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Banking sector spreads shrink at 2-year low

Mon, 27 Feb 2012 12:06:34 GMT

Karachi—The banking sector spreads have registered at 7.37 percent in January 2012, down 21bpsMoM/23bpsYoY due to a decline in lending yields and constant deposit costs since Dec 2011.

The January spreads figure is the lowest in 2yrs, it is still fairly high. Going forward, it is estimated that further attrition in spreads as the monetary easing cycle appears to be over for now and banks are likely to start charging a higher spread over KIBOR.

In this regard, banks have adjusted to shifting interest rate dynamics where exceptionally low pickup in the recent T-bill auction (PkR4.7bn vs. target of PkR75bn) likely points to bids at higher yields, in our view, particularly in the 12 month tenor.

The four big listed private banks in Pakistan have posted above average growth of 27 percent in 2011 despite lackluster trading at the Karachi Stock Exchange in the bank scrips. The big four banks – Habib Bank Limited (HBL), United Bank Limited (UBL), MCB Bank Limited and Allied Bank Limited (ABL) cumulative earnings reached Rs 66 billion in 2011, up 27 percent from 2010.

Among the listed private banks, these banks contributed 70 percent of the market capitalization. Net interest income (NII) upto 17 percent, non-interest income upto 21 percent. These banks based on deposits and branches contribute more than 50 percent share of the listed private banks’ deposits and represent approximately 60 percent of the total branch network.

Europe's banks bleed from Greek debt crisis

Thu, 23 Feb 2012 16:08:04 GMT

LONDON/PARIS (Reuters) - Greece's debt problems drove a slew of heavy losses across the European banking sector on Thursday, and bosses warned the euro zone crisis would continue to threaten earnings.

From France to Germany, Britain to Belgium, some of the region's biggest banks lined up to reveal billions of euros lost through writedowns on Greek loans. "We are in the worst economic crisis since 1929," Credit Agricole chief executive Jean-Paul Chifflet said.

Credit Agricole reported a record quarterly net loss of 3.07 billion euros ($4.06 billion), performing worse than expected from the cost of shrinking its balance sheet and after a 220 million euro charge on its Greek debt. "We think 2012 is going to still be a tense period," Chifflet said, adding: "We're hoping that our results will be largely better than in 2011.

Europe's banks have already written down billions of euros from losses on Greek government bonds and loans, and a deal agreed this week with its creditors will inflict losses of 74 percent on bondholders.

"We can't say that the writedowns are over," said Franklin Pichard, director at Barclays France. "Even if some can say that the worst is over, we are only at a new stage in terms of provisioning and not necessarily at the end."

That is because, despite the bond swap deal, bondholders could suffer further hits if Greece's economy fails to recover. Britain's Royal Bank of Scotland has marked its Greek bonds at a 79 percent loss -- or 1.1 billion pounds -- for 2011. The state-owned bank posted a fourth quarter loss of nearly 2 billion pounds on Thursday.

FAR WIDER THAN GREECE
Problems in Europe's banking sector are far wider than Greece, however. "We have reduced the balance sheet of RBS by over 700 billion pounds of assets. That is roughly twice the size of the entire national debt of Greece," said RBS boss Stephen Hester.

The region's banks are still repairing the damage of the financial crisis and shrinking their assets. They must also find 115 billion euros by the middle of this year to shore up their balance sheets against future shocks. But any weakening in the economy will hit earnings and make that harder to achieve.

Germany's Commerzbank , whose fourth-quarter earnings were spoiled by a 700 million euro hit on Greek sovereign debt, needs to find 5.3 billion euros to meet the stringent new capital requirements set by Europe's banking regulator. It has now lost more than 2 billion euros on its Greek bonds.

Commerzbank said it could reduce some of its shortfall by shedding risky assets, though the debt crisis still had the potential to disrupt earnings. "The high degree of uncertainty associated with the European sovereign debt crisis will ... continue to pose challenges for us," Chief Executive Martin Blessing said.

