Federal State-Funded Educational Institution of Higher Education
“Financial University under the Government of the Russian Federation”
Essay on the topic:
«Comparison of Royal Bank of Canada and Toronto Dominion Bank as two major banks of
Canada»
Nazarov Igor
International Finance Faculty
Group IFF3-3k
Bachelor, full-time study
Educational discipline : International Banking
Professor : Fedyunin A. S.
Moscow 2020
Introduction
Nowadays researching of banking system is one of the relevant and vital topics of world
economy. Plenty of modern businessmen devoted themselves to the issue or research
and development of functioning of the banks and creating the best conditions for its
successful work.
Legislatures pay lots of attention to elaboration of new concepts for work in banking
countries. Still, banking systems of developing countries have lots of controversies and
disputes and its insufficiency led world economy to crisis. So, what is the banking
system?
Banking system is a set of different types of national banks and credit institutions
operating under the general monetary mechanism. It includes the Central Bank, a
network of commercial banks and other credit and settlement centers. The Central Bank
conducts state emission and currency policies, is the core of the reserve system.
Commercial banks carry out all types of banking operations.
Banking system has its structure. When we talk about countries with developed market
economy, these countries have two-level banking systems. The upper level is
implemented as central bank. Commercial banks act as lower level, divided on
universal and specialized banks (investment banks, savings banks, mortgage banks,
consumer credit banks, industrial banks, internal production banks), and non-bank
financial institutions (investment companies, investment funds, insurance companies,
pension funds, pawnshops, trust companies, etc., etc.).
Central bank acts intermediary between the government and the rest part of economy
through banks. It is called upon to control cash and credit inflows and outflows with
instruments, which are legally accepted to use as such an institution.
Different countries call it differently: Federal Reserve System USA, People’s Bank of
China, Bank of England, Central Bank of Russian Federation and so on.
The Central Bank is a regulatory body combining the features of a bank and a
government agency.
The central bank is not always owned by the state. But even if the state does not
formally own its capital or partially owns, the central bank performs the functions of a
state body.
According to its position in the credit system, the central bank plays the role of a “bank
of banks”, that is, it holds the required reserves and available funds of commercial
banks and other institutions, provides them with loans, acts as a “lender of last resort”,
and organizes a national system of offsetting monetary obligations either directly
through their branches, or through special clearing houses.
Meanwhile, as every body it has its own functions as
- Emission of banknotes
- pursuing monetary policy;
- refinancing of credit and banking institutions;
- functions of a government financial agent.
In my work I would like to research the Canadian Banking system. In my opinion, this
is the most interesting for investigations and the most stable system among all overs.
Besides, it will be provided analysis of two the most famous and largest banks of
Canada with its own history.
Banking system of Canada
Banking system of Canada considered is one of the safest systems in the world. Famous
and undisputed economists and journalists always put Canadian banks in top 15 of the
safest all over the world. Both of these banks I would like to observe and describe in
this work. But firstly, it is necessary to review Canadian banking system as a whole.
To start with, in 1792 the group of businessmen made an attempt to create a bank in
Canada. But this try was not successful. But in 1817 nine Montreal traders found the
Bank of Montreal (Montreal Bank – initial name). This bank is the oldest of the existing
Canadian banks. Other banks soon followed and began business, and after a lengthy
approval process began unregulated banking business.
There were created plenty of bank which led their experience later. As currency they
used their own issued bank notes. But years later it caused failure and people began to
doubt in stability of bank note.
That is why government introduced The Provincial Notes Act in 1866 allowed federal
and provincial governments to begin to introduce their own notes.
By 1867, there were already 35 banks in British North America. Initially, banks were
registered as legal entities in the provinces. With the creation of the confederation in
1867, the new federal government received exclusive jurisdiction in all matters related
to money and banking. The final version of the Banking Law was adopted in 1871. The
Banking Law was reviewed every ten years. This law meant to bring all commercial
banks under common control and regulation.
Reviewed in 1980 this law admitted existence of 2 types of banks. It was decided to
divide banks by the lists. The list A included 11 banks, functioning before reviewing of
the law in 1980. The list B contained either foreign branches of banks or banks owned
by Canadians, but one of owners owned more than 10% of issued shares. Shares of list
A banks can not be controlled by limited number of people. Registered commercial
banks have almost 7 thousand branches, serving all the territories.
