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Canadian Chartered Banks

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Canadian Chartered Banks Presented by: Lisa Lin Jodi Leung Julie Zhong David Jung Simon Choi – PowerPoint PPT presentation

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Title: Canadian Chartered Banks


1
Canadian Chartered Banks
  • Presented by
  • Lisa Lin
  • Jodi Leung
  • Julie Zhong
  • David Jung
  • Simon Choi

2
Todays Agenda
  • Overview of Industry
  • Major Competitors
  • Product Overview
  • Revenue Composition
  • Regulatory Environment (Bank Act)
  • Scotiabank

3
Overview of Industry
  • The banking industry includes 21 domestic banks,
    23 foreign bank subsidiaries and 22 foreign bank
    branches operating in Canada. In total, these
    institutions manage almost 1.8 trillion in
    assets
  • Source Canadian Bankers Association (2007)

4
Overview of Industry
  • Banks account for over 55 per cent of the total
    assets of the Canadian financial services sector,
    with the six largest domestic banks accounting
    for over 91 per cent of the assets of the
    banking industry
  • Canadas banks play an important role in the
    national clearing and settlement system, which is
    among the most efficient payment systems in the
    world
  • Source Department of Finance Canada, PwC

5
Overview of Industry
  • The average rate of return on common equity was
    15.7 percent in 2005 despite Enron-related
    litigation charges and pressure on the spread
    margins
  • Source PwC

6
Major Competitors
  • Bank of Montreal
  • CIBC
  • Royal Bank of Canada
  • TD Canada Trust
  • National Bank of Canada

7
Major Competitors
  • Each year we see new foreign and domestic
    players in Canada. Among the entrants over the
    past few years have been Bank West, Canadian Tire
    Bank, Ubiquity Bank, CS Alterna Bank, Dundee
    Wealth Bank, ICICI Bank Canada and Capital One
    Bank

8
Major Competitors
  • Strong rivalry in the banking industry because
  • consumers have low switching costs
  • lots of firms that are equal in size and
    capability
  • high exit/entry barriers (government regulations)
  • Canadian banks are facing increased competition
    from other established financial service
    providers and new foreign entrants. New
    technology and the Internet are also enabling
    competitors to enter the market without having to
    invest in branches, which presents further
    challenges to Canadas banking industry.

9
Product Overview
  • Business/Operating Lines
  • Personal and Business Banking meet the credit,
    deposit and payment needs of clients loans,
    travelers cheques, overdraft protection, money
    orders
  • Wealth Management estate planning, GICs, mutual
    funds, managed asset programs, tax advice
  • Corporate and Investment Banking supply equity,
    manage client funds and offer advice on corporate
    takeovers, mergers and re-organizations
  • Technology
  • Internet banking, ATM
  • 85 of retail banking transactions are done
    electronically

10
Revenue Composition
  • Profits - Almost 12 billion in 2005 from the Big
    6
  • Interest income, the difference between what they
    pay you in interest and what the banks charge
    someone else to borrow
  • Loans
  • Mortgages
  • Credit cards
  • Bonds
  • T-Bills
  • Canadian banks make almost half of their revenues
    (47) from interest income
  • Investment Banking (the rest)
  • Underwriting
  • Commissions
  • Wealth management
  • Service fees (5)

11
International Presence
  • Canadian banks are wringing profits like never
    before from their operations outside Canada. Bank
    of Montreal has bought Harris Bank of Chicago TD
    has bought New England-based Banknorth Royal
    Bank has bought Centura Banks of North Carolina
  • Scotiabank (the most "international" of Canada's
    big banks) has such an extensive presence in
    Mexico, the Caribbean and Latin America that, in
    a recent quarter, it earned almost as much profit
    from those foreign markets as it generated from
    its banking operations in Canada
  • Taken as a whole, chartered banks got 28 per cent
    of their 2004 revenues from outside the country.
    And with a freeze since 1998 on big banks merging
    with each other, the Big Six are increasingly
    looking beyond Canada's borders for profits they
    can bring back home.

12
Regulatory Environment
  • Bank Act, the federal government is responsible
    for the regulation of the banking industry in
    Canada.
  • Due to the hybrid nature of the banks
    activities, some of their subsidiary activities
    such as trustee services and securities dealing
    are provincially regulated (OSC)
  • The Office of the Superintendent of Financial
    Institutions (OSFI) is the federal agency
    principally responsible for supervising all
    federally regulated financial institutions and
    pension plans. OSFIs role is to safeguard
    policyholders, depositors and pension plan
    members from undue loss, and to advance and
    administer a regulatory framework that
    contributes to public confidence in a competitive
    financial system.
  • The Canada Deposit Insurance Corporation protects
    depositors by providing deposit insurance. To
    encourage well-managed member institutions, it
    also promotes standards of sound business and
    financial practices.