STILL ROOM FOR A BONUS
European governments are hoping to avoid more state bailouts to prop up the banking sector, and to limit the fallout should any bank collapse.

Bailed out Franco-Belgian bank Dexia warned on Thursday it risked going out of business. It suffered a 2011 net loss of 11.6 billion euros, hit by its break-up and exposure to Greek debt and other toxic assets such as U.S. mortgage-backed securities.

Dexia, which accepted a state-led break-up and the nationalization of its Belgian banking arm in October and is now little more than a holding of bonds in run off, booked a 3.4 billion euro loss on its holding of Greek sovereign bonds.

French investment bank Natixis , rescued from near-collapse during the 2008 financial crisis by a government-backed merger of its retail cooperative parents, reported a milder-than-expected 32 percent decline in quarterly profits.

Despite the weak results, banks still found room for bonuses. RBS, 82 percent owned by the British government, paid out almost 1 billion pounds in bonuses to staff in 2011. Credit Agricole said it would cut trader bonuses by 20 percent.

Global Investment Banking Revenue to Drop 4%

Wed, 22 Feb 2012 16:00:53 GMT

Investment-banking revenue will drop about 4 percent this year as commissions earned from advising on mergers, underwriting securities and trading fall, JPMorgan Cazenove analysts wrote in a note to clients. Revenue will be 13 percent lower in the first quarter compared with the year-earlier period, analysts led by Kian Abouhossein wrote in the note published today.

The analysts upgraded their estimate for fixed-income, currencies and commodities sales to a 13 percent drop for the first quarter from a decline of 26 percent after a “material improvement” at the start of the year, the analysts said, while the estimate for total sales this year remains unchanged. UBS AG (UBSN), Switzerland’s biggest bank, remains JPMorgan analysts’ top investment banking pick because of the reorganization at the firm and its strong capital position.

Banking sector hits back at critic

Tue, 21 Feb 2012 15:08:28 GMT

The Australian banking sector has hit back after an offshore analyst cast doubts on the arguments used by the local sector for justifying lifting mortgage rates independently of the Reserve Bank this month.
The Australian Bankers' Association chief Steven Munchenberg disputed the basis of the analysis that concluded the big four banks enjoyed an oligopoly in the local market, saying there was "no conspiracy" between major banks and lenders in Australia to unfairly lift mortgage costs for Australians. "There is no conspiracy between the major banks, smaller banks, building societies and the RBA, all of whom say the cost of funding has risen,’’ said Mr Munchenberg.

Mr Munchenberg's comments follow a scathing analysis from Tokyo-based Societe Generale Asia Pacific head of interest rate strategy Christian Carrillo, who yesterday said it was "almost mathematically impossible" that total funding costs for Australian banks were rising, giving the sector a motive to lift mortgage rates independently of a Reserve Bank this month.

"The claim that the recent increase in mortgage rates is due to higher funding costs is very dubious," said Mr Carillo in a research note. "The mortgage hikes seem aimed at protecting their high profit margins."
Mr Munchenberg also said that Mr Carrillo’s analysis also didn’t take into account moves by smaller banks to lift interest rates this month, despite the RBA keeping rates on hold. ‘‘This doesn't explain why Bendigo and Adelaide Bank, Suncorp and even Greater Heritage Building Society all raised rates independently, citing funding cost issues,’’ he said. Banks also had to offer more competitive rates to attract depositors, he said.

Mr Munchenberg pointed to Commonwealth Bank’s decision last week to lift interest rates on mortgages by 10 basis points while increasing deposit rates by 20 basis points on six-month term deposits. "Pressure on deposits eased in the first half of last year then grew again as EU crisis deepened and the costs of overseas money went back to GFC levels," he said. Bendigo and Adelaide Bank raised their standard variable mortgage rate by 15 basis points this month, while Suncorp increased their standard variable rate by 10 basis points.

