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I'm a big fan of primary research that pits challenger banks and credit unions head-to-head against Canada's Big 6 players. After all, that's how consumers view the market. So I was particularly pleased to see a study released this week called Best online banks and credit unions in Canada for 2024, on Moneysense.ca. The study was performed by Glenn LaCoste at Serviscor, and it's well worth a read. TL;DRServiscor assessed the online and mobile banking options across criteria ranging from desktop and mobile experience, service experience and fees experience. While one might assume that nimble digital-only banks wipe the floor of the lumbering Big 6, this is not the case. TD, CIBC and RBC finished highest, with strong showings across the board on desktop experience, decent mobile experience and good rates. Desjardins, National, Scotia and BMO follow behind, mainly due to less complex digital offerings and weaker online rates. After this comes the credit unions and challenger banks. Surprisingly, digital-only offerings such as Tangerine, Simplii and EQ Bank lag far behind. These brands are docked for their more streamlined and less fulsome digital offerings. (PC Financial, the lowest performer, shows a 0 for their mobile experience. This may need to be corrected). Credit unions are recognized for their service, particularly Assiniboine and Conexus' best-in-class digital response times. However, in general their offerings fall short of the big banks. 
Methodology usedServiscor based its ratings on a review of "hundreds of typical user tasks on each individual digital platform", plus rates & fees across five products and service interactions throughout 2023. The top firm in each category received a 10 with subsequent finishers receiving one point less, down to 1 point for 10th place (details here). I would note that while there's nothing wrong with this scoring method, it does tend to exxagerate the difference between top finishers and less-mature competitors. A bank scoring 25 is not necessarily half as strong as a bank scoring 50. Please note that I was not personally involved in this study. Desjardins is rationalizing its branch network. Can (or should) banks and credit unions follow?31/1/2024
As reported in today's Le Soleil, Desjardins plans to close 30% of its branches and ATMs over the next three years. This amounts to almost 190 locations from its current complement of around 700 in Quebec and Ontario. While smaller banks such as Laurentian have slashed their physical presence, Desjardins is the first major financial institution to do so. This move will signifantly change the economics of branches for the cooperative. Desjardins' current average of $480M of personal and commercial assets per branch will rise 40% to over $670M per branch, well ahead of the Big Six. Is it only a matter of time before the competition follows suit, or will they take a different path? Economics of branchesEach of the Big 5 banks operates in the order of 900-1100 branches in Canada (Scotiabank and TD actually run more international branches than domestic, but that's not the focus here). Each branch serves a specific set of customers across retail/commercial banking, wealth management and advisory. Branches can vary widely, from multi-billion dollar commercial and high net worth urban locations to tiny rural outposts. And some financial institutions are already experimenting with advice-only locations that ditch the teller window. Average assets are the easiest metric of comparison. To attempt a like-for-like analysis, each bank's domestic personal & commercial assets are divided by the number of domestic locations (in these examples we're using 2022 annual reports). Desjardins, TD, RBC and Scotiabank all operate at $450-480M/branch. The smaller Big 6 banks follow in the $300-375M range, while credit unions trail at $177M/branch. Following its planned rationalization, Desjardins will jump to almost $700M/branch. Wealth management and other advisory services will also scale up. Desjardins operates at a higher efficiency ratio vs the banks, and a 30% cut to branch costs could go a long way to improving the metric.  What would a copycat strategy look like?Major rationalization does not appear to be in the cards - yet. RBC, for example, boasts that it operates Canada's largest branch network and has a stragegic goal of "Continu[ing] to reimagine our branch network to meet the evolving needs of our clients". In FY 2023 RBC's domestic branch network contracted by a mere 2% (source). TD notes that its "Canadian branch network continues to lead the market in total hours open", while also promoting the option of virtual services (source). While the shift from teller services to advice is clearly underway, banks do not currently appear to be planning a major retreat from brick and morter. So, what would happen if other FIs followed Desjardins' lead? If all of the Big Six were to adopt a $670M/branch average almost 40% of locations would disappear, from over 5,400 to about 3,300. For credit unions the difference would be even more pronounced, dropping from 1,669 to a mere 441.  