Canadian banks need reforms to stay strong: PwC

Canadian banks clocked an impressive 2012, raking in a combined $28.6 billion that translates into a 17.1% return on equity.

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They were also lauded internationally for being some of the strongest institutions globally.

There’s a catch, however. Canadian banks must address persistent regulatory reforms and shifting consumer behaviours to see these results continue, says the PwC’s annual Canadian Banks: Perspectives on the Canadian Banking Industry.

“[The] banks are entering an era of a new normal,” says Diane Kazarian, PwC’s Canadian financial services leader.

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“While they continue to demonstrate their strength, the banks face conflicting expectations from shareholders, consumers, regulators and central banks, all of which add additional layers of complexity to the business of banking.”

One of their major challenges is ongoing regulatory reform. In addition to changes to capital requirements, banks are facing increased operational costs to meet all new requirements.

For example, overhauls of IT systems and increasing headcounts related to new compliance developments impacts banks’ bottom lines. New rules will also lead to internal changes.

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Further, more than half of banking and capital markets CEOs (63%) will soon implement new cost-reduction initiatives, with nearly three-quarters of banks (72%) planning to change their organizational structure.

“The costs of implementing regulatory changes are unavoidable, so banks must seize opportunities to streamline operations and ensure continued productivity and optimization,” says John MacKinlay, PwC’s financial services consulting leader.

“To create efficiencies, we recommend that banks bring all regulatory projects together under a single control. This will help maintain consistency in operations and costs, and not least of all, the customer experience.”

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New business priorities

Interest rates are low, which leads to net interest margin compression and may put equity returns at risk over the long-term.

While retail lending did see growth in 2012, this market appears to be reaching its saturation point—this is in part due to record-high household debt levels faced by Canadians.

This cautious outlook for retail lending was a major factor in the recent cut in credit ratings for Canadian banks.

However, banks are expected to offer new services and focus on other profitable areas of business over the next few years. They can capitalize on commercial and small business lending, wealth management, new insurance products, and trading and investment banking.

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The mobile payment market is also expanding. It’s a competitive arena, and PwC finds Canadian banks may already have an advantage since people here prefer mobile payments tools that are provided by their banks.

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