13
Scotiabank
14
Organizational Structure
15
Net Income by Business Units
16
Net Income
17
Financial Statement
18
Financial Institutes Accounting
  • Section 308 of the Bank Act governs financial
    institutes accounting
  • F/s need to be prepared in accordance to Canadian
    GAAP with a reconciliation between Canadian and
    US accounting measurements
  • The consolidated f/s eliminates intercompany
    transactions and balances
  • Foreign monetary assets and liabilities are
    translated into Canadian dollars using the rate
    prevailing at the end of the fiscal period.
    Revenues and Expenses are translated using
    average exchange rate.

19
Financial Institutes Accounting
  • Estimates with greatest uncertainty includes
  • Allowance for credit losses
  • Fair value for financial instruments
  • Corporate income taxes
  • Pensions and other employees futures benefits
    (ESOP)
  • Other-than-temporary impairment of investment
    securities
  • Primary beneficiary of a variable interest entity
    (VIE)

20
Accrual Interest and A/R
21
Direct Unsecured Obligations
22
Realized
23
(No Transcript)
24
Risk Management
25
Risk Management Framework
26
Types of Risk
  • Credit Risk
  • Market Risk
  • Liquidity Risk
  • Operational Risk
  • Environmental Risk
  • Reputational Risk

27
Credit Risk
  • Credit risk is the risk of loss resulting from
    the failure of a borrower or counterparty to
    honour its financial or contractual obligations
    to the Bank.
  • Credit risk is created in the Banks direct
    lending operations, and in its funding,
    investment and trading activities where
    counterparties have repayment or other
    obligations to the Bank.

28
Credit Risk
  • Corporate and Commercial
  • Assessment criteria
  • Current and projected financial results and
    credit statistics
  • Industry
  • Economic trends
  • Geopolitical risk
  • Management
  • Duel risk rating system
  • Borrower risk industry sector and/or business
    lines
  • Credit facilities facilities structural and
    collateral-related elements
  • Risk-adjusted return on equity profitability
    model

29
Credit Risk
  • Consumer and Small Business
  • Customer-centric approach
  • Adjudication software calculates the maximum
    debt for which a customer qualifies
  • Risk rating system
  • Customers credit history
  • Internal credit score predictive credit
    scoring models

30
Market Risk
  • Market risk is the risk of loss in our trading,
    funding and investment positions that results
    from exposure to interest rates, credit spreads,
    foreign currency rates, and equity and commodity
    prices.

31
Market Risk
  • Market risk category
  • Interest rate risk
  • Foreign currency risk
  • Equities risk
  • Credit spread risk
  • Commodities risk

Funding Investments Trading
Interest rate risk Foreign currency risk Interest rate risk Foreign currency risk Equities risk Credit spread risk Interest rate risk Foreign currency risk Equities risk Credit spread risk Commodities risk
32
Market Risk
  • Interest rate risk
  • The risk of loss due to changes in the level,
    slope, and curvature of the yield curve the
    volatility of interest rates and mortgage
    prepayment rates
  • Manages with the objective of enhancing net
    interest income within established risk
    tolerances.
  • Foreign currency risk
  • The risk of loss due to changes in spot and
    forward prices, and the volatility of currency
    exchange rates
  • Net investments in self-sustaining foreign
    operations and from its net corporate foreign
    currency positions
  • Hedge foreign currency spot and forward
    contract, option
  • Primarily denominated in U.S. dollars and Mexican
    pesos

33
Market Risk
  • Equity risk
  • The risk of loss due to changes in the prices,
    and the volatility, of individual equity
    instruments and equity indices
  • Equity investments include common and preferred
    shares, as well as a diversified portfolio of
    third-party managed funds
  • Credit spread risk
  • The risk of loss due to changes in the market
    price of credit, or the creditworthiness of a
    particular issuer
  • Commodity price risk
  • The risk of loss due primarily to changes in spot
    and forward prices, and the volatility, of
    precious and base metals

34
Market Risk
  • Market Risk Measurement
  • Value at risk (VAR)
  • A statistical measure that estimates the
    potential loss in value of the Banks trading
    positions due to adverse market movements, over a
    defined time horizon (1-day) with a specified
    confidence level (99)

35
Market Risk
  • Stress testing
  • Examines the impact that abnormally large swings
    in market factors and periods of prolonged
    inactivity might have on trading portfolios
  • Sensitivity analysis and simulation modeling
  • Sensitivity analysis assesses the effect of
    changes in interest rates on current earnings and
    on the economic value of assets and liabilities
  • Simulation models enable the Bank to assess
    interest rate risk under a variety of scenarios
    over time. The models incorporate assumptions
    about growth, planned business mix, changes in
    interest rates, shape of the yield curve,
    embedded product options, maturities and other
    factors

36
Market Risk
  • Gap analysis
  • Assess the interest rate sensitivity of the
    Banks retail, wholesale banking and
    international operations
  • A liability gap occurs when more liabilities than
    assets are subject to interest rate changes
    during a given time period.
  • An asset-sensitive position arises when more
    assets than liabilities are subject to rate
    changes.

