TWO-ENDS OF GLOBAL EXPANSION: The five major domestic in and CANADIAN BANKS IN AND the Chinese state-owned banks have varying 1 international positions and growth trajectories. In CHINESE BANKS IN CANADA, 2012 particular, the Canadian banks currently have different goals for activities in and involving China, while the This note outlines current activities and goals Chinese banks have different goals for expansion in of major Canadian banks in China and major Chinese Canada. banks in Canada.  Canada Big 5: BMO, Scotia, RBC, CIBC, TD  China Big 4: ICBC, BOC, CCB, ABC, HSBC OVERVIEW OF BIG 5 CANADIAN BANKS

Canada Big 5 Financial Summary (C$ billion; year As you read the note, consider the following end 10/2012) questions. RBC TD Scotia BMO CIBC 1. What will be the major opportunities over the next Assets $825 $811 $668 $525 $393 five to ten years for Canadian banks in China and for Chinese banks in Canada? Market value $82 $74 $64 $38 $32 2. What key challenges will the banks face in taking Revenue $38 $30 $26 $21 $17 advantage of the opportunities? ROS 20% 21% 24% 20% 19% 3. Why do you believe that several prior expansion attempts have struggled? ROA 0.9% 0.8% 0.9% 0.8% 0.8% Employees 80k 78k 81k 46k 43k Asset growth: 10 19 12 8 6 1983-2012 Asset rank: 1983 1 5 4 3 2

1 This class note draws on reports by Weihua Wang and Naira Chaloyan (BMO) and Kar-Kin Chan, Ping He, Gabriel Matzner, Chao Yu, and Andres Lozano (ICBC) of the Rotman School of Management, plus information gathered by Will Mitchell. All information is based on public sources. Prepared January 2013, revised October 2013. 1

BMO Canada, BMO has significant share of Chinese business immigrants and international students. of (BMO) is the first Canadian bank, found in 1817 in Montreal by nine Within China, BMO has targeted the growing merchants. As of 2012, BMO is the fourth largest number of middle class and high net worth individuals. Canadian bank as measured by market value, with Early in May 2003, BMO became the first foreign $525 billion in total assets. Like other major Canadian company to acquire an equity interest in one of the banks, BMO is a full service bank with businesses original ten Chinese fund firms: Fullgoal Fund spanning Canadian , US retail banking, Management Company Ltd. This co-operation aimed wealth management, and capital markets. In 2012, to develop China’s potential in asset management, 75% of adjusted net income came from the retail investment funds, and pensions. In August 2012, BMO business. In 1987, BMO acquired the securities dealer completed its acquisition of 19.99% interest in China’s Nesbitt Thomson Inc., one of Canada’s oldest and COFCO Trust Co., a subsidiary of COFCO Group. most respected investment houses, which added This investment has the goal of helping BMO leverage investment and asset management capabilities. BMO its wealth management and capital markets experience has a long history in and New York. The and to assist COFCO Trust in developing its offering. acquisition of Harris Bankcorp in 1984 strategically Current opportunities in China include regional branch expanded its footprint in the US and also brought in network expansion (e.g., Zhejiang, Jiangsu, Fujian, the strength in and mid-market and Guangdong), wealth management partnerships commercial banking. Beyond North America, BMO (e.g., insurance, tax planning, estate planning), talent also has a strong global presence, including Europe, recruitment (e.g., via the BMO Learning Institute), and South America, and , and Asia. technological expansion (e.g., using InvestorLine in China). China is important for BMO’s global strategy. BMO in China timeline BMO’s connection to China dates back in 1818 (three  1982: Opens rep office in Beijing months after its opening in 1817) when the bank undertook its first foreign exchange transaction in  1995: Gains branch license in support of trade with China. BMO renewed its  1996: Gains branch license in Beijing connection with China in 1982 after China started  2003: Obtains equity interest in Fullgoal Fund economic reforms. BMO’s business engagement in Management Co. China ranges from personal banking to wealth  2004: First Canadian bank to be granted a license management to investment banking. In October 2010, by the China Banking Regulatory Commission to BMO officially opened its new incorporated sell derivative instruments in China. subsidiary, (China) Co. Ltd. (BMO  2005: Only Canadian bank selected as market- ChinaCo). It has branches in Beijing, Guangzhou, maker for foreign exchange trading in China Shanghai, and . These branches work to through the interbank China Foreign Exchange establish relationships and provide financing in trade Trade System (CFETS). finance, corporate lending, treasury products, foreign  2005: Guangzhou branch is first Canadian bank exchange, and immigration banking. BMO is location to receive license to provide RMB local positioning itself in China to capture new Canadian- currency service such as deposits and loans to Chinese businesses that are starting to emerge as a both foreign and local companies in China. result of Chinese government relaxing rules on foreign  2005: Fullgoal receives license to manage ownership and speeding up privatization corporate pension plan assets in China, along with three other foreign financial institution joint In addition to providing financial solutions to ventures. businesses that are doing businesses across the  2006: Investment banking arm is one of six Canada-China border, BMO ChinaCo has targeted financial institutions, and only Canadian financial business from new immigrants and international institution, to act as co-lead Manager of Bank of students. BMO ChinaCo partners with immigration China's IPO in Hong Kong. consultants in China who refer business class immigrants and other high net worth clients to wealth  2006: Beijing branch becomes first Canadian bank management group in Canada. It also sponsors an in Beijing to be authorized to conduct RMB annual booklet called “Best Education in Canada”. business. This booklet has been well received by students who  January 2007: BMO meeting are interested in pursuing education in Canada. Within held in Shanghai.  2008: Gains branch license in Shanghai