Australia's major banks - ANZ Bank, Commonwealth Bank, NAB and Westpac - have lifted mortgage customers by between 6 and 10 basis point after the RBA shocked the market earlier this month by keeping the cash rate at 4.25 per cent. The banks have insisted that the cost of funds needed to keep lending into the economy were rising, driven in part by the volatility associated with the European debt crisis. The unpopular out-of-cycle rate rises followed announcements of job cuts by ANZ Bank and Westpac, further inflaming opinion about the banks.

In a speech delivered on February 14, RBA assistant governor Guy Debelle said the rising cost of covered bonds by Australian banks is "is broadly comparable to that of recent covered issuance by banks in other jurisdictions where there has been a similar step up in cost.""In the past few days, there has been a sizeable narrowing of spreads in the secondary market on the domestically issued covered bonds, to around 140 points over swap."

Despite the variations in funding costs, a number of credit unions have kept mortgage rates steady since the RBA’s decision this month, including Credit Union of Australia, which held the standard variable mortgage rate at 6.72 per cent this month. The average standard variable mortgage rate by the major banks was 7.3 per cent last week, compared to 7.04 per cent for 56 credit unions analysed by Canstar Cannex.

AUSSIE BANKS FEEL THE PINCH

Mon, 20 Feb 2012 10:14:31 GMT

On 18 May 2011 Australians awoke to the surprising news that Moody’s Investors Service downgraded the long-term debt ratings of Australia’s pride and joy – the Big Four Banks – Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), and Westpac Banking (WBC).

Why did they do this? About 40% of the deposit mix of the big four was from wholesale funding – meaning offshore debt as opposed to Australian commercial and consumer deposits. As if that wasn’t enough, Moody’s also downgraded the overall BFSR (Bank Financial Strength Rating) from B to B-.
Some Australians sport a sense of pride in our surviving the GFC relatively unscathed with what appears to some less fortunate Western countries as a prideful swagger. It didn’t happen here, we were told, because the lending practices of the Aussie Big Four were markedly different than those of those profligate and foolhardy Americans. One of the most often cited reasons was the fact residential mortgage loans here remain on the books of the issuing institution rather than being sold and sliced and diced into exotic investment instruments as happened in the US.

Following the Moody’s bombshell we began to read of the improvement in our banks funding mix, as deposits increased. Although the housing market began to quake a bit and unemployment rose a bit, all was well as long as China, India, and the miners remained intact.

Then on 02 December 2011 the Big Four went down a credit notch again – this time from Standard & Poor’s. Many Australians shrugged off the downgrade since it was due in large part to changes in S&P’s rating criteria and Australia’s Big Four still remain among the few banks in the world with a Double AA rating. The downgrade was from AA to AA-. However, the rationale stated by S&P is the same as Moody’s concern – wholesale funding costs. S&P maintains that the banks still rely heavily on offshore wholesale debt to fund much of their loan books. Credit spreads have already widened because of the sovereign debt crisis in Europe and if they explode as happened in the GFC, our banks are at risk. Following this downgrade we were again treated to an impressive array of reassurances about our comprehensive and conservative regulatory system. Not to worry.

On 31 January, 2012 Fitch Ratings got into the act, putting on negative ratings watch citing the same reasons. Then they went on to compare us to the Canadian banking system, and sung the praises of Canada’s six major banks. Should we be worried?

Fitch noted Canadian banks have better funding profiles and a lower proportion of total assets held as loans. Although Australian banks are still highly profitable, the combination of increased borrowing costs in overseas markets and a continued slowdown in Australian property markets is cause for concern, they claim. The funding profile in Canadian Banks has a lower loan to deposit ratio, although both countries have housing markets still over-priced in the eyes of many experts.

To put this all into some kind of perspective, let’s see what a recent UBS Securities Report on the Australian Banking System has to say. The report cites a “dangerous situation” confronting the Big Four due to higher wholesale funding costs and the competition to write home loans. In short, the banks are losing money making home loans given current interest rates and funding costs. And remember, according to the Ratings Agencies the asset base of our banks is overweight in residential loans.

The author of the report, analyst Jonathan Mott, said banks will be left with a stark choice if the Reserve Bank does cut rates today. They can re-price the interest rate on new mortgages above the official cash rate, they can hope for wholesale funding markets to improve, or they can stop writing mortgages.