The banking rule explains procedure for creating a bank, necessary capital, acceptable
qualifications of directors, their responsibilities and duties. Also, this rule provides
information which financial reports the bank should present to its shareholders and the
government, how mergers and associations are carried out and so on.
To follow monetary policy, the law obliges commercial banks to keep primary and
secondary reserves in the Bank of Canada, which is owned by the state, but actually
banks do not receive profit as interest on primary reserves. The Bank of Canada is a
`bank of banks` because it controls the clearing system through which licensed
commercial banks and other financial institutions carry out mutual settlements. The
Minister of Finance regularly monitors the activities of banks.
Each bank should provide a chief executive director, who is responsible directly to the
board of directors. Shares of banks from list A are sold and bought on stock exchanges.
Canadian banks enable people 3 main types of deposit accounts are term deposits,
checking accounts and saving accounts. Also, each deposit in Canadian dollars should
be ensured by 60 thousand dollars for 1 depositor in each bank.
Besides, Canadian banks are rather active abroad on foreign markets. In 1986 45 per
cent of all assets were currency assets. Significant part of banks’ revenue is enabled by
international corporations’ accounts.
The level of interest rate depends on market factors, which affect on supply and demand
of money. Significant influence is done by federal government, which acts its monetary
policy through Bank of Canada (agent), taking into account international conditions
and internal aims.
Talking abouts commercial banks in Canada, it is generally referred in two categories:
- the five large big banks (Royal Bank of Canada, Toronto-Dominion Bank, Bank of
Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce)
- smaller second-tier banks (Canadian Western Bank, National Bank of Canada and so
on)
The smaller second-tier banks more are concentrated on domestic market and operate
with Canada, while Big Five organize its activity on multinational arenas. In other
words, it is called the giants of Canadian banking system.
Canadian retail operations of the Big Five comprise other activities that do not need to
be operated from a regulated bank. These other activities include mutual funds,
insurance, credit cards, and brokerage activities. In addition, they have large
international subsidiaries. The Canadian banking operations of the Big Five are largely
conducted out of each parent company, unlike U.S. banks that use a holding company
structure to hold their primary retail banking subsidiaries.
Talking about Canadian banking system, it is obligatory to mention Bank of Canada
which is, as I wrote before, is the Central Bank of Canada. Like a Russian Central Bank,
Canadian one does not take deposits from private individuals and does not compete
with legal commercial banks in field of commercial bank operations. But it establishes
the general amount of cash reserves that could be used by commercial banks as a group.
Each commercial bank should keep with the Bank of Canada a certain average amount
of cash reserves by the way of deposits in Bank of Canada banknotes.
Bank of Canada can provide loans or advances to commercial banks by term of mo
more than 6 months secured by definite type of securities. The discount rate of the bank
is the minimum rate, according to which the Bank of Canada is ready to provide loans
or loans.
The Bank of Canada may also require licensed commercial banks to hold a second
reserve, the size of which can be changed by the bank within certain limits. The second
reserve extends to cash reserve surpluses in relation to the authorized capital, treasury
bills and one-day loans to dealer investors.
It is essential to point out other body of Canadian banking system. The Farm Credit
Corporation was established in 1959 to provide long-term mortgage loans to farmers.
The Canadian Mortgage and Housing Corporation (formerly the Central Mortgage and
Housing Corporation) was registered as a joint stock company in 1945 and performs
two tasks: mortgage insurance, provided by certain lenders and the provision of direct
mortgage loans The Federal Business Development Bank (FBDB) was established in
1975 to provide financial and consulting services for the management of small and
medium-sized enterprises. The Bank is the successor to the Industrial Development
Bank, established in 1944 as a branch of the Bank of Canada.
Besides as I wrote earlier, Canadian government accepts foreign banks to develop its
activity. But criteria of government rather strict and obligatory to execute. You can find
some of them below:
1. It is supposed to be a foreign bank
2. It has to have assets, experience and revenue as well enough for enabling
functioning of the branches in Canada
3. Its shares as a rule should be owned by huge group of shareholders
4. It must be under control and has a good financial position
5. Bank must provide any evidence of its ability to contribute to the development
of competitive banking in Canada.
6. It should be ready to submit the letter of comfort, confirming bank’s ability to be
responsible for branch’s activity
Regarding the total assets of branches foreign banks operating in dominion, there is
a restriction: it should be 8% of all national assets of these banks. Representative
offices in. banks are subject to registration.
