Canada’s economy has continued to sputter along for the last several years. Our real unemployment rate remains high. Job creation is sluggish. Our loonie is in a downward spiral. The average Canadian’s debt level continues to increase year over year. Retailers are struggling. Manufacturing is disappearing. Half of Canadian workers live paycheque to paycheque. Interest rates remain at an all time low. Yet Canadian banks are earning billions profits every quarter. What is wrong with this picture?
The five biggest Canadian banks — BMO, CIBC, RBC, Scotia and TD — earned unadjusted profits totalling $7.37 billion in the 2nd quarter of 2014. That works out to about $80 million in profit (not revenue) per day! In the fiscal year of 2013, Canada’s big five banks delivered a total profit of $29.4-billion … an increase of 5% over 2012, despite the weak economy.
So why are the Bay Street banks raking in these huge profits while most Canadians and small Main Street businesses are being pinched and squeezed from every direction? Do you believe the banks are looking after your best interests or their own? Banks are just like any other business; they need to grow revenue and profits to survive and to continue operating. But at what cost to its customers? In a television interview just a few months before his retirement, Gord Nixon, chief executive of Royal Bank of Canada, clearly stated that the RBC Board of Directors’ #1 priority was to provide value to its shareholders. Hmmm … what about providing value for their customers?
Let’s take a look at the profits of Canada’s top 5 banks …
Surprisingly, Business News Network reported (08-26-14) that “The stock market reaction to the latest batch of Canadian bank earnings suggests solid profits aren’t enough to excite investors any more, a sign that lenders must now demonstrate they can deliver sizable growth to extend their rallies”. One can only wonder how much more shareholder value the banks can provide and to the detriment of what for its customers and employees?
Maclean’s Magazine reported (May 28,2014) in their article titled “The fee free-for-all at Canada’s banks” that “Sometime soon, possibly this year, TD and RBC will each see their total assets on their balance sheets cross the $1 trillion threshold, having roughly tripled in size in a decade. (Just four U.S. banks in the giant American economy have crossed into 13-digit territory).”
“Net Income” as stated in their annual reports?
How Do The Big Canadian Banks Earn So Much Profit?
Banks earn most of their money in three ways. First, a large percentage of their revenue comes from accepting deposits from consumers and then lending that money to individuals and businesses at much higher rates than they pay the depositors. Banks also make money by charging a wide variety of fees. And banks earn returns on investments they make. So let’s explore each of these briefly. 1. Deposits … The money you deposit into various accounts is what funds the multitude of loans that banks offer. From mortgages to personal loans, the bank borrows money from your account, lends it to someone else, collects interest on it and then returns a small portion of that interest to you. So how does a bank profit from interest they collect and pay you interest too? Let’s say your savings account of $50,000 pays you 1.25% or $625 annual interest. Your bank turns around and loans out your $50,000 for part of a mortgage, car loan or credit cards debt plus more from other depositors, and in turn earns several thousands of dollars in interest payments because they charge anywhere from 3% to as much as 20% for those loans and credit card debts. You earn $625 and the bank earns thousands.
2. Bank Fees … Banks charge monthly service fees for almost everything; maintaining your account(s), ATM fees, application fees for obtaining loans, penalties for overdrawing, NSF cheques, and on and on. While none of these fees are very large, multiply these fees by 3 to 5 Million customers per bank and the numbers add up amazingly fast.
3. Investments … As most businesses do, banks attempt to maximize profits by making their own investments in hope of earning good returns. However, banks must keep a certain amount of deposits liquid at all times and then primarily invest in loans. Any other venture must be very low-risk.
Are Canadian Banks Greedy?
Greed (and dare we say even corruption) dominates on Wall Street and Bay Street. Not much has been resolved since the crash of 2008 and the taxpayer’s bailout of several large American financial institutions that were “too big to fail”. Many gurus, including Warren Buffett, predict that we can expect another crisis, perhaps even worse than the one we saw in 2008. On the surface, Canadian banks appear to be much safer than their US counterparts. However, our banks benefit from significant privileges, such as deposit insurance and access to Bank of Canada funding … all supported by taxpayer money. Consequently, Ottawa could demand that Canadian banks use their capital to meet their clients’ needs first.
According to a study by Senior Economist David Macdonald, support for Canadian banks reached $114 billion at its peak. “At some point during the crisis, three of Canada’s banks – CIBC, BMO, and Scotiabank – were completely under water, with government support exceeding the market value of the company,” says Macdonald. “Without government support, Canadian banks would have been in serious trouble.” “The federal government claims it was offering the banks ‘liquidity support’ but it looks an awful lot like a bailout to me,” says Macdonald. “Whatever you call it, Canadian government aid for the country’s biggest banks was far more indispensable than the official line would suggest.”
Thirteen giant banks conspired to manipulate the LIBOR rate – a major world interest rate, which is the benchmark interest rate for $360 TRILLION in financial instruments around the world. Hundreds of traders were involved in conspiring to submit false reports to gain profits for their trading positions.
The LIBOR conspiracy led Bloomberg to ask: “If Barclays would lie about its borrowing costs, what else would it lie about? The most important asset any bank has is trust -especially when it comes to the figures on its own financial statements.”
Forbes questions the integrity of the entire banking sector, arguing that the poor financial performance of big banks in recent years clearly shows they are not pursuing the interests of shareholders and customers. “It doesn’t take long to figure out that the banks are being run for the benefit of the executives and traders.”
While the Canadian economy continues to sputter, Canada’s six largest banks handed out $10.3 billion in employee bonuses for 2012, ranging from small sums for retail employees to millions of dollars for top executives. That’s up about 8.7 per cent from the $9.47 billion the banks handed out in 2011.
All banks deal in proprietary products; i.e. their advisors “push” their own products, sometimes without regard for whether that product is suitable for your specific needs or not and whether a better suited product may be available elsewhere. The banks are a big business and their #1 priority is loyalty to their shareholders. The banks are constantly trying to up-sell and cross-sell various products and services to you on a daily basis. Despite the fact that it is illegal, banks are also actively engaged in tied-selling; offering you a lower rate if you give them other accounts or investments; or a better mortgage rate if you move your other business to them.
If you are tired of the various tactics and being nickel and dimed by the banks, perhaps you should take a look at a few Credit Unions in your area. The main difference between banks and credit unions is ownership. Credit unions are not-for-profit organisations owned by their customers (who are called ‘members’) vs the shareholder-first, billion dollar profits of the big banks. Are Credit Unions always better than the banks? Of course not, but they are gaining ground on the banks and are worth a look.
There is no question that Canadian banks play a vital role; locally, provincially, nationally and internationally. Without the banks, our economy could simply not function efficiently or effectively. But are the banks getting too big and simply going too far to gain market share and profits at the expense of their own customers?