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Canada Commercial Banking Report Q3 2012 - New Market Research Report

Recently published research from Business Monitor International, "Canada Commercial Banking Report Q3 2012", is now available at Fast Market Research


Boston, MA -- (SBWIRE) -- 08/01/2012 -- The big change to Canadian banking sector data since Q311 has been the shift in accounting standards to International Financial Reporting Standards (IFRS) as of November 2011. This has affected Canadian bank balance sheets in several different ways. Most importantly, residential mortgages that were securitised and insured by the Canada Mortgage and Housing Corporation, which had been held off the books, have now been recognised on balance sheets. This has substantially increased the aggregate recorded level of assets and loans in the system by roughly CAD350bn and CAD280bn, respectively. This has had a major knock-on effect on our estimates. For example, we had forecast loan growth of 9.0% in 2011. Loans had increased by 9.3% y-o-y as of October 2011, but following the accounting changes this growth figure rose to over 32% by the end of 2011. Furthermore, the IFRS restatements have lowered shareholders' equity (by around CAD18bn), and thus increased leverage ratios. The loan-deposit ratio has increased from around 1.00 to around 1.22, due to a minimal change in the deposits category of the balance sheet. The IFRS switch will not immediately affect Canadian banks' capital adequacy, as regulators are allowing a five-quarter transition period beginning in Q112 before it counts against Tier 1 capital requirements. Therefore we do not see any significant operational concerns arising from the Canada Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 22 accounting change. However, until historic data series are restated, the move to IFRS reporting means that previous years' data for assets, loans and equity will not be directly comparable. Our general outlook for loan and deposit growth in the sector is generally unchanged, however. Canadian banks had a strong 2011 financial year, with net income growth for the big six banks ranging from 16% (RBC, when only continuing operations are included) to 27% (Toronto-Dominion). Importantly, the major banks have lowered their provisions for credit losses by CAD5.3bn, a significant chunk of the total CAD23.8bn in total net income. We believe that low default rates and mortgage arrears justify the lowering of provisions. Strong earnings have meant that capital ratios remain strong even despite the IFRS changes, with Tier I capital ratios ranging from 12.0% for BMO to 14.7% for CIBC. We continue to believe that Canadian banks are among the safest in the world. However, we continue to see only modest prospects for domestic loan growth, and are currently forecasting 8.0% loan growth in 2012, followed by 6.5% in 2013. On the mortgage side (which represents over 50% of total loans) we believe the housing market has reached a plateau. The low-hanging fruit of low interest rates has been plucked, and with house price growth leveling off, we see y-o-y mortgage growth sliding from a peak of 12.9% in August 2011 to somewhere in the historic range of 7-9%. Consumer cred

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