billion, while net
income amounted to $4.8 billion. Financial performance
CIBC currently operates through four Over the five years to 2017, CIBC’s
business segments: retail and business industry-specific revenue is expected to
banking, wealth management, wholesale increase at an annualized rate of 2.3% to
banking and corporate and other. The $9.1 billion. Despite volume growth in
company’s retail and business banking recent years, the company has suffered
segment is relevant to this industry, from higher losses from its commercial
providing banking and financial advisory lending portfolio and continued low
services to domestic clients. In 2013, interest rates in the broader economy.
CIBC announced its acquisition of Consequently, the company’s market
Atlantic Trust, a private wealth share is anticipated to fall to 6.8% in 2017.

Canadian Imperial Bank of Commerce (industry-relevant operations) -


financial performance*
Revenue Net income
Year ($ million) (% change) ($ million) (% change)
2012 8,154.0 N/C 2,286.0 N/C
2013 8,319.0 2.0 2,463.0 7.7
2014 8,223.0 -1.2 2,459.0 -0.2
2015 8,406.0 2.2 2,530.0 2.9
2016 8,855.0 5.3 2,689.0 6.3
2017 9,132.1 3.1 2,899.2 7.8

*Estimates
SOURCE: ANNUAL REPORT AND IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   25

Major Companies

Player Performance Founded in 1817 and headquartered in Management and Aver Media in 2014 and
Montreal, Bank of Montreal (BMO) is a 2013, respectively. The most recent
leading and diversified financial services acquisition was that of General Electric
Bank of Montreal provider. The company provides retail Capital Corporation’s Transportation
Market share: 12.4% banking, wealth management and Finance business in 2015, expanding
investment banking services to more than BMO’s asset base.
12.0 million customers, relying on a
network of 46,000 employees. In 2016, Financial performance
the company’s total revenue reached $21.1 BMO’s industry-specific revenue is
billion with a net income of $6.2 billion. expected to increase an annualized 4.1% to
BMO currently operates through three $7.6 billion over the five years to 2017.
business segments: personal and Industry-specific net income is anticipated
commercial banking, wealth management to grow at a higher annualized rate of
and BMO capital markets. The company’s 8.5% over the same period to $2.7 billion.
domestic personal and commercial BMO’s commercial lending operations
banking operations are relevant to this have outperformed its personal banking
industry and are expected to account for performance in recent years and,
38.9% of the company’s total revenue in consequently, its market share in
2015. The company’s personal banking commercial lending is considerably higher
operations provide banking, financing and than its market share in personal banking.
investing services to domestic consumers. Commercial lending performance is
The company’s commercial banking driven by the accumulation of assets such
operations in Canada provide commercial as GE Capital’s assets from the 2015
and capital market products and advisory acquisition. However, the company’s
services to corporate customers. BMO has personal banking revenue has also grown
acquired several businesses over the five over the five-year period due to BMO’s
years to 2017 such as F&C Asset competitive fixed-rate mortgage offerings.

Bank of Montreal (industry-relevant operations) - financial performance*


Revenue Net income
Year ($ million) (% change) ($ million) (% change)
2012 6,212.0 N/C 1,775.0 N/C
2013 6,341.0 2.1 1,854.0 4.5
2014 6,495.0 2.4 2,015.0 8.7
2015 6,640.0 2.2 2,105.0 4.5
2016 6,968.0 4.9 2,207.0 4.8
2017 7,595.7 9.0 2,667.7 20.9

*Estimates
SOURCE: ANNUAL REPORT AND IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   26

Major Companies

Other Companies National Bank of Canada revenue reached $5.8 billion, while net
Estimated market share: 4.7% income reached $1.6 billion.
Founded in 1852 and headquartered in The company currently operates through
Montreal, National Bank of Canada is three business segments: personal and
the sixth-largest bank in Canada by commercial, wealth management and
assets. The company is a leading financial markets. National Bank of
provider of financial services to Canada’s personal and commercial segment
personal, corporate and institutional is relevant to this industry. The company’s
clients. National Bank of Canada offers personal and commercial segment primarily
banking and investment solutions, provides banking, credit and financing
brokerage, insurance and wealth services. In 2017, the company is expected
management services to its customers to generate $2.9 billion in industry-specific
through a network of about 20,000 revenue, with industry-specific net income
employees. In 2016, the company’s total of $574.3 million.

