Wholesale Banking

Financial results of key product segments within Wholesale Banking

Corporate banking revenue declined 57% from $752 million in 2002 to $326 million in 2003. This decrease reflects: (i) the reclassification of $11.2 billion in loans and acceptances (greater than 50% of the total loan portfolio) to the non-core portfolio at the beginning of 2003; (ii) higher costs incurred in 2003 for credit protection against the core loan portfolio; and (iii) lower assets in the core loan portfolio due to lower corporate loan activity.

Investment banking and capital markets revenues declined 11% from $1,757 million in 2002 to $1,559 million in 2003. Investment banking and underwriting revenues increased over last year reflecting better market conditions and an improvement in our franchise rankings and market share. These gains were offset by weaker trading performance in our structured product businesses reflecting reduced corporate activity levels in structured transactions and lower market volatility.

The equity investment portfolios, comprised of public and private equity, had marginally lower revenue in 2003 on reduced net security gains. Taking into account the increase in the unrealized gains in the portfolio from $228 million at the end of 2002 to $429 million at the end of 2003, the overall portfolio had significantly improved results in 2003 compared to 2002.

The non-core portfolio was established at the end of fiscal 2002, representing just over half our total lending portfolio at the time with a majority of the exposures in communications and utilities and almost exclusively outside of Canada. A key criteria in segregating the loan portfolio between core and non-core was total client relationship returns. The non-core portfolio represents accounts on which the risk-return relationship was unsatisfactory. The non-core portfolio strategy is to proactively manage down the portfolio as quickly as possible in a manner which optimizes shareholder returns, leading to the eventual redeployment of this capital. We aggressively reduced the size of the portfolio from $11.2 billion to $4.2 billion at the end of 2003, releasing approximately $600 million in invested capital and $8 billion in risk-weighted assets. During 2003, the non-core portfolio generated $136 million of revenue, net of $113 million of losses on derivative and loan sales, and after reflecting a release of $80 million in sectoral allowances reported net income of $103 million.

The Bank was a provider of financial services to the Enron group of companies, a former relationship now in the non-core portfolio. With the bankruptcy of Enron, the Bank, like many other financial institutions, has become involved in a number of regulatory investigations and lawsuits. The Bank is in the early stages of these investigations and lawsuits and the outcome is uncertain at this time. While the Bank considers that its actions were legal and consistent with market practices at the time, it has recognized that the environment for the provision of financial services has changed in light of Enron and other cases of corporate malfeasance and consequently is adapting its corporate finance processes to meet changing expectations.

 

Wholesale Banking