Looking North New England Canada Opportunities for Growth

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Looking North: New England & Canada Opportunities for Growth Financial services Michael Dolega Director

Looking North: New England & Canada Opportunities for Growth Financial services Michael Dolega Director & Senior Economist TD Economics June 9 th, 2016

Canadian financial services skewed towards banking n n Canadian financial services concentrated around credit

Canadian financial services skewed towards banking n n Canadian financial services concentrated around credit intermediation; other activities less developed that in the U. S. Most credit intermediation through banks Insurance – Big-five account for $3. 3 tn in assets (~80%) 4 Financial industry concentrated in Ontario – Province accounts for over half of national – Toronto home to all large banks and many others – TSX: financials (30%), mining (20%), materials (20%) Credit intermediation 8 6 – Shadow banking activity remains relatively limited Other* 10 – Domestic (Sched. I; ~30), foreign subsidiaries (Sched. II; ~20) and foreign branches (Sched. III; ~25) – Credit unions (~800): over $350 bn in assets n 12 Finance & insurance industry; share of economy (%) 2 0 U. S. New England Canada Ontario Rest of Canada * Consists of securities, commodity contracts, investments, funds, trusts, and other financial vehicles. Source: BEA, Stat. Can, TD Economics 2

Canada's financial industry largely unscathed by the GR. . . n Despite similar magnitude

Canada's financial industry largely unscathed by the GR. . . n Despite similar magnitude Canadian FIs weathered the GR well, as house prices fell only 8% vs. 35% in the U. S. ; differences in: – lending criteria, subprime share, securitization, origination, mortgage insurance, gov't policies – recourse laws, mortgage terms, tax deductibility, prepayment penalties n Industry is one-fifth larger in Canada/Ontario, on par in U. S. , and lower in New England 115 110 105 100 95 90 85 U. S. New England Canada Ontario 80 75 70 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 – Concentration, diversification, leverage, etc. 120 05 Since 1840, U. S. had twelve systemic banking crises; Canada had none 20 n Finance & insurance. ; real GDP (=100 in 2008) Source: BEA, Stat. Can, TD Economics 3

…positioning Canadian banks to fill credit vacuum in U. S. n n Some expansion

…positioning Canadian banks to fill credit vacuum in U. S. n n Some expansion prior to financial crisis 10 – BMO's in 1984, TD's in 2004 8 Acceleration since 2007 supported by: 6 – U. S. and European lenders pulling back 4 Canadian bank acquisitions in the U. S. ($ billions) – Good financial position of Canadian banks – Saturation in the domestic market 2 – High Canadian dollar 0 – U. S. growth prospects n Top-5 Canadian banks invested nearly $40 billion – more than half by TD -2 -4 2001 2003 2005 CIBC n Acquisitions included retail, commercial, wealth, loan books (CC, auto, leasing) 2007 BMO 2009 RBC 2011 2013 2015 TD Note: May not include all transactions. Source: TD Economics 4

Canadian banking industry safe, but risks remain n Canadian banking system often considered the

Canadian banking industry safe, but risks remain n Canadian banking system often considered the safest in the world Top-5 Canadian banks among the safest in the world ranging from TD (10 th) through CIBC (38 th) Risks rising: – Household debt is a growing concern – Select Canadian housing markets appear overheated: Vancouver and Toronto – Oil producing provinces are in recession: AB, SK, NL – Provincial government debt burdens rising 7. 0 Soundness of banks; index* 6. 0 5. 0 4. 0 3. 0 2. 0 1. 0 2008 -09 U. S. 2010 -11 Canada 2012 -13 Ireland 2014 -15 Greece * Ranges from 1 (insolvent and may require a government bailout) to 7 (generally healthy with sound balance sheets) Source: World Economic Forum Global Competitiveness Report, TD Economics 5

Canadian economic outlook n n n Canadian economy outperformed since the recession, led by

Canadian economic outlook n n n Canadian economy outperformed since the recession, led by commodity-exposed regions with housing and consumer robust. 4 Recession in Alberta, Saskatchewan, Newfoundland & Labrador 1 Fcast 3 2 0 Lower Canadian dollar and robust U. S. growth driving economy in regions most dependent on U. S. exports -1 But, support from housing and the overleveraged consumer will be only limited -4 Ultimately, potential growth in Canada slightly below that of the U. S. Real GDP; y/y % chng. U. S. New England Canada -2 -3 -5 2007 2009 2011 2013 2015 2017 Source: BEA, Stat. Can, TD Economics 6

Low rates pose challenges both in U. S. and Canada n n n U.

Low rates pose challenges both in U. S. and Canada n n n U. S. trade with Canada; financial services ($millions) Bo. C likely to stand pat through next year, before beginning to tighten in 2018 8. 0 Fed also unlikely to raise rates rapidly given the fragile global recovery 6. 0 Canadian dollar unlikely to test parity anytime soon 4. 0 7. 0 Fed Bo. C 2009 2013 Fcast 5. 0 3. 0 n n Rates are unlikely reach previous "normals" with equilibrium nominal rates projected at 2. 75% and 3. 0%, in Canada and U. S. 2. 0 Moreover, long-term bond yields will remain under pressure by substantial global liquidity. 0. 0 1993 1. 0 1997 2001 2005 2017 Source: FRB, Bo. C, TD Economics 7

Plenty of opportunities for increasing trade in financial (and other) services n n n

Plenty of opportunities for increasing trade in financial (and other) services n n n U. S. trade with Canada; financial services ($millions) U. S. exports financial services globally 7, 000 Significant trade surplus with Canada in financial services 6, 000 Liberalizing trade in financial and other services could help spur growth in both the U. S. , Canada, and globally Trade balance Exports 5, 000 Imports 4, 000 3, 000 Agreements such as the TPP, TTIP, and Ti. SA would be beneficial in expanding trade in services 2, 000 Success of currently negotiated agreements is uncertain, with rising protectionist rhetoric 0 1, 000 2006 2008 2010 2012 2014 Source: BEA, TD Economics 8

Thank you For more research and forecasts visit: www. td. com/economics Or follow @TD_Economics

Thank you For more research and forecasts visit: www. td. com/economics Or follow @TD_Economics on 9