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   27

Operating Conditions
Capital Intensity   |   Technology & Systems   |   Revenue Volatility
Regulation & Policy   |   Industry Assistance

Capital Intensity The Commercial Banking industry in


Canada operates with a low level of capital Capital intensity
Capital units per labour unit
intensity. IBISWorld estimates that for
Level
every dollar spent on labour, the industry 0.5
The levelof capital will allocate $0.09 to capital investment.
intensity is L ow The industry’s level of capital intensity has 0.4

remained steady over the five-year period 0.3


and is expected to remain steady due to
the nature of the industry’s service 0.2

offerings. Industry operators invest 0.1


heavily in their distribution networks,
which typically include brick-and-mortar 0.0
Economy Finance and Commercial
branches, ATMs and an online presence. Insurance Banking
Moreover, the industry’s largest banks Dotted line shows a high level of capital intensity
continue to invest in mobile transaction SOURCE: IBISWORLD

platforms, as commercial banks compete


extensively based on banking convenience. service offerings. For example, according to
However, the industry still relies heavily the latest available information, salaries,
on labour for each of its product and variable compensation, benefits and

Tools of the Trade: Growth Strategies for Success

New Age Economy Investment Economy


Recreation, Personal Services, Information, Communications,
Health and Education. Firms Mining, Finance and Real
benefit from personal wealth so Estate. To increase revenue
stable macroeconomic conditions firms need superior debt
are imperative. Brand awareness management, a stable
and niche labour skills are key to macroeconomic environment
product differentiation. and a sound investment plan.

Capital Intensive
Labour Intensive

Commercial Banking Apartment & Condominium Construction


Credit Unions Loan Administration, Check Dairy Farms
Traditional Service Economy Cashing & Other Services Old Economy
Wholesale and Retail. Reliant Mineral & Agriculture and Manufacturing.
on labour rather than capital Phosphate Traded goods can be produced
to sell goods. Functions cannot Mining using cheap labour abroad.
be outsourced therefore firms To expand firms must merge
must use new technology or acquire others to exploit
or improve staff training to economies of scale, or specialize
increase revenue growth. in niche, high-value products.

Change in Share of the Economy SOURCE: IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   28

Operating Conditions

Capital Intensity retention competition and share-based limited number of individuals with these
continued compensation accounted for 31.7% of skills, so industry operators compete with
Royal Bank of Canada’s total revenue in a range of similar industries for their
2016. Commercial banks require several services. Increased demand for their
skilled employees, including credit services drives up the wage that they
analysts and customer service demand and as a result, the industry’s
representatives. Moreover, there are a average wage.

Technology & Systems Over the past five years, competition in the traditional broker and branch network
Commercial Banking industry in Canada settings by utilizing decentralized hubs such
Level has been aplenty. Since this trend is as mobile applications.
anticipated to continue over the years ahead, The convenience of online and mobile
The level
of industry operators are expected to introduce banking for monitoring account balances,
Technology Change new value-added services and focus on making deposits and transferring funds is
is M
 edium mobile payment distribution methods to anticipated to draw even more consumers
improve the banking experience of their over the five years to 2022. As a result,
customers. Some examples include new commercial banks will find it necessary to
warranty provisions, digital wallets, further simplify their user interfaces and
development of mobile payment systems introduce cloud-based systems. With RBC
and other technologies focused on capturing Secure Cloud, Royal Bank of Canada
the growing shift toward mobile banking. As introduced the first cloud-based mobile
a result, domestic banks are anticipated to payments solution in Canada, and other
focus on interacting with prospective members of the “Big Six” are anticipated
mortgage customers outside of the to follow in the years ahead.

Revenue Volatility The Commercial Banking industry in depends on aggregate changes in the
Canada is characterized by a low level of origination of personal and business loans
revenue volatility. Volatility primarily and the spread between the interest rate
Level
The level of
Volatility is L ow A higher level of revenue Volatility vs Growth
volatility implies greater
industry risk. Volatility can 1000 Hazardous Rollercoaster
negatively affect long-term
Revenue volatility* (%)

strategic decisions, such as 100


the time frame for capital
investment.
10
When a firm makes poor
investment decisions it Commercial Banking
may face underutilized 1
capacity if demand
suddenly falls, or capacity 0.1 Stagnant Blue Chip
constraints if it rises –30 –10 10 30 50 70
quickly. Five-year annualized revenue growth (%)
* Axis is in logarithmic scale
SOURCE: IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   29

Operating Conditions

Revenue Volatility paid on deposits and interest garnered Consequently, personal and business
continued from loan products. Revenue fluctuations lending did not fall dramatically in
have been moderated in recent years by response to the global financial crisis and
historically low interest rates remaining in ensuing recovery, therefore tempering
place throughout the five-year period. revenue volatility for industry operators
Moreover, while the Canadian economy significantly. Yet, over the five years to
was not exempt from the impact of the 2022, the timing of interest rate increases
financial crisis, it was relatively well-off and potential consumer deleveraging have
compared with the rest of the world. the potential to increase revenue volatility.

