Focus on Demand Deposits:
The effect of the run-on Home Capital high rate savings accounts had significant impact by the end of April. This month, we look at whether there is any evidence of contagion from Home Capital and to see who the beneficiaries of the deposits shift appear to be.
It appears that the balances remain as demand deposits rather than migrating to another deposit or investment type.
|Demand Deposits Changes to Apr 2017 |
|Bank|| Apr 2017 $MM || Change since March 2017 || Apr 2017 % Share || 1Mo % Change ||3 Mo % Change|
|Zag Bank|| 739.0 || 230.0 || 0.10 ||44.0%||60.1%|
|Alterna Bank|| 323.0 || 27.0 || 0.04 ||8.3%||31.6%|
|Tangerine|| 27,400.3 || 542.0 || 3.61 ||1.2%||-0.7%|
|BMO Bank of Montreal|| 68,262.4 || 1,216.0 || 8.99 ||1.0%||1.7%|
|TD Bank Financial Group|| 151,696.8 || 2,593.0 || 19.98 ||0.9%||0.7%|
|HSBC|| 14,179.3 || 195.0 || 1.87 ||0.6%||0.9%|
|Laurentian|| 5,222.0 || 50.0 || 0.69 ||0.1%||-1.2%|
|Scotiabank|| 107,886.2 || 1,028.0 || 14.21 ||0.1%||-0.6%|
|RBC Royal Bank|| 123,881.2 || 1,076.0 || 16.32 ||0.0%||0.2%|
|National Bank of Canada|| 26,359.5 || || 3.47 ||-0.2%||-2.4%|
|Canadian Western Bank|| 4,055.4 || 23.0 || 0.53 ||-0.3%||0.8%|
|Manulife Bank|| 8,944.4 || 29.0 || 1.18 ||-0.5%||1.5%|
|CIBC|| 100,194.0 || (9)|| 13.20 ||-0.8%||-0.2%|
|ICICI|| 595.7 || (6.4)|| 0.08 ||-1.9%||-1.4%|
|Equitable Bank|| 2,085.8 || (317.0)|| 0.27 ||-13.9%||-10.8%|
|Home Trust|| 707.6 || (1,074.0)|| 0.09 ||-60.6%||-63.9%|
This table shows demand deposit balances and share as at the end of April. It also shows balances change over 1month and share changes over 1and 3 months.
- Home Trust lost almost 61% of their demand deposit share or $1.1B by the end of April.
- There appears to be limited impact on lessor known brands, notably EQ bank lost 13.9% of their share of demand deposits in April perhaps prompting their increase in their high rate savings account rate to 2.3%.
- From a share change perspective, there appears to be a shift to quality with the larger brands gaining share. Zag Bank (Desjardins) had the largest % share shift of 44.0%, a major shift from the average 8% monthly share growth in the previous two months.
Focus on Credit Unions:
Most credit unions have now published their 2016 annual reports so we are able to look at the relative performance of the top 25 credit unions across the country.
|Total Personal Products |
| ||Provincial Share of Banks |
| || Dec'16 % Share || 12 Month Change || 60 Month Change |
|First Ontario|| 0.39 ||18.6%||73.9%|
|Alterna|| 0.37 ||18.1%||18.0%|
|Meridian|| 1.33 ||8.6%||24.6%|
|Access|| 6.12 ||4.8%||34.6%|
|Blue Shore|| 1.26 ||2.6%||32.3%|
|Affinity|| 15.08 ||1.9%||81.7%|
|Innovation|| 5.04 ||1.8%||12.2%|
|Coastal Community|| 0.87 ||1.4%||0.8%|
|Coast Capital|| 5.55 ||1.3%||-3.4%|
|Connect First|| 2.01 ||1.2%||40.1%|
|Libro Credit Union|| 0.36 ||1.1%||66.5%|
|Crosstown Civic|| 6.69 ||1.1%||25.7%|
|Steinbach|| 14.03 ||0.7%||16.5%|
|Cambrian|| 10.35 ||0.4%||16.9%|
|Alberta Treasury|| 11.57 ||0.2%||6.2%|
|Prospera|| 1.11 ||-0.7%||2.8%|
|Conexus|| 12.15 ||-0.9%||3.7%|
|Desjardins|| 69.03 ||-0.9%||-2.6%|
|First West|| 3.37 ||-1.4%||31.2%|
|Assiniboine|| 11.91 ||-1.5%||5.9%|
|Servus || 6.76 ||-1.9%||-0.1%|
|Westminster|| 0.98 ||-2.4%||4.4%|
|Interior|| 0.91 ||-2.7%||-9.8%|
|Vancity|| 7.69 ||-3.1%||3.6%|
|Synergy || 3.32 ||-4.5%||1.3%|
|DUCA|| 0.24 ||-4.9%||25.7%|
This table shows credit union percent share of total personal deposits and loans of banks within their province. The information is ranked in order of 12 months change in share.