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 2010-2011: Signs mutual referral agreement with the Agricultural , establishing a Scotiabank (formerly Bank of ) subsidiary in China. was founded in 1832. Scotiabank’s current vision is “to be the best at helping customers become Other items about BMO in China financially better off by providing practical advice and  First Canadian bank to establish investment bank relevant solutions”. The bank has four business lines: representative office. Canadian banking, international banking, global  Only Canadian bank chosen as market maker for banking and markets, and global wealth management. FX trading in China. It takes pride in being the most international Canadian  First foreign bank permitted to invest in a Chinese bank. In fiscal 2012, Scotiabank had net income of mutual fund company. C$6.466 billion, almost tied with TD, the second  First Canadian bank and one of a few of foreign largest bank in Canada. Its net includes Canadian banks to participate as a market-maker in China’s Banking C$1,938 million, International banking foreign exchange market, starting in 2002. C$1,734 million, Global Wealth Management C$1,170  First Canadian bank in China to price and trade million, and Global Banking and Markets C$1,492 foreign exchange forwards. million.  Pioneer in Chinese foreign exchange market, Scotiabank states on its website that it has the consistently ranking among the top 10 banks in largest presence in mainland China among all China (domestic and foreign) for the past 10 Canadian banks. Scotiabank has been in China since years. 1982, with multiple activities. Scotiabank has offices  2012: Branches in China in Beijing, Guangzhou, and branches in Beijing, Guangzhou, , and Shanghai, and Hong Kong. Shanghai with foreign and local currency capabilities. Scotiabank entered a partner relationship with China Ever-bright Bank (which has 119 branches) to create the Scotiabank Start-Right Program that helps new immigrants and international students open accounts, set up cards, and transfer money before they come to Canada. It also owns about a 15% stake in Xi’an City Commercial Bank. In 2011, it arranged to purchase a 20% stake in the state-owned Bank of Guangzhou for $719 million. In corporate banking, the bank offers extensive services of both syndicated and individual corporate loans, financing, and restructuring for Chinese companies. Within the AsiaPacific, Scotiabank also has activities in . In 2009, Scotia increased its stake in to 49%, the Thai maximum foreign ownership. The next year Thanachart acquired Siam City Bank, becoming Thailand's fifth- biggest bank.

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RBC TD RBC (formerly Royal ) was The TD Bank Group (formerly founded in 1864. RBC is the largest Canadian bank by Bank) was formed by the 1955 merger of market capitalization and assets. RBC has five the (founded 1855) and the Dominion business units: Canadian banking, international Bank (founded 1869). The bank operates as TD banking, wealth management, , and Canada Trust in Canada and as TD Bank in the U.S. insurance. RBC has the #1 or 2 market position in (formed through a series of acquisitions during the almost all of the business/product lines. Its net income 2000s). The TD Group includes subsidiaries for retail, in F2012 reached C$7.6 billion, CS1.1 billion ahead of commercial, investment, and other services, created its closest competitor TD. RBC’s strategic goals are: through a series of acquisitions (primarily in Canada (1) In Canada, to be the undisputed leader in financial and the U.S.) and internal expansions. TD’s services; (2) globally, to be a leading provider of international activities primarily focus on the U.S. with capital markets and wealth management solutions; and a secondary emphasis on Western Europe. In Asia, TD (3) in targeted markets, to be a leading provider of Securities (wholesale banking) has offices in Shanghai select complementary to our core and Hong Kong, as well as Mumbai, , and strengths. Globally, RBC seeks to become a premier Seoul. provider of wealth management solutions to high net worth and ultra-high net worth clients. Its targets include Canada, U.S., and the U.K., as well as emerging markets. China is a strategic target market for RBC, but RBC’s ventures in China have struggled so far. It entered China twice, once in the 1980s and once in the 1990s. RBC withdrew from China both times, citing more profitable opportunities to employ resources elsewhere. RBC recently upgraded their representative office to a branch in China, and mainly offers wealth management services. RBC currently plans to expand further in China. RBC has also struggled in the US retail banking market. RBC in 2012 it sold its unprofitable US retail bank operations and a US credit card business to PNC Financial for $3.6 billion. RBC said the operations lacked sufficient scale.