The RBA unexpectedly let rates stay the same. At best, this is a temporary reprieve, as the UBS report claims the banks were already losing money at the rate in place. Nevetheless, ANZ and Westpac this week defied the RBA move by upping rates anyway. ANZ hiked variable rate mortgages and small business loans by six basis points. Westpac is upping its standard variable mortgage rate by 0.10 percentage points to 7.36%. Westpac group executive Jason Yetton said the rate hike reflected the increased cost to the bank of raising money.

As you can plainly see, the Banks have not lost money on new mortgage loans since the early days of the GFC in 2008. The cause of the dramatic drop off at the end of 2011 has to be attributable to a combination of lower rates and most importantly, funding costs. Once again, the troubles facing Australia’s Big Four banks appear to originate from the same source – reliance on overseas debt to fund their loans.

The following graph shows the cost of recent bond issuances from each of the major banks. You have heard again and again the cost of wholesale debt has exploded, with bond issues costing the issue approximately twice the 2009 cost of unsecured debt. Here you see it in bold relief. The prices account for conversion costs into Australian dollars (ll-In Cost).

In order to illustrate the extent of the rising funding costs, the below chart estimates the all-in prices (including costs associated with swapping the bonds into Australian dollars) of the banks' recent covered bond issues.

ANZ Bank Says First-Quarter Underlying Profit Increases to $1.59 Billion

Fri, 17 Feb 2012 15:02:46 GMT

Australia & New Zealand Banking Group Ltd. reported a 4.1 percent increase in underlying profit in the first quarter, saying credit growth is unlikely to return to pre-crisis levels in the “foreseeable future.”
Unaudited underlying post-tax profit adjusted for non-core items in the three months to Dec. 31 was A$1.48 billion ($1.59 billion), the Melbourne-based bank said today in a statement, without giving a year-earlier figure. It reported underlying profit in the first quarter last year of A$1.4 billion.

Chief Executive Officer Mike Smith is among bank executives fighting to maintain earnings as demand for mortgages tumbles to the weakest since 1977. ANZ Bank this week announced plans to slash about 1,000 jobs by Sept. 30, and on Feb. 10 raised its standard variable mortgage rate independent of the central bank, which left borrowing costs unchanged.

“Standard banking is performing OK given reasonably tough market conditions,” said Victor German, a Sydney-based banking analyst at Nomura Australia Ltd. who has a “neutral” rating on ANZ Bank shares. “Funding conditions are expensive and the opportunity to reprice have been limited until this quarter.”
ANZ Bank shares climbed 1.7 percent to A$21.55 in Sydney. ANZ Bank has fallen 16 percent in the past 12 months, larger rival Commonwealth Bank of Australia declined 8 percent in that time, while Westpac Banking Corp. (WBC) shed 17 percent and National Australia Bank Ltd. (NAB) lost 14 percent.
Growth Curbed
“There will not be a return to the level of credit growth that banks experienced pre-crisis for the foreseeable future, particularly in our major domestic markets in Australia and in New Zealand, as consumers reduce their gearing and businesses pace investments,” Smith said in today’s statement.
Westpac, Australia’s second-largest bank, reported yesterday first-quarter profit that was lower than a year earlier as rising funding costs squeezed the profitability of its lending. Unaudited cash earnings in the three months ended Dec. 31 were A$1.5 billion.

Commonwealth, the nation’s largest bank, said Feb. 15 that profit in the six months ended Dec. 31 climbed 19 percent to A$3.62 billion from a year earlier, helped by fewer soured loans. National Australia said Feb. 7 that its cash profit in the three months ended Dec. 31 rose 7.7 percent as it increased lending faster than rivals.

Rising Costs
The global banking environment has become “significantly more challenging following the first phase of the global financial crisis,” Smith said in the statement. “Bank funding costs are continuing to rise as the deepening economic and financial crisis in Europe causes dislocation and volatility in global markets although prospects are brighter in the U.S.”