- First Ontario and Meridian are the organic growth leaders. While mergers with 2 Ontario credit unions was a significant factor for Alterna, they would still rank in the top 3 for organic growth alone.
- Eleven of the top 25 credit unions lost share relative to banks in their Province.
- Factors driving growth in the fastest growing credit unions include:
- Providing better value than banks. High Rate Savings Accounts priced 1.50% and higher, transparent and aggressive mortgage pricing and low fee, no fee transaction accounts are examples.
- Mortgage broker channel participation: Banks have pulled back from the mortgage broker channel in favour of their in-house mobile mortgage specialist sales forces. This has opened the door for non-bank mortgage lenders like First National, but also for credit unions.
- Wealth Management: Credit unions are growing share of mutual funds at a much faster pace than other products given their relatively late participation in the category. Some have gone further to provide increased focus on the mass affluent segment building share of wallet across multiple product categories.
- Distribution Expansion: Meridian is the most aggressive credit union at expanding their physical distribution network growing their number of locations by 26 or 36% over the last two years. We have also noted several other credit unions opening one or two branches over the last year. Desjardins introduced Zag Bank in 2015 to extend reach in the digital space across Canada.
|Bank, Credit Union and Caisses Populaire Market in Canada |
| ||Q4'2016||Q4'2016||CU Share Change|||||
|Total Deposits and Loans - Personal and Commercial||Banks and Cus Balances $MM||CU Share of Province||12 Month % Change||60 Month % Change|||
|British Columbia|| 656,226 ||18.6%||0.7%||2.0%|||
|Alberta|| 489,371 ||8.6%||2.2%||2.5%|||
|Saskatchewan|| 109,397 ||32.7%||1.5%||3.7%|||
|Manitoba|| 121,518 ||41.3%||-0.7%||5.0%|||
|Ontario|| 2,119,661 ||4.1%||4.7%||8.9%|||
|Quebec|| 801,074 ||30.9%||-5.4%||-11.9%|||
|Atlantic|| 174,016 ||9.0%||1.4%||1.5%|||
|Total || 4,471,263 ||13.4%||-0.24%||-2.76%|||
- This table shows the total personal and commercial balances held by banks and credit unions by Province.
- Ontario credit unions have the lowest share of Province at 4.1%, but they achieved the largest share growth over the last 12 months and 60 months respectively at 4.7% and 8.9% respectively.
- Credit Unions overall lost .24% and 2.76% of the total personal and commercial market over the last 12 months and 60 months respectively. Credit Union share declined 5.4% in Quebec and .7% in Manitoba over the last 12 months.
- Trends to watch:
- Expansion across Provinces: UNI Financial became the first Federal Credit Union in 2016. This empowers them to expand across Provincial boundaries, though they appear to be focused on the New Brunswick Acadian community. BC's Coast Capital is close to becoming a Federal Credit Union and Saskatchewan's Innovation Credit Union has announced their intent to pursue this approach. Ontario's Alterna Savings Credit Union re-launched Alterna Bank in January with an initial offer of free transaction chequing, advantaged high rate savings, GICs and more recently, mortgages. Meridian announced their intention to launch a bank in 2018.