Royal Bank of Canada
Royal Bank of Canada is the biggest Canadian bank and the biggest Canadian company
as well.
The bank was founded in 1864 in Halifax under the name Merchants Bank of Halifax
with a group of eight entrepreneurs. Five years later, in 1869, the bank received a
federal charter and issued shares. In the early 1870s, it expanded its activities to other
coastal provinces, but further development slowed down due to a decline in the
shipbuilding industry. In 1882, the first branch was opened outside of Canada, in the
city of Hamilton in Bermuda; although it closed already in 1889, the orientation towards
the Caribbean region still persists. By 1896, the bank's assets reached $ 10 million.
Branches were opened in British Columbia in 1897–98, and in New York and Havana
in 1899. In subsequent years, the presence in Cuba increased: in 1903, the Banco de
Oriente de Santiago de Cuba was acquired, in 1904, the Banco del Commercio de
Havana. By the mid-1920s, with 65 branches, the Canadian bank had become Cuba's
largest bank.
In 1901, the bank was renamed Royal Bank of Canada (RBC), and in 1907 the central
office moved from Halifax to Montreal, which was caused by the growing importance
of Montreal as a financial center and the relative decline in maritime trade. The
following year, the number of branches reached 109, and the size of assets exceeded
$ 50 million. In 1910, there was a merger with Union Bank of Halifax, a Canadian bank
with a 54-year history. The takeover of Traders Bank of Canada and Bank of British
Honduras in 1912 doubled the number of branches and assets.
Quebec Bank was bought in 1917, Northern Crown Bank was bought in 1918, and by
the end of World War I, Royal Bank of Canada became Canada's second largest bank
with 540 branches and assets of $ 422 million, and also formed a foreign trade division.
In 1925, Union Bank of Canada and Bank of Central and South America were bought.
The Great Depression affected Royal Bank of Canada relatively little, as did other
major Canadian banks, although it could not have done without closing branches and
cutting staff.
In 1939, RBC assets crossed the $ 1 billion mark. During World War II, the bank's
business flourished in North America, but most of its European branches were closed.
After the war, the bank began financing the development of Canadian oil and gas; for
this, a special unit was opened in Calgary in 1951. In the same year, the Royal Bank of
Canada Trust Company was founded in New York.
When Fidel came to power in Cuba in 1959, the banking system was nationalized.
Although Canadian banks Royal Bank of Canada and Bank of Nova Scotia were
allowed to continue, all accounts of Cuban companies were transferred to a nationalized
banking system; Due to the loss of business in December 1960, Cuban RBC assets were
sold to the National Bank of Cuba.
In 1961, the first computer was installed (also the first in a Canadian bank). In 1962,
the bank logo was changed, on it appeared a lion, a crown and the globe. Later that year,
the headquarters moved to the new 42-story skyscraper Place Ville Marie.
In the early 1970s, RBC, together with five other banks, founded the Orion banking
company in London to enter the financial services market. Since 1981, Orion has
become a division of Royal Bank of Canada, which by this time has become the fourth
largest bank in North America, with assets of $ 53 billion.
In 1987, Royal Bank of Canada entered the investment services market by acquiring
Dominion Securities, a large Canadian brokerage company. Continuing to expand the
scope of its activities, in 1993 the bank bought the insurance company Voyageur Travel
Insurance Ltd. and an asset management company, Royal Trustco (in 1995, the Austrian
branch of Royal Trustco was sold to Anglo Irish). In 2000, credit / debit card systems
were merged with BMO Bank of Montreal in the form of Moneris Solutions.
Royal Bank of Canada is a global financial conglomerate consisting of the following
units:
1.
2.
3.
4.
5.
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Toronto-Dominion Bank
Toronto-Dominion Bank is the second largest bank in Canada. It provides banking,
insurance and investment services.
Toronto-Dominion Bank was formed in 1955 as a result of the merger of Bank of
Toronto and Dominion Bank.
Bank of Toronto was founded in 1855 to finance the milling industry of the Canadian
province of Ontario. In 1869, Dominion Bank was founded in the same province,
mainly engaged in investing in railways and construction.
At the time of the merger, Toronto-Dominion Bank had 450 branches (including in
London and New York), assets amounted to $ 1.1 billion, loans issued - $ 479 million.
