| Financial Services: Going for Growth |
 By Jennifer LeClaire
The financial services sector is a key foundation of modern knowledge-based economies. Canada’s financial sector constitutes one of the largest sectors of the Canadian economy. The industry employs more than 750,000 Canadians directly, representing over 4 percent of total employment, at wages and salaries well above the national average. It also accounts for more than 6 percent of national GDP, up from about 4 percent of national GDP 20 years ago. More importantly, the sector has evolved substantially over these past two decades and today comprises institutions that are dynamic, innovative, and globally focused. On this latter point, Canadian financial institutions have made over $60 billion in acquisitions outside Canada since 2000.
Many of these institutions have expanded beyond their core activities to offer their customers a wide range of financial services under one roof. This has not only increased competition, with obvious benefits for consumers, but has also improved the competitiveness of these Canadian financial institutions. At the same time, the legislative and regulatory environment has been reformed to make it easier for domestic and foreign financial institutions to enter the Canadian market. Finally, consolidation among Canada’s stock exchanges, alongside other changes, has increased the efficiency of capital markets.
Banks
Banks represent about 60 percent of total financial system assets. Among banks, the “big five” (Royal Bank of Canada, TD Canada Trust, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce) hold more than 85 percent of total bank assets. Foreign banks’ presence, while increasing, remains limited to less than 10 percent of bank assets. The larger banks also lead securities underwriting and merchant banking, and are among the largest asset managers.
Changes to the Bank Act in 2001 opened up new opportunities for foreign banks to operate in Canada. The changes allowed foreign-owned banks to establish direct branches in Canada, rather than restricting them to forming subsidiary companies as in the past. Most recently, as part of the Bank Act changes passed in 2007, the government streamlined the foreign bank entry regime, making it easier for foreign banks to enter the Canadian marketplace. Today, foreign banks are prominent players in credit cards, small business financing, and virtual banking. The creation of a size-based ownership regime encouraged the startup of new domestic banks, offering more choice to consumers. Today, Canada has new banks that are owned by large national retailers (grocery stores as well as sellers of housewares and automotive products), a network of insurance brokers, credit unions, a chain of auto dealers, a life insurance company, and others.
Canada’s financial services sector includes 73 banks — 20 domestic banks, 24 foreign bank subsidiaries, and 29 foreign bank branches — employing about 250,000 people. Canada is also home to more than 1,000 credit unions and caisses populaires (the French-Canadian version of a credit union), as well as approximately 35 deposit-accepting trust companies.
All of this has led to a massive change in banking, with an array of new entrants and brand new financial institutions that most couldn’t even imagine 10 or 15 years ago, to the benefit of consumers. According to Nancy Hughes Anthony, president of the Canadian Bankers Association, “Last year, banks helped nearly 1.2 million Canadian entrepreneurs turn their ideas into reality with more than $81 billion in financing. Our banking system is the envy of the world. We are respected globally, and we have a reputation that is second to none.” This sentiment is echoed by the IMF, which just recently commented positively on the soundness of Canadian banks, concluding that they are better able to weather financial challenges than are banks in other countries.
Insurance Companies
The Canadian insurance industry is stable, profitable, and well capitalized. The life and health (L&H) insurance sector is dominated by three large domestic groups, which accounted for 84 percent of the assets at the end of 2006. Both life and P&C insurers have been allowed to expand into other financial activities, through separately held subsidiaries, including banking and brokerage. Policy does not permit the consolidation of the largest life insurers, or their merger with the largest banks.
Canadian life insurers are increasingly global and earn more than 50 percent of their revenue outside Canada. The P&C insurance sector is more fragmented, with an important role for foreign insurers and those owned by provincial governments. Capital ratios comfortably exceed regulatory targets. Investment practices are conservative, with about 60 percent of assets held in investment grade bonds, and the geographic composition of assets roughly matching that of liabilities.
Investments and Capital Markets
Canada’s sophisticated securities industry has benefited from particularly favorable conditions in recent years. Total revenue amounted to C$15.9 billion in 2006, up 17.8 percent over 2005, while operating profits rose by one third. The mutual fund industry is highly developed, with a majority of assets held in tax-deferred registered savings accounts. Among the 10 largest mutual fund managers, four are part of large Canadian banking groups, and three are part of financial groups in the United States and United Kingdom. Sound fiscal policy has resulted in declining government (and more recently provincial) debt issuance, but has been more than offset by corporate bond issuance. Trading volumes, merger and acquisition (M&A) activity, and common equity issuance reached record levels in recent years. At end of 2006, the Toronto Stock Exchange (TSX) had a domestic market capitalization of C$1.98 trillion and ranked seventh among stock exchanges globally.
Additionally, hedge fund activities in Canada are rapidly expanding. Assets managed by domestic hedge funds were estimated at C$30 billion in early 2007, up from about C$4 billion in 2001. Even so, the hedge fund industry remains small by international standards, with less than 10 percent of the funds managing assets in excess of C$100 million. Canada-based hedge funds are primarily focused on long/short equity strategies. The recent acceleration in the development of hedge fund activities follows years when the growth of the industry was impaired by two prominent cases of fraud, but investor protection is improving, and a “comprehensive registration rule” has been proposed.
Hubs of Activity
Whether foreign or domestic, Canada’s growth in the financial services sector has been spread across the nation. While Toronto and Calgary are leading the way, Winnipeg and Halifax are also taking the financial services industry by storm.