- "Federated" Mergers: First West introduced the concept of merger leveraging back office economies and product and offer synergies while retaining individual credit union brands in 2011. Connect First used this approach when First Calgary and Chinook Credit Unions merged in 2014. And Alterna used this approach when they merged with Peterborough and Nexus credit unions in 2016. We see this as a particularly useful approach when expanding across Provincial boundaries where local brands have much more power than the parent brand.
It is that time of year when the mortgage market is intensely competitive. We look this month at those who are gaining and losing share.
- Direct Banks – B2B, Manulife and Equitable – lead with growth of 9.5% and higher over the last 12 months.
- Traditional leaders Street Capital and First National are experiencing slower growth perhaps due to funding challenges.
- Among major banks, CIBC is the clear leader while other major banks are holding or giving up share.
- Scotiabank and TDCT appear to recording some collateral mortgages as personal loans though both banks lost share of total loans and mortgages over the last 12 months.
- Tangerine continues to lose share after exiting the broker channel with mortgage share down almost 80% over the last 60 months. We noticed that Tangerine is now posting 5 year rates at the top of the market perhaps indicating a price leadership strategy to stop the bleeding.
- Home Trust continues to lose share as they work their way through the risk issues in their portfolio.
Pricing is getting more competitive:
Almost all credit unions monitored offer relatively aggressive posted rates averaging .35% lower than the banks monitored. PC Financial, CIBC and TDCT offer discounted rates on terms other than 5 years. This enables them to move the pricing pressure away from the larger portfolio of 5 year maturities.
The practice of negotiated pricing at some financial institutions has come under scrutiny recently (CBC Report) as the press examines allegations of aggressive sales practices in some financial institutions. This may be an opportunity for some competitors to differentiate themselves on this issue.
Market share, together with profit margins, are good measures of the relative capabilities of organizations versus others with a similar business model. Firms with advantaged capabilities can grow market share at competitive or advantaged margins. The following are capabilities that drive retail banking market share in Canada.
- Physical Distribution: While many may argue that physical distribution may not have the influence that it once had, given a choice, Canadians prefer to deal with a financial institution with a convenient local presence. After 20 years, direct banks led by Tangerine, PC Financial, Manulife Bank, EQ Bank and B2B Bank have together managed to attract just over 5% of the Canadian market. While it is unclear whether distribution extension into mature markets will be economic given the reduced need of consumers to switch banks when they move, financial institutions with existing mature networks are materially advantaged versus those who do not.
- Customer Satisfaction and Loyalty: An estimated 75% of the business of major banks are from customers who consider that bank to be their primary financial institution. While consumers are attracted by the convenience of dealer financing, mortgage brokers and the lure of high rate savings accounts, most would prefer to deal with their primary financial institution provided their rates are generally competitive. Share of wallet growth among primary customers is the highest leverage sales opportunity for banks and credit unions. Financial institutions that operate with high customer service standards and act consistently in the interests of their customers are rewarded with customer loyalty (and inertia) that is hard for competitors to break.
- Brand: Most Canadians see little difference among banks, yet they value the generic brand attributes of size, full array of competitive products and channels and globally leading financial stability. The market share challenge for bank brands is avoiding negatively differentiating your brand from these generic brand attributes. That is why the Canadian banks will act quickly and decisively to change their sales culture following recent complaints about high pressure selling – the benefit at the margin is not worth the brand risk – just ask Wells Fargo. Credit Unions have strong brand attributes appreciated by their loyal member base, yet they struggle to build awareness and preference among bank customers.
- Price: There is a small though significant portion of the market who will switch for the best price. The highest leverage price opportunities are free transaction charges, high rate savings, mortgages and term deposits. The challenge is that those who compete on price must also have a significant cost advantage to be isolated from other financial institutions matching their offers at the margin. Players like Tangerine and PC Financial who initially drove growth through material price advantage are finding they must switch to a relationship based model as the cost of re-pricing their existing business keeps them from competing with lower cost players.