In 1967, the bank's headquarters was moved to a 56-storey building Toronto-Dominion
Bank Tower building. In the 1970s, the bank began to expand its international presence
- branches were opened in Bangkok, Frankfurt, Beirut and other cities.
In 1987, Canada passed a law allowing banks to own investment companies. TorontoDominion Bank took advantage of this and founded the investment company TD
Securities Inc. He also became one of the first Canadian banks with his mutual funds,
by 1995 he already had about 50 of them. In addition, since 1995, the bank also began
to engage in insurance activities. Since 1996, after the acquisition of Waterhouse
Investor Services, a New York-based investment company, Toronto-Dominion Bank
shares have been listed on the New York Stock Exchange. In 1997, several brokerage
houses were absorbed in the USA, Australia, Great Britain and Asia.
In 2000, Canadian financial company CT Financial Services Inc. was bought for $ 8
billion. (Canada Trust), which was a subsidiary of Imasco Limited (controlled by
British American Tobacco). This transaction allowed Toronto-Dominion Bank to take
third place among Canadian banks.
Talking about branches of this bank, we consider 4 types:
1. Canadian Retail. Finance services used by 15 million clients in Canada; 1165
branches; 3150 ATM machines.
2. U.S. Retail. Here is volume of client is lower. It consists of 8 million people in
USA with 1230 branches.
3. Wholesale Banking. Here is considered financial services to the governments and
financial institutions.
4. Corporate. Corporate advisory services
The amount of deposits in the bank for 2016 amounted to C $ 774 billion, the volume
of loans issued - C $ 586 billion. The bank has about 2500 branches and 5300 ATMs,
the number of employees in full-time equivalent is 81 thousand.
In 2015, a subsidiary of TD Asset Management took 76th place among the 500 largest
investment companies in the world in terms of assets under management ($ 217 billion).
Toronto-Dominion Bank ranked 67th in the Forbes Global 2000 list of largest public
companies in the world in 2016, including 284th by turnover, 74th by net profit, 35th
by assets and 92nd by market capitalization.
That is remarkable – almost 10 per cent of all shares owned by Royal Bank of Canada
(the organization we observed above).
Financial analysis
So, lower I present the most important indicators of financial analysis of the bank. I
would like to describe each of them and observe the final conclusion which bank is
financially more effective.
Firstly, it is necessary to define each indicator.
1. Current ratio is one of the liquidities ratios. In easy words, it measures the ability
of the company to pay its short-term liabilities. It is calculated as Current Assets
divided by Current Liabilities. This ratio is taken into account by creditors in
order to observe level of risk to give a loan.
As higher the coefficient as higher liquidity of company’s assets. Optimal rate of
this ratio is 2 and more. But for some fields 1.5 is also acceptable.
Coefficient equaled to less than 1 indicates the probable difficulties with
repaying its current obligations.
2. Debt-to-equity ratio or financial leverage is ratio of borrowed and own capital of
the organization. This indicator shows financial independence of the company
and missed opportunities to use financial leverage to improve its ROE.
Normal value for this ratio is 1. For big companies it could be achieved to 2.
In case of big values company loses its financial independence and can be rather
instable. By the way, too low ratio indicates missed opportunity to use financial
leverage as I wrote before.
3. Return on Investment (ROI). This indicator emphasizes the level of yield or
deficit of the company taking into account the total sum of all investments in this
business.
Lots of decisions are done when ROI is calculated (for example,
buying an asset or effectiveness of advertising or acquisition of securities on
Stock Exchange). It is calculated according to the formula: Return on Investment
(ROI) = (Gains from Investment – Cost of Investment) / Cost of Investment. As
higher it is as better for the company.
4. Return on asset (ROA). This indicator shows how effectively company uses its
assets to gain profit. Appropriate value for banks would be equal to 1. But
generally speaking, as higher this indicator as better for business. But too
enormous value for a particular field means company does not invest money in
updating assets, which can negatively affect on long-term prospects and
opportunities of the company. ROA calculated as Net Income divided by End of
Period Assets.
5. Return on Equity (ROE). It reflects ratio of Net income to the companies own
Equity. ROE mostly used by investors and it helps to estimate how effectively
company uses its capital.
Obviously, as higher this indicator as it is better.