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CIBC OVERVIEW OF BIG FOUR CHINESE BANKS, PLUS HSBC CHINA CIBC (formerly Canadian Imperial Bank of Commerce) was formed by the 1961 merger of the The Chinese banking system includes four Canadian Bank of Commerce (founded 1867) and the major state-owned banks, plus multiple other financial (founded 1875). In May institutions. The big four include the International 2012, Bloomberg Markets magazine named CIBC the Commercial Bank of China (ICBC), Bank of China strongest bank in Canada and North America, and the (BOC), Agricultural Bank of China (ABC), and China 3rd strongest bank in the world. Currently, the Construction Bank (CCB). ICBC is the largest bank company's primary international activities are in the globally by total assets; CCB, ABC, and BOC are the U.S., U.K., and Caribbean. 13th, 14th, and 15th largest banks in the world. Although Hong Kong billionaire Li Ka Shing The big four banks have different focus. was the largest foreign shareholder of CIBC for two  ICBC funds urban projects and the manufacturing decades until he sold his shares in 2005, CIBC has sector. limited presence in China. CIBC currently offers  BOC specializes in foreign-exchange transactions energy-management services in Asia. The bank and trade finance. operates wholesale banking offices for corporate,  CCB specializes in medium to long-term credit for government, and institutional clients in Beijing, long term specialized projects, such Shanghai, and Hong Kong. The company sold its as infrastructure projects and Asian private wealth management business (based in urban housing development. Singapore and Hong Kong) in 2012. CIBC was more  ABC finances China's agricultural sector and active in international banking activities in the 1990s offers wholesale and retail banking for through its CIBC World Markets investment banking farmers, township and village enterprises (TVEs) unit, built through a series of acquisitions, but scaled and other rural institutions. back after suffering losses during the Asian financial crisis of the late 1990s, as well as losses linked to the Big Four Chinese Banks (12/2012) Enron and Global Crossing corporate accounting Bank ICBC CCB BOC ABC scandals of the early 2000s. Branches 18,000 13,637 24,000 Employees 427,356 348,995 302,016 457,484 Assets $2,777 $2,212 $2,007 $2,125 ($US bln) Net Income $38.3 $30.6 $22.1 $23.3 ($US bln)

Chinese Big Four in Canada: All four banks are pursuing aggressive international expansion; all have or have plans to establish presence in Canada. Canada offers a sizeable Chinese population, natural and energy resources, and a potentially welcoming political and economic environment as indicated by preliminary negotiation of the Foreign Investment Promotion and Protection Agreement in September 2012.  BOC was the first Chinese bank to arrive in Canada, in 1993; the bank has branches in , BC, and . The Canadian unit is part of BOC’s operations in the US. Aside from personal and commercial banking, BOC offers Chinese visa application services. The bank has recently expanded its limited personal banking services and signed an agreement with Master Card to offer their first personnel credit cards in Canada.