- Channel Participation: Mortgage Brokers, Deposit Brokers, while label (e.g. CIBC and PC Financial and National Bank with Power Financial) and Dealer Financing are four channels that can drive market share for financial institutions who participate. The challenge is the customer loyalty is with the mortgage broker or financial planner and the products become a single service commodity. For this reason, banks are withdrawing from participation in the mortgage broker channel in favour of their own mobile mortgage specialist networks and they participate selectively in the deposit broker channel. Specialty companies like First National and Street Capital can profitably gain share from the mortgage broker channel as banks withdraw.
Focus on Commercial Banking:
The commercial market has been a strong driver of growth posting a 57% increase over the last 5 yeas. All products except term deposits have been growing well.
The market growth remains strong increasing more than 9% over the last 12 months with demand deposits and business loans being the fastest growing categories.
- Bank are the dominant players in the Commercial market with an 88% share. Bank share has grown .9% over the last 12 months and 2.4% over 5 years.
- Credit Unions (does not include deposits) lost 2.7% share over the last12 months after gaining 7.5% over the last 5 years.
- The top end of the market has been the largest driver of growth with loans over $5 million (65% of total loans) growing 108% over 5 years and 12.2% in the last 12 months.
This table shows total commercial balances, share and % change in share for the banks posted in order of 5-year change in share.
TDCT is the long term and short term share growth leader with growth of 6.7% over 6.5% respectively. Deposit share growth was the main driver for TDCT 5-year share growth.
The only other major bank to gain share over the last 5 years was Laurentian posting a modest 2.1% growth.
Bank of Nova Scotia and Bank of Montreal lost the most share of commercial over the last 5 years and both banks continued to lose share in 2016. The major driver for share losses for both banks was commercial loans perhaps reflecting a reduced appetite / capability in the top end of the commercial market.
- Deposits was the fastest growing category in commercial banking and those positioned well gained the most share over the last 5 years.
- Loans >$5MM drove most of the commercial lending growth. Appetite for this level of borrowing is often a driver of share as banks often syndicate loans in the higher end to reduce exposure. However, chronic share losses may also be indicative of disadvantaged capabilities in serving the sector.
Focus on Loans and Mortgages:
Governments continue to worry about the inflation in housing prices, particularly in Toronto and Vancouver, and the effect a housing correction may have on homeowners and mortgage underwriters. There have been several measures over the years to address this problem, most recently increasing the underwriting standard for debt service ratios (must qualify at the 5-year posted rate) and an increase in CMHC premiums. While mortgage growth has slowed somewhat to 5.8% per annum from 6.2% last year, we expect that growth will slow even further in 2017.
Collateralized mortgages have become more common with some lenders classifying them as personal loans rather than conventional mortgages. Home equity lines of credit are also the dominant form of personal lending. So, this month, we look at total personal lending share to assess the share winners and losers.
Total Mortgage and Personal Loan Share Changes to Nov 2016
Nov 2016 $MM
Nov 2016 % Share
3 Mo % Change
12 Mo % Change
60 Mo % Change
Canadian Western Bank
National Bank of Canada
BMO Bank of Montreal
TD Bank Financial Group
RBC Royal Bank
This table looks at share performance for banks and mortgage companies that comprise 85% of the market in Canada. Results are posted in order of 12 months % share growth.
Mortgage channel participation is a key driver of share growth for 7 of the top 8 share growth leaders. The exception is CIBC which is posting a remarkable turnaround.
This chart shows CIBC change in share of mortgages, personal loans and total personal loans over the last ten years. Both personal loans and mortgages were on a long term share decline trend until 2013 for mortgages and 2014 for personal loans. The mortgage share rebound was quite strong in 2016. CIBC exit from the mortgage broker channel was a key driver of the decline in 2012. It is unclear how CIBC could execute such a strong turn around in 2016, but we speculate:
- A change in leadership provided renewed focus on mortgage portfolio growth.
- CIBC has strong capabilities overall – client base, physical distribution, mobile mortgage specialists and PC Financial – which should drive share growth if working well together.
