Monday, November 27, 2006 – Ottawa – The value of services produced by deposit-accepting intermediaries (chartered banks, trust companies, caisses populaires and credit unions) increased in 2005 at their fastest rate since the turn of the millennium, thanks to robust growth across most business lines.
In total, these intermediaries produced services worth $61.7 billion, up 6.8% from 2004. This was the fastest annual rate of growth since 2000 when the high-tech boom fuelled growth of 10.6%.
Note To Readers
The annual Survey of Deposit-accepting Intermediaries covers the Canadian-based activities of the principal deposit-accepting intermediaries, namely chartered banks, trust companies, caisses populaires and credit unions. The report does not cover foreign operations.
Retail banking services (chartered banks, trust companies, caisses populaires and credit unions) cover all financial services to individuals and to small- and medium-sized businesses through a traditional branch network.
Corporate and institutional finance services cover financing and operating services for institutions and large corporations. They include trade, export and project financing and syndicated lending.
Electronic financial services cover services to individuals, businesses and institutions through networks of banking machines, debit and credit cards, telephone banking and the Internet. Some of the respondents were unable to provide separate estimates for their activities in electronic financial services. This may result in some under-estimation of the values for these services and over-estimation for retail banking services. The aggregated totals including these two segments remain strong.
Treasury and investment banking services: Treasury banking manages the funds of the deposit-accepting intermediary, itself. Investment banking covers services to individuals, corporations and institutions such as securities brokerage, mutual fund management, corporate financing and other investment services.
Fiduciary services refers to all services provided when acting as a trustee or agent such as record-keeping, custodial and performance evaluation services for personal trusts, pension funds, corporate and institutional investments and group Registered Retirement Savings Plans.
Net interest income is the difference between interest income and interest expenses. Interest income covers all interest from loans, titles and deposits of deposit-accepting intermediaries. Interest expenses cover interest paid on deposits, subordinated debentures and other interest costs.
Non-interest income covers all sources of revenue other than interest income. Examples include revenue from brokerage and other securities services, credit services, deposit and payment services charges, trading, mutual fund management, card services, foreign exchange, securitization activities and trans-sectoral income.
Value of services produced is the sum of net interest and non-interest income. This value is not to be confused with service charges.
Services recorded strong growth across all business lines, except for the fiduciary services portfolio, which was last year’s weakest performer. There was also a substantial drop in net interest income in the treasury and investment banking services portfolio.
Fiduciary services continued to be consolidated into larger wealth management portfolios, which included broader investment banking services.
Financial settlements related to a high profile business failure and other transfers to international operations affected some intermediaries. Both weighed negatively on the treasury and investment services portfolio.
Net interest income increased a healthy 4.5% to $31.8 billion last year. This growth reflects strong gains in revenue across lending, deposit and investment businesses. These gains occurred despite low interest rates and a narrowing of the gap between interest rates charged to borrowers and those paid to depositors.
Non-interest income recorded a strong 9.4% increase to $30.0 billion. Revenue from fee-based services in the corporate segment was fuelled by widespread growth in volume. As well, self-directed brokerage, full-service brokerage and mutual fund business experienced strong growth. Higher levels of issuing securities of credit card receivables in a process known as securitization also contributed to this notable growth.
In addition, deposit-accepting intermediaries increased their provision for credit losses by 64.3% to $2.5 billion last year. Provisions for credit losses reflected changes that management expected in losses from impaired loans and other credit instruments.
The year-over-year growth in this account was exaggerated by high levels of loss recoveries in 2004. Although economic conditions were favourable in 2005, higher volumes of personal and corporate loans as well as recorded losses pushed provisions for credit losses higher.
Robust growth in retail banking volume
The value of services in the retail banking segment surged 7.0% to $37.6 billion in 2005, the fastest rate of growth in this segment since this survey began in 1996. These retail services accounted for 60.8% of the value of services produced, consolidating their position as the mainstay income-generating activity for deposit-accepting intermediaries.
Relatively low interest rates continued to create high demand for personal loans and residential mortgages, while deposit volumes were also up. Solid employment gains were a big factor, and the strong housing market drove mortgage volumes higher.
The growth in the retail banking portfolio was partially tempered by competitive pricing in the industry and a narrowing of spreads coupled with the low-interest rate environment.
As retail banking historically has been largely interest-based, net interest income continued to contribute the lion’s share (72.7%) of the value of services produced by retail banking.
Foreign operations hamper treasury and investment activities
The value of treasury and investment banking services grew 4.7% to $11.9 billion, accounting for 19.3% of total services produced. Certain losses against foreign operations dampened what was an otherwise positive year for this segment.
Non-interest income rose 9.5% to $11.2 billion, representing 94.0% of the services provided by this portfolio. This growth was fuelled by robust mutual fund sales, brokerage fees, investment management fees related to higher client asset levels, and transaction volumes. Mergers and acquisitions as well as equity underwriting activities also played a part in this growth.
Net interest income from these activities declined 38.2% to $716 million, far below the peak of $1.9 billion in 2002. Financial settlements and other losses against foreign operations were charged against net interest income in Canada.
Many deposit-accepting intermediaries continued the trend since 2001 of aligning treasury and investment banking with client-based wealth management services.
Solid growth in electronic financial services
The electronic financial services portfolio produced services worth $6.8 billion, a 13.4% increase from 2004. A volatile segment, this portfolio has been the fastest growing business segment of deposit-accepting intermediaries since the inception of this survey.
Growth was strong in both net interest income (+9.0%) and non-interest income (+15.0%). Increased balances and volumes of credit card business occurred last year, along with gains in deposit and payment services.
Non-interest related activities accounted for the vast majority (73.0%) of the value of services produced in this portfolio. However, this was still below the peak of 89.5% in 1999.
Electronic financial services, which are closely aligned with retail banking, are the third largest contributor to income, accounting for 11.0% of total services produced. This portfolio serves as a means of delivery to extend the reach of other financial products and services.
Rebound in corporate and institutional finance portfolio
The value of services produced by corporate and institutional finance activities increased 10.2% to $4.1 billion in 2005, reversing a 2.0% decline in 2004. The corporate and institutional finance segment accounted for 6.6% of the total value of services.
Net interest income grew 6.0% to $1.8 billion, while non-interest income increased 13.9% to $2.3 billion. Business loans and particularly deposits stimulated growth, fostered by favourable economic conditions
Non-interest income outperformed net interest income in corporate and institutional finance activities, partly because of increased securitization of assets. Gains and losses from securitization are recorded as non-interest income.
Fiduciary services down
The value of fiduciary services declined 14.1% to $1.4 billion, as fiduciary services continued to be included under the treasury and investment portfolio.
Growth in assets under management in private investment advice and financial planning services were widely reported for 2005.
Fiduciary services traditionally represent a small portion of the total value of services produced. Last year, they accounted for only 2.3%.
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