Australian banks may eliminate 7,000 jobs in the next two years, seeking to reduce labor costs that account for 58 percent of expenses, UBS AG said last month. ANZ Bank said Feb. 13 that it will eliminate about 1,000 positions by Sept. 30. ANZ Bank staff in Australia were told Feb. 13 of 492 roles affected by the lender’s 1,000 in planned reductions.

Australia’s four-pillar banks, so named for a law that prevents them from buying each other, are managing slower demand for mortgages, which account for about 60 percent of all lending in the nation. Borrowing slumped after the central bank boosted interest rates seven times from October 2009 to November 2010. Policy makers cut the key rate by a quarter percentage point in November and December to 4.25 percent, an unexpectedly held the rate unchanged at this month’s meeting.

Mortgage Lending
Credit to home buyers rose 5.4 percent in December from a year earlier, the smallest annual increase since 1977, when central bank data begins. The gain is also a third of the average monthly pace recorded in the decade to December 2009.

ANZ Bank’s mortgage lending rose 2.4 percent in the quarter from the previous three months, 1.5 times system growth and deposits gained 3.6 percent, or 1.3 times system. The bank’s net interest margin, a measure of profitability of its lending, narrowed about 1 basis point from the previous six months. That figure doesn’t include ANZ Bank’s global markets business. At the bank’s Australian business, the net interest margin narrowed 9 basis points “due to higher funding and deposit growth,” it said.

ANZ Bank said its term wholesale funding program for 2012 is “in line with 2011” at around A$20 billion and the lender is ahead of schedule have raised about A$9 billion year-to-date. ANZ Bank’s Tier 1 capital ratio, a measure of its ability to absorb potential losses, was 11 percent.

‘Banking, rail communications vital for Pakistan, India trade’

Thu, 16 Feb 2012 15:26:42 GMT

Karachi —Opening of bank branches, rail communication, and removal of non-tariff barriers are some of the important areas pointed out by trade and industry for normalization of trade between Pakistan and India. :President of India-Pakistan Chamber of Commerce and Industry (IPCCI), S M Muneer has demanded to implement the agreement between the Reserve Bank of India and the State Bank of Pakistan, which was signed in 2005 for opening of branches by two Indian commercial banks in Pakistan, and two Pakistani banks in India.

Speaking at the dinner reception hosted by Federation of Pakistan Chambers of Commerce and Industry (FPCCI) in honour of India’s Commerce Minister, Anand Sharma and trade delegation, Muneer said that during his visit to Delhi with Mr. Amin Faheem the opening of MCB Bank branch in Delhi/Mumbai was announced by him. He emphasized that without the provision of banking services, opening of letters of credit, and cross border transactions of funds, trade could not be taken place.

He urged upon the Indian minister to remove all NTBs (non-tariff barriers) as bilateral trade between the two countries cannot be boosted due to Indian restrictions. He strongly recommend rail service via Khokhrapar Munabao, bus services between Srinagar and Muzaffarabad, religious visits to Lahore and Nankana Sahib, new shipping protocol, deregulation of air services and joint registration of basmati rice should also be revisited.

He suggested that trade facilitation through expeditious border crossings, streamlining documentation requirements, border agency coordination, opening of new border crossings, quick customs clearance, electronic data interchange, telecommunications, improved transport links, shipping protocols and easing visa restrictions for businessmen should be carried out immediately. He further invited the delegates of FICCI and IPCCI to visit Karachi/Lahore/Islamabad to organize business meetings/seminars and welcome them in befitting manner.

He demanded liberalizing the visa regime by both the Indian and Pakistani governments as both the countries have agreed to issue visa to the bonafide businessmen multiple visa valid for one year for 10 cities and this decision must be implemented as soon as possible. Moreover in my opinion the visa should be valid for whole country and not for 10 cities this will be a great help for the businessman to increase business and also help for tourism in both the counties. It is also recommended that senior citizens of both the counties may be exempted from visa formalities and they may be granted visa on arrival.

