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Canadian Economy
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Canada has weathered the U.S. downturn helped
by an aggressive easing in policy
0
1
2
3
4
5
6
7
00 01 02 03 04 05 06 07 08 09 10
%
Source: Bank of Canada, RBC Economics Research
Bank of Canada overnight rate
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Oil prices remained historically high
Crude oil price WTI
0
20
40
60
80
100
120
140
1999 2001 2003 2005 2007 2009 2011
Source: W all Street Journal, Bloomberg, RBC Economics
US$/barrel
Forecast
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99
as demand from emerging markets, though
slowing, did not collapse
8.7
5.6
-0.4
-6.8
-0.8
10.0
7.7
4.74.0 3.9
9.7
7.8
3.74.7
4.3
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
China India Brazil Mexico World
Source: IMF, RBC Economics Researc h
2009
2010
2011
Major emerging economies% change in real GDP
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1111
has limited the extent of declines in residential
investment in Canada relative to the U.S.
-28
-23
-18
-13
-8
-3
2
7
12
17
99 00 01 02 03 04 05 06 07 08 09
% change, year-over-year
Canada
U.S.
Source: Statistics Canada, Bureau of Economic Analysis, RBC Economics Researc h
Residential investments
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The Canadian dollar to mirror growing optimism about the
global recovery & attendant rise in commodity prices
0.6
0.7
0.8
0.9
1.0
1.1
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
U.S dollar per Canadian dollar
Forecast
Canadian dollar forecast
Source: Bank of Canada, RBC Economics Research
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14
Ontario felt the full brunt of weak U.S. demand in
2009, particularly for autos
8
10
12
14
16
18
20
22
98 99 00 01 02 03 04 05 06 07 08 09 10
Mil. Units
U.S. auto sales
Source: BEA, RBC Economics Research
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Canadian Banking Sector
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Canadas Banking Market is Underpinned by
Solid Fundamentals#1 for soundness of banks, World Economic Forum (1)
#1 for economic strength over past decade among G7 (International Monetary Fund)Persistently low interest rates and flow of government stimulus spending is spurring
recovery for the Canadian economy. Forecasted growth for the Canadian economyin 2010 will be 2.6% and 3.6% for 2011. (2)
Higher leverage than CanadaHousehold net worth has beendecreasing
Modest leverageHousehold net worth has beenincreasing
Consumer fundamentals
9.9%8.7%Unemployment rate
Lower mortgage qualityHigher loan-to-value ratiosHigher delinquencies
High mortgage qualityLow loan-to-value ratiosLow delinquencies
Mortgage fundamentals
2010 Forecast (2) Canada U.S.
Real GDP forecast 2.6% 1.9%
Inflation (Core CPI) 1.6% 1.3%
(1) World Economic Forum, Global Competitiveness Report 2008-2009(2) RBC Economics, December 14, 2009
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Canada Has The #1 Ranked Banking System
* Source: The Global Competitiveness Report 2009/2010 World Economic Forum
None of Canadas 21 banks have sought government funding since credit seized upworldwide in August 2007, promptingCanadian officials to promote thecountrys regulatory system and conservative banking culture in forumssuch as the group of 20 nations.Bloomberg.com
Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial
or mortgage sectors. Yup, its Canada.Newsweek, February 7, 2009
Canadian banks have gained relative heft as aresult of the crisis, as many of their global
competitors shrank.Wall Street Journal, August 31, 2009
The Canadian banking system, which proved resilient in the global economic crisis, is finally
getting its day in the sun.The New York Times, February 28, 2009
The Canadian banks have survived thecredit market meltdown without any
infusion of government money, and haverelied less on liquidity support than their US and European counterparts.
Financial Times, August 28, 2009
Canada banks prove envy of the world.
Financial Times, February 20, 2009
GLOBAL BANKING SYSTEMCOMPETIVENESS REPORT*
6.16.16.16.2
6.26.26.26.36.36.36.36.3
6.36.36.46.46.56.66.66.7
SCORE
NorwayIsraelBahrainQatar
MauritiusSlovak RepublicLuxembourgMaltaBarbadosFinlandBrazilPanama
SingaporeNamibiaSouth AfricaHong Kong SARChileAustraliaNew ZealandCanada
COUNTRY /ECONOMY
20191817
161514131211109
87654321
RANK
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Canadian Banking Highlights
Highly efficient - same day clearing of paper and electronic payments
Progressive - world leader in ABMs, debit cards and internet banking
Electronic - 75% of payment transactions in Canada are processed electronically; dominated bydebit cards, credit cards, and ACH
Risk Managed - LVTS is a collateralized RTGS, and processes over 85% of the inter-bankpayment value
National - operates across Canada in 6 time zones
Concentrated - Big Six account for 90% of bank assets
Stable - one of the soundest banking systems in the world
Scale - all the major Canadian Banks have over 1000 branches
Building for the Future - banks take a co-operative approach to new infrastructures: chequeprocessing, image processing, credit card settlements, large value payments, etc.
