Author: Gilly Wright

By Thomas Clouse, Jonathan Gregson, Antonio Guerrero & Gordon Platt

RECORD EARNINGS FOR CANADIAN BANKS

Canadian banks have continued to report record earnings, despite a slowdown in the Canadian economy, surprising most analysts. Plus, they have avoided many of the scandals and risky investments that have plagued most large US financial institutions.

Strong business lending and stellar wealth-management results, along with a tight grip on costs and lower loan losses, enabled Canada’s big banks to beat analysts’ expectations for the first quarter. Following the global financial crisis, Canadian financial institutions did not have to go back to basics because they never lost sight of the importance of prudent lending—and neither did their regulators. Their soundness could soon be put to the test, however, as Canada’s housing market appears to be entering the early stages of a correction and the country’s highly indebted consumers are beginning to deleverage.

Canada’s strongly capitalized and carefully regulated banks are sometimes characterized as boring. But boring can be good in an age of shocking lapses, huge losses and overreaching at many of the world’s biggest financial institutions.

US banks stand to benefit from an apparent turnaround in the US housing market. The Federal Deposit Insurance Corporation reported that earnings of US banks in 2012 were the second highest on record. The FDIC says this was mainly the result of a decrease in capital set aside for loan losses. The agency’s list of problem banks fell to 651 in the fourth quarter of 2012, the lowest since before the 2008 financial crisis. Asset quality has been improving for the past two years, the FDIC notes, and banks have been lending more to support a US economic recovery.

Amid these hopeful signs, the banks that were already too big to fail have gotten even bigger. They have also continued to take big trading risks that don’t always pan out.

REGIONAL WINNER

Royal Bank of Canada

Royal Bank of Canada (RBC) exemplifies the financial strength and prudence that made Canadian banks the soundest in the world for the past five years. RBC, Canada’s biggest bank by assets and market capitalization, earned more than $2 billion in its fiscal first quarter, ended January 31, 2013. That was up 12% from a year earlier, reflecting strong growth across most of the bank’s businesses, as well as good control of costs. Net income set records in personal and commercial banking as well as wealth management. Gordon Nixon, RBC president and CEO, said: “We believe our financial strength and competitive advantages position us to successfully manage through the ongoing industry headwinds and continue to extend our lead in Canada, while selectively growing our presence globally.” The bank has offices in 51 countries, including 20 in the Caribbean.

Gordon Nixon, president and CEO / www.rbc.com

"Our financial strength and competitive advantages position us to successfully manage through the ongoing industry headwinds."

– Gordon Nixon, RBC

COUNTRY WINNERS—NORTH AMERICA

BERMUDA

HSBC Bank Bermuda

HSBC Bank Bermuda and its main competitors have been adversely affected by the country’s weak mortgage market. HSBC Bank Bermuda has also been hurt by its commercial real estate loans in North America. Nonetheless, HSBC’s significant international banking, trust and asset-management services have helped it to weather the local downturn. As Bermuda’s recession extends into its fifth year, HSBC’s nonperforming loans are continuing to rise, although the rate of increase has shown signs of slowing. The bank has added to its loan-loss provisions. While earnings fell to $20 million in 2012 from $152 million a year earlier, revenues held up well at nearly $400 million before loan-impairment charges.

Richard Moseley, CEO / www.hsbc.bm

CANADA

Royal Bank of Canada

Royal Bank of Canada achieved growth of 7% by volume across all its Canadian personal and commercial banking businesses in its first quarter, ended February 28, 2013, compared with the same period a year earlier. The Toronto-based bank’s return on common equity rose to 19.6% in the first quarter from 18.7% in the fourth quarter of 2012.Craig Wright, RBC’s chief economist, says: “After boasting a relatively strong economic performance over the past several years, Canada’s economy hit a speed bump in late 2012. That said, conditions continue to support growth. As confidence recovers, business spending should accelerate, albeit at a less rapid pace than we saw in the early days of expansion.” RBC is increasing its focus on global capital markets and wealth management. It sold its US retail bank last year to PNC Financial Services and bought out its joint venture partner in RBC Dexia Investor Services, which was renamed RBC Investor Services.

Gordon Nixon, president and CEO / www.rbc.com

UNITED STATES

Bank of America

Bank of America, one of the world’s largest financial institutions, has made solid progress since the financial crisis in restructuring its operations. The Federal Reserve recently approved the bank’s capital plan. Bank of America will return capital to its shareholders by repurchasing up to $5 billion of common stock and redeeming about $5.5 billion in preferred stock.

The bank granted nearly $30 billion in relief to more than 370,000 homeowners last year through programs of the National Mortgage Settlement and funded more than $22 billion in mortgage loans in the fourth quarter of 2012, up 41% from a year earlier. BofA increased its deposits and boosted its fee income from investment banking. It also more than doubled its profits from wealth management last year. The bank has demonstrated that its acquisition of Merrill Lynch in September 2008 is paying off: Bank of America Merrill Lynch ranked number two globally in investment banking fees last year, according to Dealogic.

Brian Moynihan, president and CEO, says: “Double-digit growth in mortgage production, commercial lending and global markets revenue demonstrates the power of deeper customer and client relationships as we intensify the focus on connecting all our capabilities.”

Brian Moynihan, president and CEO / www.bankofamerica.com

alt Awards: World's Best Banks 2013