- Pricing may be a factor. It is not evident from posted rates at either CIBC or PC Financial, however, most share growth in today's environment requires fully competitive pricing as a pre-requisite.
Looking at the other end of the share ranking, it is becoming evident that major banks are becoming more conservative in driving personal lending share growth. This is being reflected in posted mortgage rates:
Credit unions are generally more aggressive and transparent with posted rates averaging .57% lower than those posited by the banks. As well, we have noted that banks, particularly TDCT and RBC are willing to lead the increase in mortgage pricing as the longer-term deposit rate curve rises.
Tangerine share decline has been very strong since withdrawing from the mortgage broker channel. Their mortgage pricing has also been relatively uncompetitive suggesting that this is not a product category where they intend to win.
It is interesting to note that Manulife Bank is losing combined lending share which includes their advantaged Manulife One line of credit and conventional mortgage products.
We expect that 2017 will be a year of change in the mortgage business as lenders put a higher priority on risk management, funding and profitability over growth in what looks to be a softening real estate market as government led growth containment measures take hold.
With the banks fiscal year ending in October, we will look at the market share winners and losers over the last year as well as noting some key trends we are seeing:
|Bank||October 31, 2016||5 Year CAGR||12 Month Growth %|
| ||$000|| || |
Toronto Dominion Bank
Royal Bank of Canada
Bank of Nova Scotia
Canadian Imperial Bank of Commerce
Bank of Montreal
National Bank of Canada
Laurentian Bank of Canada
Tangerine Bank (included in BNS)
Manulife Bank of Canada
Canadian Western Bank
B2B Bank (included in Laurentian)
Canadian Tire Bank
Capital One Bank
Caisse Populaire Acadienne Ltee
Presidents Choice Bank (Credit Card Only)
Home Equity Bank
Hollis Bank of Canada (included in BNS)
Amex Bank of Canada
Zag Bank formerly Bank West (Owned by Desjardins)
General Bank of Canada
KEB Hana Bank Canada of Canada
Bank of China (Canada)
Walmart Canada Bank
Industrial and Commercial Bank of China (Canada)
Shinhan Bank Canada
CS Alterna Bank (owned by Alterna Credit Union)
CTBC Bank Corp (Canada)
UBS Bank (Canada)
First Commercial Bank
First Nations Bank of Canada
JP Morgan Chase Bank NA
Habib Canadian Bank
Mega International Commercial Bank (Canada)
Citizens Bank of Canada (owned by Vancity)
Deutsche Bank AG
Wealth One Bank of Canada
Bank of Tokyo - Mitsubishi UFJ (Canada)
Direct Cash Bank (ATM Managers)
United Overseas Bank Limited
- This table lists all 50 banks with personal offers operating in Canada. It shows the total personal deposits and loans under management as at October 31, 2016 as well as the % growth over the last 12 months and the compounded annual growth rate over the last 5 years.
- TDCT has edged out Royal bank as the largest personal bank in Canada with $518B in total personal deposits and loans.
- The fastest growing bank among the big 6 over the past year was CIBC posting a growth of 8.7%.
CIBC share had been on a declining trend over the last 5 years with declines in every product category. The rebound this year was due to strong mortgage growth where they improved share by 4.8% from an already advantaged base. Every other product category also improved share this year.
- The three largest of the major banks all lost share over the last 12 months posting growth rates below the 5.5% all bank growth rate.
- Newer banks are posting the fastest growth rates over the last year (though in most cases off a relatively small base):
- Zag Bank is a direct banking subsidiary of Desjardins. Growth is driven by high rate savings and broker channel term deposits.
- Home Bank is a direct banking subsidiary of Home Capital. The bank was purchased from CFF Financial in August 2015. Growth is driven by term deposits and mortgages. The bank is currently marketed with Oaken Financial to extend CDIC Insurance within the Home Capital family.
- Alterna Bank is a direct banking subsidiary of Alterna Savings Credit Union. While it has been operating since 2000, growth was boosted this year with an advantaged high rate savings offer and a recently launched term deposit offer.