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Canadian Dollar Exposure
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Currency Outlook - USD/CAD
Four Quarter Forecast:Q2 2010: 1.00 Q1 2011: 1.03Q3 2010: 1.01Q4 2009: 1.02
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Why Hedge?
VolatilityUncertainty
Recent years have seen increased volatility
Fluctuations jeopardize profit marginsCan cause operating losses
Budgets are fixedForecasting exchange rates is difficult
Product focus
Focus on underlying business of the company, not on currencymarket speculation
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Forward Contract
A firm obligation to buy or sell foreign currency for delivery beyondSPOT valueA forward contract fixes the US dollar value of the purchase or sale offoreign currency for some date in the future
All exchange rate fluctuations after the fixing, positive and negative, areeliminated
Forward Window Contract
Same as the forward contract but with a maturity that spans a range ofdates (e.g. 1 month)
Allows for flexibility in timing when the exact date of the payment orreceipt cannot be pinpointed
Hedging Tools
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Hedging Tools
OptionsProvide protection from adverse rate fluctuationsAllow opportunity to benefit from favorable market movementsStructure can be customizedSuitable for contingent situations
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Canadian Treasury Management
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Bank Account/Relationship Best Practices
Options Local account with Canadian Bank vs. Special Cross Border Account vs. Multicurrency account
Considerations Complexity Managing multiple bank relationships Local borrowing needs Centralized vs. local treasury Transaction initiation and account visibility (information reporting) Risk assessment Costs
Best practices Banks have an important role here in providing tools for enhanced visibility,
better decision-making and increased control.
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Overall TM services for Canada
Wholesale Lockbox
Stop Payments
Transfers
Account ImagesCurrent Account
Branch Deposits
ACH
Wire Transactions
Tax Payments
Bill Payments
Previous Day Balance Reporting Options: BAI, MT940, MT950
Intra-day Balance Reporting: MT942
File Transmission- Account Images, Lockbox Images
Positive Pay
Electronic Advice of Return Items
Real Time Balances
E-Commerce
Online Access
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Recent Canadian Treasury Management Updates
CPA Payments Strategy Vision 2020 , the Payments Strategy, was approved by the CPA Board of Directors on
February 18, 2010 Starting now and over the next decade, the CPA will promote electronic payments and drive
efficiencies in paymentsWire Payments Initiatives Cross border wire payment must contain full details (remitter/beneficiary) to satisfy AML/ATF
regulations. The information provided will be shared with Financial Transactions and Reports Analysis
Centre of Canada (FINTRAC) where required by law. The information may also be subject to the laws of any jurisdictions the wire payment passesthrough in order to be processed
Preauthorized Debits (PAD s) Changes introduced effective June 2008, transition period ended February 28, 2010 Payors Agreement with mandatory elements, to be approved by sponsoring FI Electronic Agreements must include a commercially reasonable process to be approved by
sponsoring FI Summary of key changes available on CPA website
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Exhibit I:Canadian Banking System
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Number of Commercial Banks 77 (OFSI) vs. 7086 in the US (FDIC)
Types of Banks under the Canada Bank Act Schedule I (domestic) 22 Schedule II (subsidiaries of foreign banks) 26 (e.g HSBC Canada) Schedule III banks (foreign bank branches)
22 full-service (e.g. J P Morgan)7 - lending only (e.g. PNC Bank Canada Branch)
Many US banks have partner relationships with Canadian banks to offerspecialized cross border accounts that offer full or partial TM services for UScompanies operating in Canada
Canadian Banking System
Source: Office of the Superintendent of Financial Institutions (OSFI), FDIC
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Representative Office
29 foreign bank representative offices
Simplest form
Can not actually carry on banking business in Canada-
i.e., no booking or transacting capability in Canada- permitted only to promote the services of the parent bank
Limited regulatory oversight
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Schedule II Banking Subsidiary
26 foreign-owned Schedule II bank subsidiaries
Separately capitalised with a minimum of $5 million of equity capital
Have all the banking powers of the domestic banks (the Schedule I banks)
Legal Lending Limit driven by the Canadian capital base- Never more than 100% of regulatory capital; ideally less than 25% of capital- Commitments in excess of 50% of capital are permitted but discouraged
Essential for banks having a retail strategy- Must obtain CDIC insurance to raise significant amounts of retail-sized deposits (i.e., deposits of less than
$150,000 or its equivalent in other currencies (even though CDIC does not insure foreign currency
deposits))- Banks may opt out of CDIC coverage, provided they do not pursue retail-sized deposits
Corporate Governance- Board of directors of at least 7 individuals- At least half of the directors must be resident Canadian citizens- Not more than two-thirds of the directors may be affiliated with the bank (affiliated includes having a
significant commercial interest in, or arrangement with, the bank)- Not more than the higher of 15% of directors or 4 directors may be employees of the bank or of asubsidiary of the bank- The CEO must be resident in Canada (not necessarily a Canadian citizen)- Must have an Audit Committee and a Conduct Review Committee
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Exhibit II:Hedging Strategies
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Strategies-Rolling Hedge Program
Reduces Rate Volatility while still providing the flexibility to takeadvantage of favorable CAD movements
By partially hedging against future exposures, then adding toforward positions until achieving a complete hedge, a companywill realize a blended rate that will incorporate favorable ratemovements, and smooth out the negative impact of CADvolatility.
