The past few years have been hard on Canada’s banks as loan-loss provisions for telecom and power-sector loans mounted and economic crisis in Latin America took their toll.

Less vulnerable to the troubled telecom and power sectors, however, Royal Bank of Canada and Bank of Montreal came through relatively unscathed. And despite big losses in Argentina and just as high exposure to telecom and power loans, Bank of Nova Scotia also sailed along. The hardest hit are CIBC and TD Financial Group.

TD’s problems were much the worst in the fiscal year ended Oct. 31, 2002, with loan-loss provisions soaring to $2.9 billion from $920 million the year before and putting it in a loss position for fiscal 2002. It is dramatically reducing its corporate lending portfolio and restructuring its non-North American discount brokerage and U.S. equity options businesses. TD’s substantial U.S. discount brokerage operations are still profitable even with the depressed equity markets, and it has completed the integration of Canada Trust without significant erosion of the 10-million customer base.

Where TD could have a problem is reducing corporate loans and merchant-banking portfolios. The idea is to confine future loans to companies with whom the bank has an ongoing relationship and sell off the riskier loans. But there aren’t a lot of buyers for risky loans. So far, this has meant that while the loan portfolios are declining, the proportion of non-investment-grade loans is rising: 94% for telecom and cable, excluding regulated telephone, and 70% for power and power generation at end of the second quarter ended April 30, vs 83% and 59%, respectively, three months earlier.

The problems at CIBC are less dramatic but more long-standing. CIBC started reducing its corporate lending portfolio in 1998; it was down by a third by the end of fiscal 2002 and there are plans to cut a further third by 2005.
The merchant-banking portfolio is also being cut by a third by 2005. There has also been aggressive cost-cutting, with full-time employment down by more than 9,000, or 20% as of April 30 from yearend 1998. Yet CIBC’s efficiency ratio (non-interest expenses as a percentage of revenue) remains stubbornly high almost 70% in the second quarter, the highest of the Big Five.

At the end of 2002, CIBC also exited its Amicus electronic business in the U.S., sold U.S. retail brokerage CIBC Oppenheimer and moved its Caribbean operations into a joint venture with Barclays PLC. This leaves no retail operations outside Canada.

CIBC’s strategy is to grow in Canada, focusing on its retail and wealth-management businesses. This will be challenging, says Toronto-based Dominion Bond Rating Service Ltd., as all the banks want to increase their share of retail markets.

One additional wrinkle at CIBC is the higher costs and new competition it faces in the credit card market. Its Aerogold Visa card has the biggest market share, but a new agreement with bankrupt Air Canada increases the fees CIBC must pay. As well, American Express is allowed to offer aeroplan points. CIBC says the new agreement will reduce earnings per share by less than 10¢ a year. That’s not large, given EPS of $2.00 (excluding unusual and non-recurring items) in the first six months of this year, but it could be bigger if it loses market share to American Express.

CIBC’s pluses include the biggest retail brokerage, thanks to its acquisition of the Merrill Lynch Canada Inc. retail network in 2001. It does, however, need to improve service to the network, given its low ratings in Investment Executive’s Brokerage Report Card (May 2003).

Scotiabank is a cheerier story. It has not only returned to previous earnings levels but is aggressively pursuing growth opportunities outside Canada. It has increased its ownership of Mexico’s Grupo Financiero Scotiabank Inverlat to 91% from 45% and has an offer out for the remaining 9%, and has indicated interest in an U.S. acquisition.

One reason for Scotiabank’s success is its cost control, which has been the best of the big banks. Its efficiency ratio was 55.6% as of Apr. 30, vs an average 68.1% for the other four. The bank has also grown at a good pace, with assets up 25% as of April 30 vs Oct. 31, 1998, levels — without the large acquisitions that pushed TD’s assets up 77% and RBC’s up 43%. (BMO’s were up 16% and CIBC’s assets down 1%.) It’s also worth noting that Scotiabank is the only bank with a pension-plan surplus.