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 ICBC purchased a 70% stake of the Canadian Study Loan, overseas insurance services and overseas operations of the Hong Kong-based Bank of East financial services. Asia in 2010 (about 6 branches in Canada) and ICBC enjoys strong political and financial renamed the bank as ICBC (Canada), ICBK support from the Chinese government. In 2011, ICBC (Canada) in short. ICBC is in talks to acquire had over 33 billion yuan ($4.22 billion CAD) in cash Bank of East Asia’s operations in the U.S. ICBC reserves alone. During fall of 2011, when ICBC’s focuses on Ontario and BC. The bank offers stock had declined due to expected slowing of Chinese personal and commercial banking, plus M&A growth, Chinese state-owned investment funds consulting services. In the short-term, this gains provided capital in the form of stock purchases in an business from the Chinese immigrant population, effort to sustain the stock price. Chinese international students in Canada, and trade and economic activities between Canada and ICBC offers several corporate services. China. In the longer term, this is a step in  M&A consulting services and information: implementing ICBC’s broader global strategy. Currently, ICBC offers consulting services for  CCB & ABC applied for authorization to open prospective M&A clients. The service revolves Canadian operations in late 2011. Although ABC mainly around its information database, which does not have an operating branch in Canada, it offers historical deals and comparison tools that opened its first “representative office” in can be used to analyse potential transactions. in June 2012 and has partnered with ICBC’s consultants utilize this database to advise local correspondent banks to facilitate the building clients. In execution of the deals, the bank of a financial service network in North America. currently relies on partnerships with other Industrial and Commercial Bank (ICBC) investment banks and funds.  Risk management and information: ICBC Industrial and Commercial Bank of China is offers services in risk management as well as the largest commercial bank in China. It is the world’s credit grading and credit investigations. The largest bank by profit, market capitalization, and central hub is an information database that assists customer deposits. In 2011, ICBC had revenue and net ICBC in advising clients. income of CN¥475.21 billion and CN¥208.44 billion. ICBC provides a wide range of financial products and  Foreign corporate listing: ICBC has built services to 4.11 million corporate clients and 282 networks for foreign owned firms wishing to list million individual customers, including finance and their company in the Asian stock market. insurance, retail banking, commercial banking, Combined with this is an array of investment investment banking, investment management, global banking consulting, accounting services, and legal wealth management. advisory teams. ICBC, being the largest bank in Asia, has access to resources to assist in making ICBC is a household name in China and has a this happen and is the bank of choice for growing international reputation. In a recent study by originating, structuring, and executing equity and Brand Finance, an independent brand valuation equity-linked capital raisings in Asia. consultancy, ICBC was ranked 11th world wide in its annual Banking 500 ranking. It was placed 2nd overall in China for brand value of major financial institutions. ICBC’s global strategy started 15 years ago when it set up ICBC Singapore Representative Office (later becoming the ICBC Singapore Branch). During last 15 years, through mergers and acquisitions, ICBC has established a network of branches, subsidiary banks, and representative offices in major financial centers globally and across economic and financial regions in China. This extensive network allows ICBC to offer international banking services to both business and individual customers. ICBC cross-border personal financial services include ICBC Currency Exchange, A/C Opening Services, Credibility Letter, Overseas

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Bank of China (BOC) China Construction Bank (CCB) Bank of China is the oldest bank in China, China Construction Bank (CCB), founded in founded in 1912 with the approval of Sun Yet-San and 1954, is the second largest commercial bank in China serving as from 1912-1949. BOC is the by total assets as of 2011. It also is the second largest 5th largest bank in the world by market capitalization. bank in the world by market capitalization. CCB is a In 2011, it had revenue and net income of CN¥413.1 full service bank with product and service offerings billion and CN¥124.18 billion, respectively. across retail banking, commercial banking, wealth management, insurance, and investment banking. In As China’s most international and diversified 2011, CCB had revenue and net income of CN¥397.09 bank, BOC provides comprehensive financial products billion and CN¥169.43 billion, ranking 2nd in terms of and services to customers across the Chinese net income. Its net income per employee was about mainland, Hong Kong, Macau, , and 32 oversea half million, equivalent to ICBC’s. countries. The Bank’s core business is personal and commercial banking. It also conducts investment CCB’s strategic goal is to become a world- banking, insurance, investment management, asset class bank by providing the best service to its management, and leasing businesses through various customers, maximizing shareholder value, and subsidiaries: BOCI, BOCG Insurance and BOC providing excellent career opportunities to its Insurance, BOCG Investment, BOCIM, and BOC employees. In order to achieve this strategic goal, CCB Aviation. focused it resources and effort on target customers, products, and geographical regions. In the commercial BOC’s strategic goal is to become a premier banking segment, it focuses on industry leaders in multinational banking group. To achieve this goal, strategic industries such as power, BOC stresses its core value of excellence and focuses telecommunications, oil and gas, and infrastructure, as on providing a diversified and integrated cross-border well as major financial institutions and government business platform. BOC has ten branches in Canada, agencies; in the personal banking segment, it seeks including two testing branches. Currently, its focus is revenue from high-income retail customers while to extend personal banking services to new immigrants emphasizing cost efficiency and economies of scale to and international students in Canada and to provide serve mass markets. Its high per employee income is trade services and business banking to people who result of CCB’s strategic focus. have business relationship between China and Canada. CCB has branches and offices in Japan, Germany, , U.K., U.S., Korea, Singapore, South Africa, and Australia. It also set up branches in Canada, following the footstep of ICBC.