Regulation & Policy Canada’s federal government has both the quality and quantity of required
jurisdiction over commercial banks, regulatory capital bases and enhances
regulating them through the Office of the the risk coverage of the Basel II capital
Level & Trend Superintendent of Financial Institutions framework to capture on- and off-
 he level of
T (OSFI). The primary legislation relevant to balance sheet risks. The accord also
Regulation is H  eavy commercial banks is the Bank Act, which strengthens the consistency and
and the trend designates those banks that are legally able transparency of the capital base for
to operate in Canada by categorizing them commercial banks by defining and
is I ncreasing
as either a schedule I, II or III bank. limiting the types of capital instruments
Schedule I banks are permitted to accept they use. Globally, Basel III is expected
deposits and are not subsidiaries of foreign to be phased in between 2013 and 2019.
banks, which makes them eligible to receive, Yet, the OSFI mandated the early
hold and enforce a special security interest. adoption of some aspects of the rules.
Schedule II banks are also permitted to For commercial banks in Canada, the
accept deposits and are subsidiaries of OSFI expected industry operators to
foreign banks, but they are excluded from have exceeded a common equity Tier 1
the Back Act security. Finally, schedule III ratio of 7.0% by the first quarter of 2013.
banks are permitted to operate in Canada Moreover, by the first quarter of 2014,
but are not incorporated under the Bank Canadian commercial banks were
Act, which limits their range of banking expected to meet a total Tier 1 capital
activities. In addition to the Bank Act, ratio of 8.5% and total capital ratio of
provincial governments have the power to 10.5%. Additionally, the requirements are
enforce some regulations on banks if they tougher for the “Big Six” banks, given
are deemed necessary to provide stability. that they have each been designated
domestic systemically important financial
Basel III institutions. As D-SIFIs, a 1.0% increase
Developed by the Basel Committee on to their common equity tier 1 ratios was
Banking Supervision, Basel III raises required beginning in 2016.

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   30

Operating Conditions

Industry Assistance The Commercial Banking industry in to risk-adjusted assets ratio remained
Canada receives a low level of much higher than the 7.0% that is
government assistance but does receive required by Canada’s federal bank
Level & Trend ongoing assistance from industry regulator. However, assistance was given
 he level of
T associations. When the United States fell in this situation and is available for
Industry Assistance into recession, Canadian commercial commercial banks moving forward
is L owand the banks were not unaffected. While should they need it.
Canada’s banks were in more sound Aside from direct government
trend is S teady
capital positions relative to their US assistance, commercial banks receive
counterparts, government officials in assistance from several associations like the
Ottawa agreed to insure the money that Canadian Bankers Association (CBA). The
they routinely borrow from other banks CBA promotes a healthy environment
to keep their credit operations liquid. In between commercial banks and consumers,
the end, commercial banks did not need while also working for the industry in
the assistance because their Tier 1 capital regards to regulation and competition.

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Key Statistics
Industry Data Industry Overnight
Revenue Value Added Establish- Wages Domestic rate
($m) ($m) ments Enterprises Employment Exports Imports ($m) Demand (%)
2008 50,623.4 26,787.8 7,667 77 259,560 -- -- 13,991.7 N/A 3.0
2009 47,651.0 27,298.4 7,662 79 267,240 -- -- 14,320.8 N/A 0.4
2010 50,173.3 29,034.2 7,675 73 274,120 -- -- 13,842.1 N/A 0.6
2011 50,065.7 30,374.4 7,688 80 275,280 -- -- 13,293.9 N/A 1.0
2012 51,583.6 32,743.7 7,720 80 279,795 -- -- 14,404.0 N/A 1.0
2013 53,402.1 33,678.6 7,727 80 280,145 -- -- 14,424.1 N/A 1.0
2014 54,446.1 34,857.5 7,860 81 280,115 -- -- 15,131.5 N/A 1.0
2015 57,132.9 36,758.1 7,913 82 289,479 -- -- 15,760.1 N/A 0.6
2016 59,392.2 37,887.9 8,083 86 298,268 -- -- 16,329.9 N/A 0.5
2017 61,373.5 39,163.4 8,213 87 306,143 -- -- 16,838.3 N/A 0.6
2018 66,066.2 42,211.6 8,522 90 323,402 -- -- 17,983.9 N/A 1.1
2019 69,969.8 44,742.5 8,756 92 337,942 -- -- 18,949.6 N/A 1.5
2020 71,959.4 46,013.7 8,941 94 346,414 -- -- 19,491.3 N/A 2.0
2021 74,720.3 47,789.2 9,125 96 357,429 -- -- 20,211.4 N/A 2.5
2022 76,028.8 48,605.3 9,283 98 364,256 -- -- 20,626.5 N/A 2.5