The trade figures between the two countries it is evident that India is a beneficiary of the bilateral trade having export of US $ 1.4 Billion to Pakistan in 2009-2011.

Banking system should work for all: Swan

Wed, 15 Feb 2012 15:02:32 GMT

Federal Treasurer Wayne Swan says the latest financial results from Commonwealth Bank of Australia's (CBA) shows how "hugely profitable" it is, despite the volatile global markets.

The CBA, along with the other big banks - ANZ, National Australia Bank and Westpac - have raised their standard variable mortgage rates in recent days, blaming rising overseas funding costs flowing from the European debt crisis.

The increases came despite the Reserve Bank having left its official cash rate unchanged at last week's monthly board meeting, sparking a verbal stoush between the government and the financial institutions.

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St George Bank was the latest bank to lift its standard variable home loan rate, increasing it by 12 basis points - more than the big four, which recorded rises of six to 10 basis points.

CBA, the nation's largest home lender, reported a net profit of $3.6 billion for the six months to December 31 on Wednesday, up 19 per cent from the previous corresponding period. "They have made that profit despite global volatility in financial markets. It shows they are hugely profitable," Mr Swan told parliament on Wednesday.

He said the banking system should work for "all Australians", not just shareholders, which was why the government had pursued reforms to increase competition. Still, unlike the ANZ - which led the way in the round of rate moves, and followed up by cutting 1000 jobs - the CBA has no plans for drastic staff reductions, either by redundancy or sending positions offshore.

But CBA chief financial officer David Craig told reporters unemployment was likely to rise in the finance sector and that it was hard to say whether other sectors of the economy would offset that. His comments came ahead of Thursday's release of official labour force data for January.

Economists' forecasts centre on a 15,000 rise in the number of people employed, although this is not enough to prevent unemployment rate ticking up to 5.3 per cent from 5.2 per cent. In making its staff decision, ANZ joins a long line of other sectors to announce job reductions, particularly in manufacturing.

But Shop Distributive and Allied Employees' Association boss Joe de Bruyn says he does not believe the cuts will push up jobless figures significantly. "The truth is there are some job losses getting a lot of publicity but there are companies that are expanding," the union boss told AAP.

Mr de Bruyn said the union's national executive had seen a list of new supermarkets, discount and hardware stores in the pipeline, generating work for hundreds in coming years.

Employment concerns do not appear to be worrying consumers just yet, with the latest reading of the Westpac-Melbourne Institute confidence index rising by 4.2 per cent to 101.1 points in January, and in belated response to the rate cuts in November and December. Above an index of 100 shows there are more optimists than pessimists.

But Westpac chief economist Bill Evans said the survey period for the index would not have totally taken into account the disappointment that the Reserve Bank left the cash rate unchanged, when a cut was widely expected, or the subsequent increases in bank lending rates.

Mr Evans still expects the Reserve to cut the cash rate by a further 50 basis points this year, with the first 25 basis points likely in March.

China's Banks Face New Fee Regulations

Mon, 13 Feb 2012 15:52:04 GMT

BEIJING—China's banking regulator has drafted rules to stop banks from charging their customers excessive fees, which have become a focus of rising frustration in a country where customer service is seldom a priority.

The new rules, issued Friday evening by the China Banking Regulatory Commission, said all fees must be set by banks' head offices and not local branches, that banks must be more transparent when setting prices, and that they must give three months' notice before raising fees.

Customers of Chinese banks have long had to deal with fees that overseas bank users don't. Customers at a bank in one city will often be charged a fee when using the ATMs of the same bank outside the city. But over the past year, fees have become the source of rising frustration, with customers complaining about being charged for everything from transferring funds to changing their Internet banking password.

Fee income has become an increasing proportion of bank revenue, in some cases having risen more than 50% as a share of operating income for some of China's biggest banks over the last four years. And as the banks continue to post record-beating profits each quarter, anger has been growing over customer service in general.

Banks questioned in the recent past have said that improving customer service is a priority. None were available for comment following the announcement of the new fee regulations.

