TORONTO - Senior Canadian bank executives say it's largely business as usual for lending by their institutions but there's no doubt the country is undergoing a credit crunch as other loan sources evaporate.
As the economy slides deeper into recession, "there's nothing that is out of the ordinary, given where we are in the cycle, with the exception, of course, of the U.S. real estate business," Royal Bank of Canada (TSX:RY) CEO Gordon Nixon told an investor conference.
"To a large degree, notwithstanding what is sometimes reported in the press, it is business as usual," Nixon said Thursday, commenting on perceptions as Finance Minister Jim Flaherty has said credit availability is a crucial issue as he prepares his Jan. 27 budget.
"We're continuing to see business growth in most of those (lending) lines," Nixon said, although Canada's largest bank expects "higher, more normalized" loan losses in 2009 after years of unusually favourable business.
Every bank is scrutinizing all loans more closely than a year ago because of the economic circumstances, declared Ed Clark, chief executive of TD Bank (TSX:TD).
"It doesn't mean, from the public policy debate, that that says we're tightening credit; it just says we're in the business of making loans that get repaid," Clark said.
"What we're not going to do, though, is turn down people who we think could repay us. That's the wrong thing socially, but also from a business point of view, I do want to take advantage of this and take market share."
Clark predicts "a pretty deep downturn" economically but expressed optimism because Canadian banks differ from the U.S. industry in having avoided "the stupid things."
"This is going to be ugly, it's not going to be fun, but it's not going to be life-threatening," Clark told the RBC Capital Markets conference, webcast from the Four Seasons Hotel.
Despite the economic slide, bank earning power remains strong, Bank of Montreal (TSX:BMO) chief executive Bill Downe told the gathering.
The stock-market slump of bank shares has left BMO paying a dividend that yields over eight per cent but Downe said he and the board are "patient" about the payout ratio.
Investment in Canadian retail banking "will be constrained a little bit," Downe said, but BMO will continue to roll out new products.
Although BMO has suffered from exposure to U.S. real estate, "we're going to come out the other side of this at some point, and the banks that have relatively clean balance sheets in that market will be able to grow their business, and very profitably, because I expect that we'll have a lot less competition down at the ground level in 2009 and 2010."
Both Downe and Nixon noted that Canada's banks have fewer large single-loan exposures than in previous downturns.
And the RBC chief emphasized that Canada's housing market "is fundamentally different" from that of the United States, and is supported by low rates of unemployment by historical standards and very low interest rates.
On the credit-crunch issue, the Royal stands ready to lend, "as a good citizen in the Canadian marketplace but also because there are opportunities," Nixon said.
"Banks haven't stopped lending in Canada, but there is no question there is a credit tightening in Canada because you've seen a large percentage of the marketplace, whether it's foreign banks or the automotive leasing companies, et cetera, exit the marketplace. And as a result of that, there'll be opportunities to allocate capital and generate good returns."
There still is heavy demand for consumer loans, said Chris Hodgson, head of retail banking at Bank of Nova Scotia (TSX:BNS), adding that Scotiabank continues to grow its lending to small businesses.
Consumer borrowing is "stronger than we would have expected, given the economic environment," said Hodgson, filling in for CEO Rick Waugh who was otherwise engaged.
"We've been quite focused on our pricing and on moving a number of our clients from variable into fixed" interest rates, he added.
On the other side of the business, more money is coming into deposits despite "very aggressive" interest-rate offers from some of the competition.
Scotiabank has seen a "nominal" uptick in credit card delinquencies, and also in borrower fraud, Hodgson said, and it is watching closely as portions of the real estate market soften, particularly condominiums in Vancouver and Toronto.
BNS has $12 billion in auto loans outstanding, a large majority on vehicles from financially robust Asian carmakers, "and we feel good about that portfolio."
RBC's Nixon noted that the Bank Act bars the chartered banks from auto leasing -- an area where financing has crashed amid the financial woes of the U.S.-based manufacturers.
Nixon reiterated that the Royal, which has a substantial presence in the southeastern United States, is wary about U.S. acquisitions. The ongoing troubles of the American financial system will produce "lots of opportunities" for years to come, he predicted.
Downe said BMO's Chicago-centred Harris Bank sees prospects for small purchases of branches and deposits liquidated by U.S. banking authorities, but "to buy somebody's loan book and have to work it out -- not a very attractive proposition."
Clark, whose acquisitions of Banknorth and Commerce Bank made TD a force in the U.S. Northeast, said he fears to take on the risk of another takeover until it's clear the American market has hit bottom.
After the storm in financial services, "there is no question that regulatory scrutiny will increase, and I think it's appropriate," Nixon said.
More broadly, Nixon foresees an era of "reintermediation," after years in which the banks' traditional business seeped away into investment banks, securitization, hedge funds and private equity.
Clark echoed that expectation, adding that "within the banking system, in both Canada and the United States, there's a reintermediation between weaker banks and stronger banks," and hundreds of billions of dollars of assets need to be refinanced.
"In fact, all banks are having tremendous growth, just because they're filling in for people who have left the market."