Toronto, Ontario: Toronto is the hub of North America’s largest consumer marketplace and a major gateway to the United States and Europe. More than 180 million customers live and work within a day’s drive or a two-hour flight of Toronto — including 125 million Americans or roughly 40 percent of the U.S. population. The City of Toronto is also the heart of the Toronto region with a population of 5.3 million. In North America it ranks alongside economic powerhouses such as Chicago and New York.
The Toronto region is the business and financial capital of Canada. It has the third-largest financial services employment concentration in North America, after New York City and Chicago. In 2007, approximately 225,000 individuals were employed in this sector. Profitable and growing, Toronto’s financial services sector added nearly 50,000 jobs over the past 10 years — a total growth of 41 percent. The sector is important to the local economy, leading all other service-producing sectors by contributing 17 percent to Toronto’s Gross Municipal Product.
The city is home to all but one of Canada’s national banks, 50 foreign bank subsidiaries and branches, and 115 securities firms. It is home to two of the world’s largest life and health insurance companies based on market capitalization, along with 61 mutual funds companies, 58 pension fund managers, and five of Canada’s largest pension plans with combined assets in excess of $250 billion. Toronto is also home to the TSX Group — the third-largest equity exchange in North America and ranked eighth internationally, based on market capitalization. With 1,200 or close to 60 percent of the world’s global mining companies, TSX Group is a leader in global mining finance.
A deep pool of well-educated, business-savvy individuals with international ties gives Toronto a financial services industry edge. More than 70 percent of the financial services sector’s employees hold postsecondary designations — well ahead of the regional industry average. Toronto represents the second-largest CFA® Society after New York, in addition to a significant concentration of accounting and actuarial talent. Approximately 50,000 new immigrants per year provide the city with a rich diversity of 100 spoken languages, broad cultural knowledge, international business connections, and an understanding of foreign markets — a distinct advantage for growing global players. The city’s financial sector is supported by three world-renowned universities, five dynamic colleges, and the requisite industry-specific training organizations to ensure that its financial-sector employees are the best and brightest and that the city remains an attractive location for global financial institutions.
Calgary, Alberta: Calgary’s business and financial services industry is another national leader, with more than 19,000 new jobs created over the past 10 years. According to the City of Calgary, the business and financial services sector there accounts for 10.4 percent of total employment. Over 11,500 companies operate within this sector in Calgary.
The growth drivers include a booming population, wealthy economic activity, and business and personal investment. Calgary’s flourishing energy sector is also driving the growth of this thriving industry, according to a recent report entitled “Calgary: Supporting Growth.” Calgary’s oil and gas industry now produces more than $100 billion in annual revenue and is among the nation’s most active in financing and related activities. The continuing economic growth and the concentration of corporate headquarters in Calgary and Alberta is fueling this dynamic sector and providing further opportunities as the region’s economy continues to expand.
“The complexity and diversity of the firms in this sector contribute to the activity within Calgary and illustrate the growing importance of these services to the economy,” says Adam Legge, director of research and business information at Calgary Economic Development. Calgary Economic Development found that employment growth in the sector averaged 3.8 percent a year between 1996 and 2005, and totaled more than 35 percent over the period. In fact, nearly 54 percent of the new financial and business services jobs created in Alberta over the past decade have been in Calgary.
Halifax, Nova Scotia: Nova Scotia has long been Atlantic Canada’s financial services hub. Now, leading hedge fund administration and reinsurance firms are tapping into its capital city of Halifax to service their global client base. “We see Halifax as a strategic center to develop our Canadian operations,” says William Keunen, global director of Citco Fund Services. “With Nova Scotia’s education infrastructure and competitive advantages, we know it is the right place for our new office and training center.”
More than 6,000 financial services and insurance firms are operating in Nova Scotia, employing approximately 22,000 people. The sector has seen unprecedented growth since 2006, with major firms like Butterfield Bank, Captive Solutions Group of Marsh, Citco Group, Flagstone Re, Icelandic Bank, Meridian Fund Services, Olympia Capital, and West End Capital Management establishing strategic business operations in Halifax’s downtown core.
“The financial services industry is a rapidly expanding sector in Nova Scotia,” says Richard Hurlburt, Minister of Economic Development. “Citco’s new Halifax office is exactly what the province needs to remain competitive and help combat out-migration.”
Winnipeg, Manitoba: Manitoba’s financial services sector employs about 20,000 people, according to Manitoba Competitiveness, Training and Trade. The most dominant activities there are consumer, commercial, and investment banking; vehicle and equipment leasing; and wealth management.
All major Canadian chartered banks call Manitoba home, as well as a few smaller regional banks and three foreign banks. Each offers about 45 branches. The province has also attracted 55 credit unions and six caisses populaires, which operate about 200 branches throughout the province.
<img src="images/indent.gif" width="11" height="7">Manitoba’s life insurance companies are major participants in the national financial services industry. The largest player is Great West Life Assurance Company, which is also the largest insurer in Canada. About 2,800 of Great West Life’s 12,000 employees are located in Manitoba. There are also nine property and casualty insurance firms based there.
In Sum
Canada’s financial system appears stable, with a low risk of systemic problems. Financial stability is supported by sound macroeconomic policies, a well-designed crisis management framework, and advanced prudential regulation and supervision. |
