4. Canada's Banks

Photo: Things were looking up this year for Canada's banks. (CP)

This wasn’t the best year for banks around the world. Major names like Bank of America, Citigroup and Deutsche Bank all announced layoffs, and analysts made much ado of the shrinking banking sector, which has shed 160,000 jobs globally in the past few years
.
Not so in Canada, where the big five posted record profits – even in the face of deteriorating business conditions.

A quick rundown of the numbers: RBC led the way, posting a record $7.5 billion in profits in fiscal 2012, up 17 per cent on the year; BMO saw its profits jump by about a quarter; Scotiabank hit a record $6.5 billion in profit; TD saw its profit jump more than 10 per cent; CIBC’s profit jump was somewhat smaller than the others.

Meanwhile, the global financial industry continued to shower Canada’s banks with accolades, a trend that started with the financial crisis, when Bay Street’s big names pulled through relatively unscathed. The big five dominated this year’s Bloomberg list of the world’s strongest banks.

And it all culminated with the poaching of Bank of Canada Governor Mark Carney by the Bank of England – perhaps the clearest sign yet that Canada’s financial system is the envy of the world.

What makes the banks’ performance even more remarkable is that it all took place as Canada’s economy showed signs of stagnation. Exports have been under pressure, and Canada fell back into trade deficits in the second half of the year. And, more important to the banks, the housing market moved into a significant slowdown, particularly the Toronto and Vancouver markets. Given their dependence on consumer lending, that bodes ill for the banks.

Canada’s economy will probably only eke out a 1.5-per-cent growth rate for the year. So how does that translate into the record profits we’re seeing at the banks?

For a lot of analysts, it doesn’t. For all the positive earnings reports, the credit rating agencies are looking at the numbers and seeing red. Canada’s banks were hit with a slew of credit downgrades this year, with Moody’s downgrading RBC this summer, over “concerns about high consumer debt levels and elevated housing prices.”

Standard & Poor’s downgraded Scotiabank just last week, along with the National Bank and four smaller Canadian financial institutions. The agency predicted “pressure on profitability growth, especially in banks' retail businesses” – coded language for a decline in mortgage and consumer lending. Indeed, the CMHC reported a whopping 37-per-cent drop in the issuance of new mortgages in the third quarter of this year.

But perhaps more telling than any analyst’s report is CIBC’s move this year. Canada’s fifth-largest bank shut down its low-end mortgage business, a clear sign that it wants to reduce its exposure to the housing market.

So it seems unlikely that the banks will repeat their winning performance next year. For now, however, the shareholders are happy, pundits are happy, and the employees and executives at the banks are happy, with record high bonuses coming their way.

Yet the one group that might not be happy with Canada’s banks is … Canadians.

According to a survey carried out earlier this year, Canucks are growing increasingly unhappy with their banks, largely on account of rising fees.

And Canadians are also reportedly growing more pessimistic about the reliability and stability of their banks, which – given what the credit agencies are expecting – might be pretty smart of them.

— Daniel Tencer