Seven years after the global financial crisis started, Canada's banks remain selective in what they disclose – a problem illustrated by Ottawa's recent crackdown on credit-card transaction fees.
Despite being one of the banking sector's most widely discussed issues, with lenders lobbying Ottawa furiously out of fear that any ruling would be too harsh, the average investor had almost no way of calculating how many millions or billions of dollars were at stake.
The reason is simple: The banks do not reveal this revenue number in their financial disclosures, forcing even the best Bay Street analysts to rely on estimates when making their investment recommendations.
"What is the financial impact of these changes? We cannot know for certain," CIBC World Markets analyst Rob Sedran wrote in a note to clients. "Though several banks noted the potential changes on recent webcasts, none provided any financial information that would be helpful in quantifying the impact."
The fees are just one of many veiled areas within Canadian banking, even after demands for greater transparency that followed the financial crisis.
For more than a decade, no one knew with certainty that Canadian Imperial Bank of Commerce's Aeroplan credit card portfolio contributed 11 per cent of the lender's total profit; it was only when CIBC sold half of the accounts to Toronto-Dominion Bank in 2013 that this information was made public.
At RBC, there have been attempts to sell the bank's U.S. proprietary trading unit, yet no one knows exactly how that will affect the bottom line because the bank has only disclosed the division's revenues.
Although there has been progress, particularly around disclosure of bank capital levels and real estate exposure, much investment analysis still comes down to guesswork. That may not seem like a problem because Canada's Big Six banks are incredibly profitable, collectively earning nearly $33-billion in profit over the past 12 months. Yet J.P. Morgan Chase & Co.'s recent $6-billion (U.S.) loss on its so-called "London Whale" trade proved surprises can come at any moment.
It is also a problem because the banks are bracing for a slowdown as Canadians borrow less, which forces lenders to look for new ways to make money. But it is hard to track which tactics they use to squeeze their customers because banks are reluctant to disclose details.
On their part, the banks often say they are selective in revealing information for two reasons. First, they worry about offering too much insight on their operations to their rivals.
Toronto-Dominion Bank has made a name for itself as being progressive when it comes to investor relations, but chief financial officer Colleen Johnston acknowledged that "sometimes there are competitive or proprietary reasons that we may not go a lot deeper."
In these cases, TD opts for directional guidance as to whether profit is rising or falling. "Trend-wise, [analysts] certainly know what direction we are headed in in our key businesses," she added.
The banks also argue that because global regulators now require a large volume of data to be disclosed, they are concerned about inundating investors with far too much information.
"Transparency and good disclosure is about finding the right balance between volume and relevance – because if you simply put out more information, the really important pieces can get buried," RBC chief financial officer Janice Fukakusa wrote in an e-mail.
Bank analysts say they have seen a great deal of progress. "The devastating impact of the financial crisis forced the banks to open the kimono a lot wider in terms of the information they were offering to investors," Scotia Capital analyst Sumit Malhotra said. For example, some banks' supplemental financial disclosure packages have more than tripled in size.
However, more information does not necessarily mean more detail. For instance, the banks often break out big-picture information about which sectors their commercial and corporate lending arms are exposed to, but provide few details about exposures to specific companies. Last week, the Bank of Nova Scotia announced a $109-million (Canadian) writedown on three specific loans in the Caribbean, but it did not disclose which companies caused the charges.
In some cases, the banks have taken the lead in disclosing more information. When the European economic crisis took hold in 2011, RBC voluntarily provided more details about its regional exposure by country, products and counterparties.
National Bank Financial analyst Peter Routledge argues that it is often tough for any one bank to lead the charge. If its rivals don't follow suit, that lender can feel overexposed.
For this reason, Mr. Routledge believes banking watchdogs play a crucial role. "Regulators cure this dilemma by standardizing disclosures and ensuring compliance," he said.
Canada's banking regulator, the Office of the Superintendent of Financial Institutions, is viewed as one of the more aggressive regulators worldwide. In September, Canadian and British banks were cited as being among the best in the world for risk disclosures by the Financial Stability Board, the top global banking regulator.
"OSFI recognizes that [Canadian banks] should disclose information that is in the public interest or that is necessary for the public to make informed decisions," the regulator wrote in an e-mail.
But outside its targeted areas of disclosure, such as bank capital, the lenders still have a lot of leeway.