Boston Consulting Group, which surveyed 1,600 consumers in 15 Chinese cities last year, said in August that more than half of home- and car-loan seekers claimed that procedures were too time-consuming and that China's main banks took up to a month to process a loan application.

A June survey by consulting firm McKinsey & Co. of 56,000 bank customers in Asia found that loyalty among Chinese people to their bank has dropped significantly over the last five years.

"China's front-line banking service is still one step behind the rest of the Asia-Pacific," said Kenny Lam, a partner with McKinsey in Hong Kong. "China still needs to make sure the basics are taken care of."

According to that survey, key factors that drive loyalty in China toward a bank include whether its employees are familiar with bank procedures, whether staff make mistakes with accounts, and whether employees are courteous—factors that didn't even register as concerns throughout Asia as a whole.

"I try not to visit the bank," said Zhang Xiuqin, a 54-year-old from Beijing who has accounts with Bank of China, ICBC and Bank of Beijing, with little attachment to any of them. "Every time I go I waste too much of my time standing in line."

Tina Tian, a 29-year-old Beijing native, spent two hours recently at a Beijing branch of Industrial & Commercial Bank of China Ltd. waiting in line and arguing over how to pay her tuition.

"I always end up standing in a long line for at least half an hour, or even longer, to buy electricity, a very simple service, so it's always a frustrating experience," she said. Bank branches also serve as utility portals.

The banking regulator has encouraged banks to offer new services to clients in an effort to diversify their businesses, which have traditionally been dominated by making loans.

Traditionally, China's big state-owned banks—China Construction Bank Corp., ICBC, Bank of China and Agricultural Bank of China Ltd.—paid scant attention to retail investors in favor of big corporate borrowers. For example, lenders often require retail customers to make lump-sum payments instead of offering more-flexible terms. Seeing a loan officer can take most of a day.

"The branches of big state banks aren't structured for retail banking," said Douglas Red, formerly a vice president at the Bank of Tianjin who has worked in China's banking and finance sector for 20 years. "They were set up to service companies, represented by a driver or an accountant who's paid to stand in line all day."

American Banks Prove Inferior to Canadian Banks Led by TD

Thu, 09 Feb 2012 13:01:40 GMT

Toronto-Dominion Bank Chief Executive Officer Edmund Clark faced investor doubts when he announced in 2004 he was buying a U.S. consumer lender, challenging larger rivals such as Bank of America Corp. in the world’s largest financial market.

“Every analyst said ‘You see, another dumb Canadian trying to go into the U.S.,” Clark said yesterday in an interview at Bloomberg’s headquarters in New York. “They don’t know how to do it. They don’t have the guts. They’re too conservative.”

More than seven years later, Canada’s second-largest bank is one of the 10 biggest lenders in the U.S. by assets, and may soon have the third-most branches in New York City, a banking market almost as big as Canada’s.

By sticking to consumer lending and avoiding high-risk subprime loans and structured products, the Canadian lender posted profit of almost C$3 billion ($3 billion) in U.S. consumer banking over the past three years, while bigger banks such as Bank of America and Citigroup Inc. required government bailouts.

“When we went into the United States, we refused to do subprime lending,” Clark said. “We said, ‘I don’t care what the spreads are, we are not going to do that.’”Shareholders have rewarded Clark’s ability to weather the financial crisis while expanding earnings on both sides of the border. Toronto-Dominion now has more branches in the U.S. than in Canada. It’s also one of the only banks with an Aaa credit rating from Moody’s Investors Service.

Shares Rally
Toronto-Dominion shares have gained 42 percent in the five years ended Dec. 31, 2011. That’s the best performance among Canada’s five largest banks over that period, and compares with a drop of 87 percent for Charlotte, North Carolina-based Bank of America.

“We have had a philosophical view all along that people were changing banks from being built around customers and clients, to being built around traders,” said Clark, 64. “And that was not a good thing for society and it wasn’t a good thing in the end for the banking system.”

