Conservatively-minded Canadian banks have emerged from the financial crisis stronger than most, but they’re not about to change tack now. Finbarr Bermingham reports.
When asking banks active in the trade finance space about the challenges they’re currently facing, two terms are always quick to arise: “eurozone crisis” and “Basel III”. For Canadian banks, however, the terms resonate only as afterthoughts. Banks in Canada are traditionally known to be more conservative than their US or European counterparts and were generally better-equipped to deal with the global downturn.
“The Canadian banks were on more of a solid footing because of some of the early work done on the regulatory side,” says Todd Winterhalt, group vice-president of international business development at Export Development Canada (EDC), the country’s export credit agency. “They felt less need to retrench [at the time of the eurozone crisis] or be protective over capital. Part of that is because there’s natural conservatism in Canada, so the exposure may have been less from the outset.
Essentially, informal capital requirements already existed here. The Office and Superintendent of Financial Institutions (OFSI) was very active and Canadian banks were much less levered than American and European banks.”
The resultant regulation has perpetuated many banks’ stay of absence from overseas markets. But it is not expected to have“material adverse impact” on Canadian banks. In fact, it’s meant that some have been able to steal a march. “Events such as the eurozone crisis, while affecting our European business, provided opportunities for us due to the exit of European banks in Asia and to a lesser extent, Latin America,” Scotiabank’s senior vice-president of trade services & financial institutions Paul LeBlanc tells GTR.
Scotiabank, for instance, has been strengthening its hand in the booming Turkish market, partnering with local players and being heavily involved in the spate of large refinancing transactions they regularly tap the international markets for. But the core business of most Canadian banks remains the sort of “short-term financing of commodities produced and exported by the agribusiness, metals and mining, energy and forestry” sectors in which the country is strongest.
Canadian banks are still more likely to be found participating in large, multinational syndicates than leading them. BMO’s managing director of trade finance Peter Grills explains: “While they have sufficient balance sheets to lead deals, they have a tendency to limit doing so. Canadian banks tend to allocate credit on a selective and strategic basis.”
But the opportunities afforded by the marketplace, coupled with the demands of Canadian corporate clients means that relationships with international banks and businesses abroad are likely to become stronger. As discussed elsewhere in this issue, the country’s overdependence on the US market has helped contribute to sluggish growth (one commentator tells GTR that the downturn in the US market is “the best thing ever to happen” to Canadian exports, since it has forced companies to look elsewhere). The demand from corporates to diversify their trade routes has led to commercial and development banks looking further afield.
EDC facilitated C$85bn of Canadian exports and investments in 2012. It works closely with most of the active players in the domestic trade finance market and has been trying to forge closer links with banks in frontier markets too. Winterhalt explains: “We work with a lot of international banks – we have good relationships with those who are similarly motivated by the Equator Principles, or things of that nature: names like Citi, HSBC and Standard Chartered. But in certain markets, we’re working more and more with regional or local banks. We’re in the process of figuring out Africa, but we partner with banks such as Nedbank and Rand Merchant bank. They have great connectivity to the market.”
But while the Canadian banks, in tandem with its economy, are certainly more outward-looking than they historically were, there’s little chance of them abandoning their conservative principles. As the saying goes: if it’s not broke, don’t fix it.