The price of oil has tanked and took the loonie with it. The housing market is nervous. Government finances are crumbling and our exports are a mess. The poor performance of Canada’s economy over the last year has been unsettling for a nation that, only a few years ago, was feted for its resilience. So the news in December that a key economic pillar remains strong must surely have put many a worried mind at ease. That’s right, the banking oligopoly that has squeezed and gouged us for decades on its way to multi-billion-dollar profits and bloated bonuses had defied expectations and enjoyed another blockbuster year. Hooray?
Canadians have a complex relationship with their banks. When not grumbling about soaring ATM fees and other charges, the fine print on their mortgages or long waits on hold to speak to a human, we’ve also learned from recent experience in the U.S. and elsewhere to appreciate the stability of this country’s financial system. Just recently I overheard this snippet of conversation from a table of boisterous seniors at McDonald’s:
—“I keep hearing there’ll be a downturn.”
—“That’s not going to happen, the banks are too strong.”
If only it were that simple. The reality is the banks face a perfect storm in the coming year. For one thing, the latest results from the banks masked deeper problems. Slowing growth and rising expenses have already eaten into earnings, forcing the banks to cut and restructure their businesses. In the last quarter, for instance, CIBC shed close to 200 jobs, RBC axed around 500 and TD ditched 800. The banks are shuttering locations and scaling back their operations.
At the same time, the banks’ consumer and commercial customers are having a tough go of it. Two sectors have propped up the Canadian economy, and hence bank earnings, in recent years: energy and real estate. The full effect of the commodity crash and ensuing oil rout is likely only to be felt in 2016, as awareness finally sets in that a quick rebound in prices isn’t in the cards. Meanwhile, even though the Toronto and Vancouver housing markets continue to defy gravity, other markets are struggling. Even the Canada Mortgage and Housing Corporation, the taxpayer-backed insurer that guarantees mortgage lenders against losses and has consistently been bullish on the housing market, has begun warning of a correction.
The banks have weathered commodity crashes before. And taxpayers have, to some extent, got the banks’ backs through CMHC should things go bad in housing. (You’re totally welcome, guys.) Yet, against this backdrop, Canada’s banks are also in the early stages of their own Uber moment. In the same way technology upstarts kneecapped industries as diverse as news media, movies, music, cable, hotels, retail and taxis, a swarm of so-called “fintech” companies are lining up for a slice of the global banking sector’s fat profit margins. Apple, Google and Facebook are among them. So are myriad companies you’ve never heard of, all keen to handle your payments, money transfers, portfolio management and lending needs. As one bank watcher, National Bank Financial analyst Peter Routledge, described it in a report this past fall, unconventional rivals pose “a long-term and dangerous competitive threat” to Canada’s banks.
The Canadian banks are keenly aware of what’s at stake, and have been investing heavily to shore up their defences. But the question of whether technology will upend Canada’s banks will come down to two starkly opposite realities. On the one hand, many a foreign banking giant has been humbled by attempts to pry open the stranglehold Canada’s banks have on the domestic market. On the other hand, we have yet to see a cloistered industry, no matter how rich and powerful, successfully outmanoeuvre and outsmart these new breeds of innovators.
How the banks fare in the year ahead will be something every Canadian should watch closely. The “big five” is an outdated moniker. “Gargantuan” or “mammoth” would be better adjectives. The assets held by Canadian banks have ballooned in size over the last decade.
Some of that growth came through acquisitions outside the country, but a large part of it was due to the housing boom and the explosion in residential mortgages, lines of credit and other loans over the last decade. To put their size in perspective: the combined assets of the five largest American banks is equal to about 50 per cent of U.S. GDP; in Canada, the total assets of the big five are now more than twice the size of Canada’s economy. In short, Canada’s biggest banks are far larger, relatively speaking, than the too-big-to-fail institutions that crippled the U.S. economy during the financial crisis.
A full-on repeat of that crisis here is unlikely. Canadian banks are even better capitalized than they were seven years ago. Yet it’s also true the banks face an existential threat unlike anything they’ve confronted before. If consumers are lucky, it will be manageable enough for all the banks to pull through, yet punishing enough that we end up with more competition in the sector—and the lower fees, better choice and more convenience that come with it.