Deposit-accepting intermediaries: Activities and economic performance

Smaller interest rate spreads and a decline in corporate business tempered the growth of services produced by deposit-accepting intermediaries last year, despite higher volumes of consumer loans and deposits.

The value of services produced by these intermediaries (chartered banks, trust companies, caisses populaires and credit unions) rose 2.4% to $56.9 billion. This was less than half the annual average growth rate of 5.1% during the previous seven years.

Strong growth in treasury and investment services was offset by declines in corporate and institutional finance and fiduciary services.

Deposit-accepting intermediaries continued to consolidate their corporate loan portfolios and shift fiduciary services to larger wealth management portfolios, which included broader investment services.

Net interest income grew a mere 1.3% to $30.4 billion in 2004. Volume growth was strong across most business segments. However, the continuing low interest rate spreads between interest charged to lenders and paid to depositors hindered revenues.

Non-interest income rose 3.7% to $26.5 billion, owing entirely to retail and treasury and investment banking. Self-directed and full service brokerage and mutual fund business experienced strong growth, both due to higher volumes and improved market conditions. The improvement in retail banking was due partly to revenues gained from popular electronic retail banking services.

During 2004, deposit accepting intermediaries slashed their provision for credit losses by 51.1% to $1.5 billion. Provisions for credit losses reflect changes that management expects in losses from impaired loans and other credit instruments. This reduction can be attributed to overall improvement in the credit quality of their portfolios, in addition to reduction in exposure to problem sectors.

Retail banking volume growth tempered by low interest rates

Services in the retail banking segment rose only 1.7% to $34.8 billion in 2004. These retail services accounted for 61.2% of the value of services produced, the largest income-generating activity for deposit-accepting intermediaries.

Low interest rates continued to create high demand for personal loans and residential mortgages. Again in 2004, the strong Canadian housing market was a driver of increased mortgage volumes. Residential mortgages remained attractive and represented relatively lower risk activities compared to the instability in corporate lending since 2000.

However, these factors were partially offset by competitive pricing in the industry, and a narrowing of spreads caused by the low interest rate environment.

As retail banking historically has been largely interest-based, net interest income continued to contribute the lion's share (74.0%) of the value of services produced by retail banking.

Rebound in treasury and investment activities

The value of treasury and investment banking services rebounded 9.2% to $11.0 billion last year, reversing two consecutive annual decreases. The gain put this segment at its highest level since the survey began in 1996.

Net interest income from these operations increased a strong 15.5% to $1.2 billion, which was still far below the peak of $1.9 billion in 2002. Non-interest income rose 8.5% to $9.9 billion. It represented 89.5% of the services provided by this portfolio.

Both self-directed brokerage and asset management business also contributed to this growth, reversing the downturn after 2000. Strong mutual fund sales and a positive RRSP season, along with improved market appreciation, helped to drive this growth. RRSP contributions totalled nearly $28.8 billion, up 4.5% from 2003.

Many deposit-accepting intermediaries continued the trend since 2001 of aligning treasury and investment banking with client-based wealth management services.

Moderate growth in electronic financial services

The electronic financial services portfolio produced services worth $5.9 billion, a 3.0% increase over 2003. A volatile segment, electronic financial services growth was below its average annual growth during the last seven years.

Strong expansion in net interest income, which rose 17.3%, was offset by a 1.7% decline in non-interest income. Although growth in balances and volume of credit card business occurred last year, claims on loyalty reward programs mitigated these gains.

Non-interest related activities accounted for the vast majority (71.4%) of the value of services produced in this portfolio in 2004. However, this was down from the peak of 89.5% in 1999.

Closely aligned with retail banking, electronic financial services are the third largest contributor to income. In 2004, they accounted for 10.3% of total services and have remained stable over the last three years at about 10%.

This portfolio serves as a means of delivery to extend the reach of other financial products and services.

Decline in corporate and institutional finance

The value of services produced by corporate and institutional finance activities declined 2.5% to $3.7 billion in 2004. The corporate and institutional finance segment produced 6.5% of the total value of services.

Net interest income rose 4.3% to 1.7 billion in 2004. Increased corporate deposits were partially offset by a decrease in corporate loan volumes.

Non-interest income declined 7.7% from $2.1 billion in 2003. The decline was exaggerated by the historically high level of non-interest income reached in 2003. From 2002 to 2004, non-interest income actually increased from $1.7 billion to $2.0 billion. Lower lending fees on smaller loan portfolios occurred as deposit-accepting intermediaries continued to take a more selective approach to corporate lending.

The corporate and institutional finance portfolio generated more of its value from non-interest income; however, it declined to 53.5% from the record level of 56.6% in 2003.

Fiduciary services down

Fiduciary services fell 13.9% to $1.5 billion in 2004, as fiduciary services continue to be incorporated under the treasury and investment portfolio.

Increased revenues from wealth management, retirement and estate planning needs of an aging population, as well as improved market conditions, were widely reported for 2004.

Fiduciary services traditionally represent a small portion, only 2.7% in 2004, of the overall value of services produced by deposit-accepting intermediaries.

Definitions, data sources and methods: survey number 2513.

For more information or to enquire about the concepts, methods or data quality of this release, contact Sam Neofotistos (613-951-4875; sam.neofotistos@statcan.gc.ca), Industrial Organization and Finance Division.