37
Liquidity Risk
  • The risk that the Bank is unable to meet its
    financial obligations in a timely manner at
    reasonable prices
  • Financial obligations include
  • Liabilities to depositors
  • Payments due under derivative contracts
  • Settlement of securities borrowing and repurchase
    transactions
  • Lending and investment commitments.

38
Liquidity Risk
  • Liquidity risk management
  • maintain confidence of depositors and
    counterparties
  • enable core businesses to generate revenue
  • Key elements of liquidity risk framework are
  • Measurement and modelling
  • Funding diversification
  • Core liquidity
  • Stress testing
  • Contingency planning

39
Liquidity Profile
40
Operational Risk
  • The risk of loss, whether direct or indirect, to
    which the Bank is exposed due to external events,
    human error, or the inadequacy or failure of
    processes, procedures, systems or controls
  • Can result in financial loss, regulatory
    sanctions and damage to the Banks reputation

41
Operational Risk
  • Operational risk management approach
  • Accountability
  • A robust internal control environment
  • An effective organization structure
  • An effective program to promote compliance with
    relevant laws and regulatory requirements
  • An operational risk management framework

42
Reputational Risk
  • Reputational risk is the risk that negative
    publicity regarding Scotiabanks conduct or
    business practices, whether true or not, will
    adversely affect its revenues, operations or
    customer base, or require costly litigation or
    other defensive measures.
  • Who ensure that the Bank is seen to be acting
    with high ethical standards?
  • Reputational Risk Committee
  • Legal Department
  • Corporate Secretary
  • Corporate Government Affairs and Compliance
    Departments

43
Reputational Risk
  • How to manage?
  • Codes of conduct
  • Corporate governance
  • Risk management programs
  • All directors, officers and employees have a
    responsibility to conduct their activities in
    accordance with the Scotiabank Guidelines for
    Business Conduct, and in a manner that minimizes
    reputational risk.
  • Believes that if all employees follow the
    guidelines, reputational risk will minimize.

44
Environmental Risk
  • Environmental risk refers to the possibility that
    environmental concerns involving the Scotiabank
    Group or its customers could affect the Banks
    financial performance.
  • To keep all kinds of concurrent and potential
    clients interested and keep their accounts in
    Scotiabank

45
Environmental Risk
  • Identify the Banks role in the environmental
    responsibilities
  • Address the issues of climate change
  • Protection of biodiversity
  • Promotion of sustainable forestry practices
  • To ensure environmentally responsible manner
  • Ongoing interaction with government, industry
    and stakeholders in countries where it operates
  • Sponsor of the
  • Carbon Disclosure Project in Canada
  • which provides corporate disclosure to the
    investment community on greenhouse gas (GHG)
    emissions and climate change management

46
Derivatives
  • The Bank uses derivatives to
  • Generate revenues from trading activities,
  • Manage market and credit risks,
  • Lower its cost of capital
  • Derivatives trading was a record of 585 million
    and contributed 57 of total trading revenue

47
Derivatives
  • Interest rate exposures
  • Interest rate swaps, futures and options
  • Foreign currency risk exposures
  • Forward contracts, swaps and options
  • Credit exposures
  • credit default swaps
  • (credit return swap and credit linked notes)

48
(No Transcript)
49
Credit Derivatives
  • Credit derivatives can be defined as arrangements
    that allow one party (protection buyer or
    originator) to transfer credit risk of a
    reference asset, which it may or may not own, to
    one or more other parties (the protection
    sellers).
  • Buyer seeks ways to avoid a certain risk
  • Seller seeks ways to be exposed to a certain risk
  • Credit default swap (Two parties)
  • The counterparty (Seller) agrees to insure this
    risk in exchange of regular periodic payments
    (essentially an insurance premium). If the third
    party defaults, the party providing insurance
    will have to purchase from the insured party the
    defaulted asset. In turn, the insurer pays the
    insured the remaining interest on the debt, as
    well as the principal.

50
Credit Derivatives
  • At October 31, 2006, credit derivatives used to
    mitigate exposures in the portfolios totaled
    1,420 million (notional amount), compared to
    444 million at October 31, 2005. This increase
    is indicative of the Banks active portfolio
    management program. The industries with
    significant protection purchased include the
    media and oil and gas sectors.
  • The Banks use of credit derivatives increased
    year over year, as notional principal amounts
    rose by 13.7 billion to 34.8 billion.
  • Mostly used in
  • Banks trading businesses, where the activity
    includes trading with customers, structured
    transactions and modest proprietary trading.
  • Investment and loan portfolios. Credit protection
    is sold as an alternative to bond or loan assets,
    while credit protection is bought to manage
    credit exposures.

51
Employee Stock Options
  • Employee stock options granted have Tandem Stock
    Appreciation Rights (Tandem SAR)
  • To either exercise the stock option for shares
  • Or to exercise the Tandem SAR and thereby receive
    the intrinsic value of the stock option in cash.
  • Tandem SARs are settled in cash so they are
    recorded in other liabilities
  • Fair value based on Black-Scholes pricing model

52
Thank You!
  • Any Questions?
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