2020-01-31 2019-01-31 2018-01-31
Royal Bank of Canada
Current Ratio
0.91
0.93
0.89
Debt/equity ratio (financial leverage)
0.12
0.13
0.13
ROI
14.28%
13.95%
13.61%
ROA
0.93%
0.93%
0.92%
ROE
15.92%
15.58%
15.33%
Analyzing RBC, I would like to say that during presented 3 years company shows rather
stable situation. Nevertheless, it is remarkable that for Current ratio value is rather low.
It could mean that for Royal Bank of Canada to pay its short-term liabilities a little hard.
As for Debt/Equity ratio we observe rather small value. In my opinion, company tries
rely on only on its own capital. Sometimes it is rather costly and inefficient. Moreover,
RBC loses opportunity to gain benefit on financial leverage.
Return on equity shows rather good results for banks. To add, we see a slight rise from
year to year which shows a positive tendency.
Return on asset have not changed over these 3 years significantly. The value always
close to 1, which reflects satisfactory result for banks.
Talking about ROE, we see fluctuations but still bank implements good result
2020-01-31 2019-01-31 2018-01-31
Toronto-Dominion Bank
Current Ratio
1
0.93
0.93
Debt/equity ratio (financial leverage)
0.13
0.12
0.11
ROI
12.36%
12.7%
12.06%
ROA
0.85%
0.85%
0.81%
ROE
13.82%
14%
13.61%
As for Toronto-Dominion Bank, which partially owned by RBC, current ratio achieved
1 that means equal value for current assets and current liabilities. The trend is positive.
Debt-to-equity ratio does not significantly differ from RBC but here tendency is upwarding. But changes from year to year are not substantial.
Return on investment stays satisfactory after year to year fluctuations, but Return on
asset should be improved a bit. Return on Equity as few indicators above has
fluctuations as well. But results still make sense.
Comparing two banks I would like to reflect the last data and choose whose indicators
are more acceptable.
TorontoDominion Bank
Current Ratio
1
Debt/equity ratio (financial leverage)
0.13
ROI
12.36%
ROA
0.85%
ROE
13.82%
Royal Bank of
Canada
0.91
0.12
14.28%
0.93%
15.92%
Frankly speaking value of indicators are rather similar to each other but it is necessary
to choose the best one.
As for Current ratio, Toronto-Dominion banks looks better.
As for D/E ratio, results almost the same. Nevertheless, both should be improved not
to lose financial leverage opportunities. Right now, Toronto-Dominion bank is better.
As for ROI, ROA and ROE, RBC shows higher value. As I Wrote earlier, as higher
these indicators as better for the organization.
Taking everything into consideration, we got 3 “pluses” for RBC and 2 “pluses” for
Toronto-Dominion bank.
However, it is important to remember that this is the analysis of just a few ratios, while
other ratios could be calculated and different results could be seen. Also, there is nonfinancial information that also should be taken into consideration while comparing the
banks.
Conclusion
In this work, I observed Canadian banking system. We assumed its main functions,
brief history and criteria for international banking activity in Canada.
Moreover, we observed two main banks of Canada: Royal Bank of Canada and
Toronto-Dominion bank. It is represented 5 main ratios for financial analysis (Current
ratio, Debt-to-Equity ratio, Return on Asset, Return on Equity, Return on Investment)
for the last 3 years.
Briefly speaking, both banks showed quite normal results. But nevertheless, it is
remarkable that both RCB and TDB rely on shareholder’s equity and lose their
opportunity to make profit on financial leverage. Moreover, RCB experiences some
problems with paying its short-term liabilities, while TDB have a better situation.
Also, Royal Bank of Canada has an advantage in returns. The way RBC use its
investments, equity and assets is more profitably and effectively.
Taking everything into consideration, I would like to point out that in comparison of
Royal Bank of Canada and Toronto-Dominion Bank the first one would be the winner.
References
1. https://www.investing.com/equities/toronto-dominion-bank-ratios
2. https://ru.wikipedia.org/wiki/Royal_Bank_of_Canada#Финансовые_показате
ли
3. Royal Bank of Canada (RY.TO) People | Reuters.com
4. https://mirznanii.com/a/258882/bankovskaya-sistema-kanady/
5. www.ereport.ru.
6. https://www.centralcharts.com/en/15601-royal-bank-of-canada
7. https://www.bankofcanada.ca/core-functions/financial-system/