Partially Protects Profit MarginIf CAD weakens, a company will not absorb the full impact of aweaker-than-expected CAD.If CAD strengthens, a company will still be able to benefit from astronger CAD.
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Strategies-Rolling Hedge Program
Summary :
Ideal when there is uncertainty in forecasting exposures
Valuable tool when there is substantial market volatility
Systemically layers in exposures over time, to dollar cost average totalunderlying exposure
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Advantages:
Typically structured with a zero cost
Preserves the ability to execute better than the current forward if marketconditions permit
Unlimited upside
FASB 133 friendly
Considerations:
Obligated to execute 50% at the worst case rate
Strategies-Participating Forward
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Strategies-Participating Forward
Example:
Assume Sale of CAD 500,000 at a strike of 1.0300 for participating fwd
If, at expiry, CAD has weakened to a spot above 1.03, the company
sells 100% at 1.03
If, at expiry, CAD has strengthened to a spot below 1.03, thecompany is obligated to sell CAD 250K at 1.03. The company canthen sell the remaining CAD 250K at the more favorable current rate.
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Exhibit III:Canada v. US Treasury Management
Side by Side Comparison
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Account Services
US Canada
Canadian dollar accounts Not standardCross border accounts withCanadian correspondents
Standard
US dollar accounts StandardCross border accounts in US$
Standard
ZBA End of day Same
Multicurrency Accounts Multicurrency accounts in variouscurrencies (e.g. Canadian, Euro,Yen, Peso, Pound Sterling)
Same
Best practice : Multicurrency or Cross Border Accounts with your US Financial Institution for most needsOther : Canada unlike the US, Canada offers interest on business chequing accounts
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Check/Cheque Clearing
US Canada
Funds availability Float zero to three days No float, same day availability fordomestic currency (across 5 timezones)
Check clearing process
Check value
Fragmented and complex networkFederal ReserveClearing Houses (e.g. SVPCO)Direct sends (correspondents)Image exchange dominating thecheck clearing process
No limit
One centralized cheque clearingsystem- The Automated ClearingSettlement System ACSS is usedfor clearing cheques, ACH and EDI6 clearing centers across Canada11 direct clearing banks + the Bankof CanadaThe US Dollar Bulk Exchange(USBE) is a parallel system to theACSS used to clear U.S. dollars
$25,000,000 limit
Other : Post dated Cheques in Canada lockbox; No cheque conversion to ACH in Canada (e.g. ARC)
Best practice : ACH/EFT
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Receivables
Best practice : Many US companies take advantage of lockbox to offer a collection addressin Canada, to reduce CA US mail/clearing float, and to outsource the payment processing of receivables
US Canada
Lockbox
Depository
Remote Capture
Extensive use Many options Several US banks offer nationwide
networks Top US collection sites : Dallas,
Boston, Chicago, Atlanta,Pittsburgh, Charlotte (PhoenixHecht 2009)
Some banks can process CA$ andother foreign items in lockbox Many lockbox banks have multiple
post office deliveries per day
Restricted to bank footprint
Check 21 Remote Deposit solutions
Primarily used to reduce internaladministration costsThe big 5 Canadian banks offernationwide lockbox servicesSites: Vancouver, Calgary,Winnipeg, Toronto (primary),Montreal, HalifaxLockboxes can collect both US$
and CA$ itemsCanada Post delivers once per dayMail time to US from 9-10 days
Nationwide banking
TECP Truncation and ElectronicCheque Presentment cancelled
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Disbursements
Types US Canada
Controlled Disbursement Commonly offered Not applicableNo float same day availability
Account Reconciliation/ Positive Pay
Full and partial reconVarious positive pay optionsPayee Positive Pay
Partial and full reconPositive Pay more commonPayee Positive Pay emerging
ACH/EFT Automated Clearing House ACH paymentsFormats: MultipleNACHA rulesRemittance information (CCD, CTX)Debit blocks
Electronic Funds Transfer (EFT) paymentsFormats:Inter-bank proprietary or CPA 005CPA Standard 005No Remittance info: cleared thru ACSSEFT debit block emerging
EDI North American (ANSI) standard Same payments cleared thru ACSSand addenda cleared thru Netpay
Wire All sizes of payments to ensurepayment finalityFed and CHIPs
SameLarge Value Transfer System-LVTS
Purchasing Cards Widely usedSome banks offer CAD$ p-cards Not as widely used; howeveremerging
Best practice : Use positive pay and electronic payments method vs. paper, explore International ACHOther : Canada can process US$ EFTs
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Balances
US Canada
Daily Consolidation of bankaccount balances
ZBA ZBANotional Pooling for interest
Credit balances on businesschecking accounts
Interest Not available (Reg Q)Sweep accountEarnings Credit
Interest availableNo automated SweepEarnings Credit not available
Debit Balances Overdrafts not allowedOverdraft feesCredit facility
More common business practiceDebit interest is charged
Best practice : Optimize resources and tools to ensure your capital is working for you in both countries
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