This disparity is even more pronounced when one looks at individual credit unions. Large credit unions such as Vancity and Coast Capital are very similar to Desjardins and the Big Six in assets per branch. However, others such as Meridian and Servus with a ground game strategy operate significantly smaller locations. One notable standout is Steinbach, with three locations that are amongst the largest branches of any financial institution in Canada.  Should the banks and credit unions follow?Desjardins does have some marked differences from the other big financial institutions. It is geographically concentrated in one province, with a very strong market share in Montreal, Quebec City and smaller communities. Desjardins runs significantly more branches in Quebe than the Big Six banks, providing opportunities to reduce duplication. And unlike credit unions in the rest of Canada, Desjardins can make central decisions that the member caisses must follow. Is Desjardins making the right move? Should it be holding onto physical locations, or should it go even further towards an all-digital future? Does continued brick & more investment provide an opening for digital-only challengers? And is Canada's branch network going to continue on a slow decline or is it heading for a cliff? I'd be interested to hear your thoughts. The 21st Century has seen two parallel financial trends - an extended period of low interest rates and net interest margin compression. Would margins return to historic levels once interest rates rose? After 18 months in an elevated interest rate environment, the answer appears to be a resounding no. Net interest margin, the difference between what a financial institution earns in interest vs what it pays, is a critical metric in fractional reserve banking. The larger the gap the more money you earn. Increased competition and other factors can cause the spread to shrink. One hypothesis is that as interest rates rise, so to will the spread. After all, an environment with 7% mortgages has more wiggle room than when they are at 2%. However, data does not appear to be bearing this out. Of the five banks shown, four are reporting net interest margins lower than their average pre-inflation rates. Only EQ Bank has managed to increase its NIM in the last two years, continuing a trend that started back in 2018. Will the situation change as more mortgages renew? What impact does this have on financial institution strategies? Read here for more:  Life at the marginsNet interest margin has been on an extended decline. For example, RBC recorded a NIM of 2.97% in 1990. This dropped to 1.87% in 2000 and just 1.51% in Q4 of this year. RBC's NIM has trended down over this time, regardless of the Bank of Canada's rate decisions. CIBC has converged with RBC over the last decade, and all of the Big 5 are in essentially the same spot. at 1.5% margin, a bank will record just $15M of interest revenue on every $1B in their loan portfolio. Smaller financial institutions have a bit more leeway. National Bank and EQ Bank are both in the 2% range, while credit unions can vary widely depending on local market conditions and growth strategies. We've now spent almost two years in a higher-rate environment. If financial institutions were hoping this would ease the pressure on net interest margin, that has not been the case. From 2014-2021 CIBC's average NIM was 1.85%, while today it is 1.44%. National bank went from 2.22% to 2.14%. It is possible that duration will have an impact. EQ Bank tends to sell shorter-duration mortgages and more uninsured mortgages vs the big banks. Their margin has improved from 1.68% to 2.00%. As loans reset at the higher rates there is an opportunity to increase the spread. However, EQ's trend started back in 2017 - well before recent rate hikes. Beyond NIMNIM spreads can increase due to different product mixes (e.g., unsecured vs secured lending), capital strategies (e.g., relying on retained earnings vs. broker deposits vs. GICs) and other factors. These must of course be accompanied by appropriate risk management strategies. Duration mismatch is another important factor. As Silicon Valley Bank showed, a long duration of lending mixed with short-term borrowing can prove fatal. Sound treasury management during a period of rate instability is critical. Financial institutions must also look to build resilience via revenue diversification. Developing sources of non-interest revenue is more important than ever. |
Doug MacdonaldAnalysis of credit union, challenger bank and fintech competitiveness. Archives
January 2025
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