The lender posted record annual profit in 2011 of C$6.05 billion, or C$6.43 a share, according to International Financial Reporting Standards. Since Clark became CEO in December 2002, Toronto-Dominion has increased earnings 18 percent on a compounded annual basis.

Bank of America CEO Brian T. Moynihan, 52, has spent the last two years atoning for ill-fated acquisitions made by his predecessor, Kenneth D. Lewis. The 2008 takeover of Countrywide Financial Corp., the biggest home lender during the U.S. housing bubble, saddled the firm with so many liabilities from shoddy mortgages that last year it weighed putting the unit into bankruptcy.

Avoiding Subprime
Jerry Dubrowski, a Bank of America spokesman, declined to comment. Toronto-Dominion and other Canadian lenders avoided subprime lending and structured products during the worst financial crisis since the Great Depression. Canada’s banking system has been ranked the world’s soundest for four straight years by the World Economic Forum, and avoided government bailouts.

“I’m a big believer that you should run an institution and become capable of understanding any part of the institution that you run,” Clark said. “The moment you’re saying ‘No, no, no, but I have a third vice president that does,’ look out. I like to keep institutions a little narrow in their focus.”TD’s narrow focus began in August 2004, when the lender announced it would buy 51 percent of Portland, Maine-based Banknorth Group Inc. for $3.5 billion.

TD Ameritrade
A year later, the bank sold TD Waterhouse to TD Ameritrade Holding Corp., making it the largest shareholder in the Omaha, Nebraska-based discount brokerage. By 2007, Toronto-Dominion had acquired the rest of Banknorth for $3.19 billion. In March 2008, the bank bought Cherry Hill, New Jersey-based Commerce Bancorp for about $8.33 billion. Toronto-Dominion added South Financial Group Inc. for $191.6 million and now has about 160 branches in Florida.

“You look eight years ago, TD really had no U.S. retail banking presence,” said John Aiken, an analyst at Barclays Capital Inc. in Toronto. He rated Toronto-Dominion shares “overweight/neutral.” “Fast forward to today and they’re a top-10 lender in the U.S., which is hugely impressive.”

U.S Southeast
Toronto-Dominion purchased auto lender Chrysler Financial Corp. from Cerberus Capital Management LP in 2010 for about $6.3 billion. Clark said a year ago that the bank will become a top- 10 auto lender in the U.S. within three to four years.

The U.S. Southeast bore much of the brunt of the financial crisis as subprime lending and falling home prices roiled housing markets in the area. Regions Financial Corp., Alabama’s largest bank, hasn’t posted an annual profit since 2007. The Birmingham-based bank wrote off more than $3 billion in loans during the financial crisis, mostly tied to developers, home builders and mortgage borrowers in Georgia and Florida. Its shares have fallen about 84 percent since 2007.

SunTrust Banks Inc., based in Atlanta and the 10th-largest U.S. lender by assets, posted six consecutive quarterly losses from 2008 to 2010 as borrowers in the Southeastern real estate market struggled to keep up with loan payments.

Florida Expansion
Tim Deighton, a spokesman for Regions, declined to comment. Michael McCoy, a spokesman for SunTrust, didn’t immediately respond to messages seeking comment. Toronto-Dominion was said to be in discussions to buy Florida lender BankUnited Inc. last month before the bank decided to remain independent, according to people with knowledge of the situation. Clark declined to comment on the potential sale, and said the bank doesn’t need acquisitions to grow.

The U.S. economy is showing signs of a turnaround, he said. “There is a mood shift here,” he said. “Consumers are more optimistic, businesses are more optimistic.”The bank’s next goal is to become a “top three” bank in New York, Clark said. He said the city’s deposit base is about $750 billion, compared with C$1 trillion for all of Canada. Toronto-Dominion needs to add 60 or 70 more branches to become third largest in the city, Clark said.

“We are now the fifth-largest bank in greater New York City and we’ve set a goal to be the third largest,” Clark said. “So over a 15-year period, we’ll go from zero to third largest.”--With assistance from Laura Marcinek and Hugh Son in New York and Doug Alexander in Toronto. Editor: David Scanlan,