- Equitable Bank growth was boosted with the launch of EQ Bank in January 2016 with high rate savings priced at the top end of the market.
- There have been new banks introduced this year:
- Caisse Populaire Acadienne Ltee operating as UNI Financial Corporation was founded this year from the conversion of the New Brunswick Caisses Populaire of the same name. The bank had over 4.5B in total deposits and loans as at October 31st. UNI focuses on serving the French-speaking Acadian population in New Brunswick.
- Wealth One Bank of Canada was formed in 2016 to focus on serving the Chinese Canadian community. The bank offers personal banking services online and through 3 retail offices in Ontario and British Columbia.
- Exchange Bank is a subsidiary of Currency Exchange International and specializes in wholesale foreign exchange.
Trends to Watch in 2017:
- Credit Unions are looking to extend their reach beyond their provincial markets. Alterna Bank and Zag Bank are already operational and expected to expand to become full service, relationship oriented banks. Meridian has announced plans to launch a direct bank by 2018 to serve markets outside of their home markets. It is unclear why Caisse Populaire Acadienne Ltee converted to a bank, but it enables expansion beyond their home market of New Brunswick
- More Competition for Term Deposits: This year saw a return to growth for term deposits and they are expected to become even more attractive in 2017 as the yield curve expands. Non-bank mortgage companies will increasingly look to access retail funding following the lead of Home Capital (Oaken Financial and Home Bank) and Equitable Bank.
- Mortgage growth is expected to moderate as interest rates edge higher and real estate markets begin to cool.
There has been a lot of discussion in the media in recent months about the diminishing need for physical branches and the trend toward direct banking and other Financial Technology initiatives. This month we look at how physical distribution is changing and offer some observations about distribution trends overall.
This table looks at the larger banks and credit unions.
- There are 9,188 bank and credit union branches in Canada (Q2'16). There is one financial institution branch for each 3,900 population and the average branch has just over $300 million in total personal deposits and loans under management.
- There are 6,435 bank and ATB branches – one for each 5,600 population. Average personal deposits and loans per branch is 21% higher than the average at $368 million.
- There are 2,885 credit union and caisse populair branches – one for each 12,600 population. Average total personal deposits and loans per branch is only 55% of the average at $169 million.
- The number of branches declined by 92 over the last 2 years. There have been material reductions by some of the largest players – Desjardins (70), Scotiabank (41), TDCT (12), CIBC (11); however, the trend is far from universal.
- While mergers have been a growth strategy on the credit union front, they do not add to the total distribution system and in some cases, result in consolidations.
- It is interesting to note Meridian Credit Union's aggressive expansion strategy over the last two years when they have added 19 branches. We note that Coast Capital has started to open new branches in new markets with 2 new branches opened in recent months.
- Canada is significantly over branched and it is natural that the larger distribution networks will contract through consolidations and closures. We believe this is business as usual rather than representing a significant shift away from branch banking.
- Canadian consumers have a strong preference to deal with multi-channel financial institutions. They can get all the convenience of online, mobile and telephone banking while also having a physical presence nearby when they need it. The advantages of direct banking (mainly price) are insufficient for most consumers to forego the benefit of a physical branch.
- Competitors who wish to expand their market reach (like Meridian) are recognizing that a physical presence in their target markets is a major driver of success.
- Yet creating a traditional network of branches across Canada de novo is likely prohibitively expensive. That is why we are seeing the emergence of low cost, relationship oriented direct banks by several credit unions – Alterna Savings (Alterna Bank), Desjardins (Zag Bank), Meridian (Planned by 2018).
- We believe that even these banks will benefit from some form of physical presence in the market – like PC Financial's in-store kiosks, Tangerine's Café's or a traditional branch serving much larger catchment areas than the branch of today. Some may also opt for "financial management centres" where mobile sales forces (Mortgage Specialists, Commercial Account Managers, Financial Planners, Personal Bankers) can be deployed to originate and manage relationships backed by fully capable direct banking platforms. Time will tell…
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