With the high profile nixing of TD Bank's purchase of First Horizon Bank last month, I thought I'd take a step back and try to visualize the last few decades of Canadian bank expansion outside of the country.
What I've done is go through the annual reports of the big-5 banks at five-year intervals in order to make a few charts out of each bank's total loan data. More specifically, I measure the big bank's foreign presence by comparing their domestic lending to lending made outside of Canada. For those who don't know, the big-5 are made up of Royal Bank, Toronto Dominion, CIBC, Scotiabank, and Bank of Montreal.
My first chart is the total amount of bank loans issued by the big-5, separated into Canadian loans and non-Canadian loans. (This category that also includes bankers' acceptances.)
Unsurprisingly, both domestic and international lending in 2022 were far higher than in 1995, with international loans rising above $1 trillion in 2022. What pops out is that while lending within Canada has advanced over all periods, there was a decline in big-5 international lending between 2000 to 2005.
In the chart below I've used a logarithmic scale instead of an arithmetic scale in order to better visualize the 2005 blip.
What happened during that period? Canadian banks were damaged by loans they had made in the late 1990s tech craze that soured in 2001 and 2002, particularly in the U.S. As a result of these setbacks, the big banks dialed back their willingness to engage in risk and that's probably why we see a pullback in their foreign lending portfolios.
The next chart shows international lending as a percentage of all big-5 lending.
This chart further delineates the severity of the 2000-2005 episode. In 2000, international loans constituted more than 25% of the big banks' portfolios of loans. After getting stung in the early 2000s, this proportion plummeted to 18%. It would took twenty years for Canadian banks to rebuild the international side of their loan portfolios back to 25%. By 2022, international loans constituted over 30% of all Canadian bank loans, providing an answer to the title of my blog post: the foreign expansion of Canadian banks is still advancing, and is at its highest peak going back to 1995.
One thing I find interesting is that the big-5 did not contract their foreign loans after the 2008 credit crisis. I suspect this is due to the fact that most Canadian banks that operate internationally tend to focus on loans to foreign businesses and governments, not foreign individuals or consumers, and since much of the fallout in 2008 was on the U.S. residential side of things, Canadian banks escaped mostly unscathed.
In the next chart, I've broken up foreign lending by bank.
As you can see, TD Bank was the biggest foreign lender in both 2015 and 2022, followed by Scotiabank, which had historically held the crown over the entire 1995-2022 period. Apart from the recent nixing of TD's attempted purchase of First Horizon Bank, TD has executed a very successful push into the U.S. over the last two decades starting with its acquisition of Banknorth in 2005, and now sits as the U.S.'s tenth largest bank.
As for Royal Bank, while it may be Canada's most valuable company by market capitalization, in 2022 it was only a middling foreign lender, hitting the same level of foreign loans as the much smaller Bank of Montreal. The laggard in the group is CIBC. But CIBC was also one of the fastest growers between 2015 and 2022, albeit from a very low base, no doubt helped by its 2016 acquisition of US-based PrivateBank.
As before, here's the same chart as above, but using a logarithmic scale.
A logarithmic scale gives move insight into how leadership in foreign lending has changed since 1995. Of the big five banks, TD was the smallest foreign lender in 1995. Now it leads the pack. As for CIBC, it was one of Canada's leading foreign lenders in 1995, but between 2000-2005 it went cold turkey. Long-time Canadian bank watchers will recall that of all Canadian banks, CIBC was the most aggressive in pushing into the U.S. in the late 1990s, particularly on the investment banking side with CIBC World Markets. But it got caught up in notable failures like Enron and, chastened, retrenched back to the low-risk world of Canadian retail banking.
For my last chart, here is a bank-by-bank breakdown of international lending as a total of all bank lending.
You can see that Canada's smallest domestic lender, the Bank of Montreal, has spent much of the last thirty or so years as Canada's most international bank, measured in terms of international lending as a proportion of all lending. This is most likely due Bank of Montreal's long and successful presence in the U.S midwest, going back the early 1980s when it bought Harris Bank. Scotiabank has also been a leader in international lending, focusing mostly on Mexico and Latin America.
Royal Bank's lack of focus on international lending can probably be partly blamed on its lacklustre experience with Centura Bank, a franchise it bought back in 2001 and expanded over the next few years with additional acquisitions, renaming it RBC Bank. But Royal's RBC effort never worked out and Royal sold it in 2012.
What to expect in the future?
Having locked up most of the Canadian banking market, it's all but inevitable that Canada's big banks will continue to push into foreign markets, especially the highly-fragmented U.S. banking market. There will be failures such as the rotten loans made during the late 90s bubble, but as before Canadian banks will learn from these. While TD's acquisition of First Horizon was cancelled, Bank of Montreal's purchase of Bank of the West last year went through, which moves it from 23rd to 13th on the list of biggest U.S banks.
And there is a giant waiting on the sidelines. Having relaunched its push into the U.S. with its acquisition of City National Bank in 2015, Royal Bank is probably due for another big U.S. takeover.
To conclude, by 2025 Canada's big-5 banks will likely be even more reliant on international loans, with perhaps as much as as 34-35% of all their lending being to non-Canadian sources.
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