Annual Change Industry Establish- Domestic Overnight


Revenue Value Added ments Enterprises Employment Exports Imports Wages Demand rate
(%) (%) (%) (%) (%) (%) (%) (%) (%) (%)
2009 -5.9 1.9 -0.1 2.6 3.0 N/A N/A 2.4 N/A -86.5
2010 5.3 6.4 0.2 -7.6 2.6 N/A N/A -3.3 N/A 47.5
2011 -0.2 4.6 0.2 9.6 0.4 N/A N/A -4.0 N/A 69.5
2012 3.0 7.8 0.4 0.0 1.6 N/A N/A 8.4 N/A 0.0
2013 3.5 2.9 0.1 0.0 0.1 N/A N/A 0.1 N/A 0.0
2014 2.0 3.5 1.7 1.3 0.0 N/A N/A 4.9 N/A 0.0
2015 4.9 5.5 0.7 1.2 3.3 N/A N/A 4.2 N/A -37.0
2016 4.0 3.1 2.1 4.9 3.0 N/A N/A 3.6 N/A -20.6
2017 3.3 3.4 1.6 1.2 2.6 N/A N/A 3.1 N/A 18.0
2018 7.6 7.8 3.8 3.4 5.6 N/A N/A 6.8 N/A 85.6
2019 5.9 6.0 2.7 2.2 4.5 N/A N/A 5.4 N/A 37.0
2020 2.8 2.8 2.1 2.2 2.5 N/A N/A 2.9 N/A 33.3
2021 3.8 3.9 2.1 2.1 3.2 N/A N/A 3.7 N/A 22.5
2022 1.8 1.7 1.7 2.1 1.9 N/A N/A 2.1 N/A 0.0

Key Ratios Imports/ Exports/ Revenue per Share of the


IVA/Revenue Demand Revenue Employee Wages/Revenue Employees Average Wage Economy
(%) (%) (%) ($’000) (%) per Est. ($) (%)
2008 52.92 N/A N/A 195.04 27.64 33.85 53,905.46 0.18
2009 57.29 N/A N/A 178.31 30.05 34.88 53,587.79 0.19
2010 57.87 N/A N/A 183.03 27.59 35.72 50,496.50 0.20
2011 60.67 N/A N/A 181.87 26.55 35.81 48,292.28 0.20
2012 63.48 N/A N/A 184.36 27.92 36.24 51,480.55 0.21
2013 63.07 N/A N/A 190.62 27.01 36.26 51,487.98 0.22
2014 64.02 N/A N/A 194.37 27.79 35.64 54,018.89 0.22
2015 64.34 N/A N/A 197.36 27.58 36.58 54,442.98 0.22
2016 63.79 N/A N/A 199.12 27.50 36.90 54,749.08 0.23
2017 63.81 N/A N/A 200.47 27.44 37.28 55,001.42 0.23
2018 63.89 N/A N/A 204.29 27.22 37.95 55,608.50 0.24
2019 63.95 N/A N/A 207.05 27.08 38.60 56,073.53 0.25
2020 63.94 N/A N/A 207.73 27.09 38.74 56,265.91 0.25
2021 63.96 N/A N/A 209.05 27.05 39.17 56,546.61 0.26
2022 63.93 N/A N/A 208.72 27.13 39.24 56,626.38 0.26

Figures are in inflation-adjusted 2017 dollars. SOURCE: IBISWORLD

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WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   32

Jargon & Glossary

Industry Jargon ALLOWANCES FOR LOAN LOSSESFunds set aside as LOAN DEFAULTWhen a customer fails to pay back
allowances for bad debts, which are debts where the money received through a loan to the bank.
customer defaults or where the terms of the loan need
to be renegotiated.
BIG SIXThe six largest commercial banks in Canada,
which include Royal Bank of Canada, Toronto-Dominion
Bank, Canadian Imperial Bank of Commerce, Scotiabank,
Bank of Montreal and National Bank of Canada.

