After a 16-year reign as the biggest bank in Canada by Tier 1 capital, Royal Bank of Canada (RBC) has been surpassed by rival TD Bank Group, which expanded its core capital by 13.7% to reach $69.4bn. TD is also the biggest lender by total assets for the third year running.
While the Canadian banking sector remained robust throughout the Covid-19 pandemic, which many attribute to the banks’ diverse business models as well as government support, 2022 was a mixed year for lenders, not least because of the strong US dollar, interest rate rises, inflation and economic slowdown.
Only five out of the 13 Canadian banks in the main Top 1000 World Banks ranking managed to improve their core capital and only three saw an increase in pre-tax profits. However, 11 expanded their total asset base, with Equitable Bank recording the biggest increases in Tier 1 (42%), advancing it one position to 10th in the country table, and total assets (34.2%).
Bank of Montreal (BMO), with a 22.5% jump in Tier 1 capital, leapfrogged Scotiabank to become the third-largest lender in the country. BMO also comes out on top for both return on capital (20.17%) and return on assets (1.19%).
Unsurprisingly, BMO takes the accolade for the overall best-performing bank among the six largest lenders in Canada, moving up from third place in the 2022 table. It tops the cohort in seven of the eight metrics evaluated, namely growth, profitability, operational efficiency, asset quality, return on risk, soundness and leverage. In the liquidity category, it comes in third. Like many of its contemporaries, BMO has expanded outside its home market into the US; in December 2021, it announced plans to acquire BNP Paribas’ Bank of the West operations; the deal was completed in February 2023.
TD places second in the best-performing table, up from fifth place last year. It topped the group in the liquidity category, as well as performing well in growth, profitability, operational efficiency and return on risk. Like BMO, TD has been on the acquisition trail in the US. In mid-2022, it sold a portion of its stake in Charles Schwab to buy US investment bank Cowen and First Horizon Bank. The latter acquisition was abandoned in May this year, with both parties citing an uncertainty around when the purchase would receive regulatory approval.
RBC comes in third for performance, with solid results in asset quality and liquidity. While RBC successfully expanded its US operations in 2015 with the acquisition of Los Angeles-based City National, in 2022 its expansion plans were focused on the domestic market. In November, RBC announced it would purchase HSBC Canada, which includes the latter’s commercial banking and wealth and personal banking businesses. The deal is expected to close in the first quarter of 2024.
Desjardins, Canada’s largest co-operative group, comes sixth in performance for the second year in a row, despite strong results in both soundness and liquidity. It also recorded the second-highest capital-to-assets ratio, of 6.92%, behind Canadian Western Bank (8.29%).
While the Canadian banking system appears in rude health, 2023 is looking more challenging. In its 2023 outlook report, published on December 6, Fitch assigned a deteriorating sector outlook for the Canadian banking system, indicating that key risk indicators are going to be worse than they were in 2022.
In its Financial System Review – 2023, the Bank of Canada identified six key vulnerabilities in the financial system:
- elevated level of household indebtedness;
- elevated house prices;
- reliance of some businesses on high-yield debt markets;
- high potential demand for market liquidity relative to supply;
- cyber threats in an interconnected financial system; and
- mispricing of assets exposed to climate-related risks.
In addition to a more challenging economic environment, there are several regulatory and market infrastructure changes expected this year. These include Canada’s payment systems modernisation, which includes the move to Lynx release two, a high-value payment platform, and faster payments platform, the Real-time Rail, both supporting the ISO 20022 payment messaging standard.