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Agricultural Bank of China (ABC) HSBC Bank (China) Agricultural Bank of China was founded in HSBC Bank (China) Company Limited 1951. ABC serves 320 million retail customers and 2.7 started operations in 2007 as a wholly-foreign-owned million corporate clients with an extensive network bank by Hong Kong and Shanghai Banking (nearly 24,000 branches). In 2011, ABC had revenue Corporation Limited, the founding member of the and net income of CN¥377.73 billion and CN¥121.95 HSBC Group. Based in the U.K. and Hong Kong, billion. While its revenue and net income are the HSBC’s roots lie in Hong Kong and Shanghai, where lowest among the big four, it has the highest number of branches were opened in 1865. HSBC Group is one of employees and branches. This leads to the lowest per the world’s largest banking and financial services employee net income of CN¥0.27 million as compared organizations with offices and branches in over 80 to CN¥0.51 million for ICBC & CCB and CN¥0.43 countries, including Canada (HSBC Bank Canada). million for BOC. This is due to its history of serving In mainland China, HSBC Bank China has county areas. the most extensive branch network among foreign ABC’s goal is to become a major commercial banks, with about 135 outlets. Its business mix bank that leverages synergy between urban and county includes personal banking, business banking, corporate areas. ABC intends to develop urban and county banking, and private banking. The bank offers a full businesses into the “two engines” of growth, range of services that cater to both middle-class leveraging its dominant market position in county individuals and business-oriented individuals. The areas. vision, competitive advantages, and strategy of HSBC China reflect those of HSBC Bank Canada. The second part of its strategy is to gradually expand globally. Currently, it has branches or offices Hoover’s (1/2013): HSBC Bank Canada’s throughout mainland China, Hong Kong, London, vision is to be the leading international bank and the Tokyo, New York, Frankfurt, Sydney, Seoul, and best bank for business in target markets in the country. Singapore. In Canada, ABC has a representative office Its strategy is based on two elements aligned with key in BC. trends shaping the global economy: (1) International connectivity that strengthens its presence in markets In addition to banking businesses in personal, and businesses that are most relevant to global trade corporate, and agro-related banking, ABC is growing and capital flows; and (2) Economic development and fee- and commission-based businesses, including wealth creation that invests in wealth creation in wealth management. In 2011, ABC and BMO entered selected markets and focuses on retail banking only in into a private banking cross-border financial services markets with profitable scale. HSBC Canada’s Retail cooperation agreement. "The cooperation between Banking and Wealth Management business seeks to be ABC and BMO will be a big step for the development the leading international premium bank in Canada by of ABC's private banking department," said Zhu offering premium customers global connectivity, Hongbo, Executive Vice President, ABC. "Through providing them access to emerging market exposure, the cooperation between ABC and BMO, together with and deepening relationships with them through each other's long-term accumulation of cooperative propositions and pricing. relationships with many institutions like immigration agencies, overseas study intermediaries, investment CapitalIQ (10/2013): HSBC Bank Canada and tax planning firms, we will be able to provide provides various financial products and services to comprehensive solutions for clients. This tight small and midsize companies, and individuals in cooperation will help ABC complement its business Canada. Its Retail Banking and Wealth Management ranges and promote service model innovations." segment offers personal banking products, including current and savings accounts, mortgages and personal loans, credit and debit cards, and local and international payment services; and wealth management services, comprising investment products, and estate and financial planning services. The company’s Commercial Banking segment provides a range of financing, including overdrafts, receivables finance, term loans, and leasing services; domestic and cross border payments and collections, liquidity management, and account services; international trade products and services; treasury 8

services; capital raising on debt and equity markets, as well as advisory services; commercial cards; and telephone banking, HSBCnet. Its Global Banking and Markets segment offers a range of financial services comprising treasury and capital market services, including foreign exchange, currency, interest rate, bond, credit, equity, and other derivatives; government and non-government fixed income, and money market instruments; precious metals and exchange-traded futures; and equity services and distribution of capital markets instruments. This segment also offers capital raising, advisory services, bilateral and syndicated lending, leveraged and acquisition finance, structured and project finance, lease finance, and non-retail deposit taking services; and international, regional, and domestic payments, as well as cash management services; and trade services. The company offers its products and services are through approximately 240 offices. HSBC Bank Canada was formerly known as Hongkong Bank of Canada and changed its name to HSBC Bank Canada in June 1999. The company was founded in 1981 and is headquartered in Vancouver, Canada. HSBC Bank Canada operates as a subsidiary of HSBC Canada Holdings (UK) Limited.

HSBC Global Financials (12/2012)  Employees: 270,000  Assets: US$2,692 billion  Net income: US$14.0 billion

HSBC (Canada) Financials  Founded: 1981  Employees: 6,000  Revenue: C$ 2.0 billion  Assets C$ 84.3 billion  Net income: C$650 million

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