IBISWorld Glossary BARRIERS TO ENTRYHigh barriers to entry mean that INDUSTRY CONCENTRATIONAn indicator of the
new companies struggle to enter an industry, while low dominance of the top four players in an industry.
barriers mean it is easy for new companies to enter an Concentration is considered high if the top players
industry. account for more than 70% of industry revenue.
CAPITAL INTENSITYCompares the amount of money Medium is 40% to 70% of industry revenue. Low is less
spent on capital (plant, machinery and equipment) with than 40%.
that spent on labour. IBISWorld uses the ratio of INDUSTRY REVENUEThe total sales of industry goods
depreciation to wages as a proxy for capital intensity. and services (exclusive of excise and sales tax); subsidies
High capital intensity is more than $0.333 of capital to on production; all other operating income from outside
$1 of labour; medium is $0.125 to $0.333 of capital to the firm (such as commission income, repair and service
$1 of labour; low is less than $0.125 of capital for every income, and rent, leasing and hiring income); and
$1 of labour. capital work done by rental or lease. Receipts from
CONSTANT PRICESThe dollar figures in the Key interest royalties, dividends and the sale of fixed
Statistics table, including forecasts, are adjusted for tangible assets are excluded.
inflation using the current year (i.e. year published) as INDUSTRY VALUE ADDEDThe market value of goods
the base year. This removes the impact of changes in and services produced by the industry minus the cost of
the purchasing power of the dollar, leaving only the goods and services used in production. IVA is also
“real” growth or decline in industry metrics. The inflation described as the industry’s contribution to GDP, or profit
adjustments in IBISWorld’s reports are made using plus wages and depreciation.
Statistics Canada’s implicit GDP price deflator. INTERNATIONAL TRADEThe level of international
DOMESTIC DEMANDSpending on industry goods and trade is determined by ratios of exports to revenue and
services within Canada, regardless of their country of imports to domestic demand. For exports/revenue: low is
origin. It is derived by adding imports to industry less than 5%; medium is 5% to 20%; and high is more
revenue, and then subtracting exports. than 20%. Imports/domestic demand: low is less than
EMPLOYMENTThe number of permanent, part-time, 5%; medium is 5% to 35%; and high is more than 35%.
temporary and casual employees, working proprietors, LIFE CYCLEAll industries go through periods of growth,
partners, managers and executives within the industry. maturity and decline. IBISWorld determines an
ENTERPRISEA division that is separately managed and industry’s life cycle by considering its growth rate
keeps management accounts. Each enterprise consists (measured by IVA) compared with GDP; the growth rate
of one or more establishments that are under common of the number of establishments; the amount of change
ownership or control. the industry’s products are undergoing; the rate of
technological change; and the level of customer
ESTABLISHMENTThe smallest type of accounting unit
acceptance of industry products and services.
within an enterprise, an establishment is a single
physical location where business is conducted or where NONEMPLOYING ESTABLISHMENTBusinesses with
services or industrial operations are performed. Multiple no paid employment or payroll, also known as
establishments under common control make up an nonemployers. These are mostly set up by self-employed
enterprise. individuals.
EXPORTSTotal value of industry goods and services sold PROFITIBISWorld uses earnings before interest and tax
by Canadian companies to customers abroad. (EBIT) as an indicator of a company’s profitability. It is
calculated as revenue minus expenses, excluding
IMPORTSTotal value of industry goods and services
interest and tax.
brought in from foreign countries to be sold in Canada.

Provided to: University of Waterloo (2128943596) | 09 May 2018


WWW.IBISWORLD.CA Commercial Banking in CanadaSeptember 2017   33

Jargon & Glossary

IBISWorld Glossary VOLATILITYThe level of volatility is determined by WAGESThe gross total wages and salaries of all
averaging the absolute change in revenue in each of the employees in the industry. Benefits and on-costs are
continued past five years. Volatility levels: very high is more than included in this figure.
±20%; high volatility is ±10% to ±20%; moderate volatility
is ±3% to ±10%; and low volatility is less than ±3%.

Provided to: University of Waterloo (2128943596) | 09 May 2018


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