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Commercial Banking Overview

Commercial banking is the business of offering deposit and credit (lending services) products to small, medium and large enterprises. Commercial banking divisions are set-up differently at each of the Canadian banks. Junior roles are either credit related, sales related or a combination of the two roles.

Deposit taking is where businesses store their cash safely with the bank while they receive an interest rate based on how long they are locked in for (term deposits). Extending credit comes in a variety of forms – the most well known being a loan.

Loans themselves can be structured differently for many different purposes. For businesses, loans can include commercial mortgages, term loans, construction loans, lines of credit (including credit cards), and letters of credit for trade finance.

The commercial banker is the foundation of a business’ relationship with the bank, and all ancillary products and cross-sell opportunities will stem from the commercial banker. A business that is growing can be introduced to the leasing arm, derivatives arm and investment banking services by their commercial banking relationship manager.

Commercial Banking Career Trajectory

In contrast to investment banking roles, commercial banking roles start at the associate level and move onto either analyst roles on the credit side or account manager roles on the sales side. The associate will be responsible both for supporting the underwriting function (credit) and the sales team by writing account plans and preparing the team for client meetings.

Analysts are responsible for underwriting credit for new deals, performing annual reviews on existing clients (making sure the company as it stands still fits within the bank’s risk appetite), new credit requests for existing clients and monitoring and control of existing credit products for each client.

Account Managers (called differently at each of the Canadian banks) are primarily responsible for managing existing client relationships and bringing in new business. Compensation for these roles is based on a variety of factors including meeting deposit goals, credit goals, new business goals, and overall client satisfaction.

Successful account managers or relationship managers can get promoted to District Vice President (DVP) and then Regional Vice President (RVP) before moving on to senior management roles in corporate. Very high ranked commercial bankers can clear $300,000 or $400,000.

What A Commercial Banker Does – Credit or Portfolio Management (PM) Side

The credit or underwriting side of commercial banking is focused on how much the bank can lend to clients. As part of the bank’s checks and balances mechanism, there is a risk management team that adjudicates the credits that the portfolio management team underwrites.

New, proposed loans are under much higher scrutiny as the credit analyst along with the relationship manager will work together to make an initiating client report or loan request that is a thorough overview of the prospective borrower’s business and an evaluation of its credit risk. The size of the loan depends on the client’s needs as communicated by the relationship manager. The credit analyst will see if this loan size falls into risk concentration limits as prescribed by the company’s credit profile. If the loan demanded is larger than the bank’s appetite for that risk, an extraordinary case will have to be presented.

Once the loan joins the portfolio, it has to be given a credit health checkup from time to time. Usually, this will be on an annual basis – credits that are in trouble may be monitored quarterly. Loans that have defaulted and need to be restructured will be moved to a distressed loans team.

If there is an existing borrower that is known to the bank and wants additional credit capacity whether through an incremental loan, an extension of certain loan maturities or an upsizing of a facility, a new application has to be submitted – however, the risk management team will be more comfortable with already onboarded clients.

Commercial Banking Annual Reviews

The Annual Review focuses on the company’s ability to pay debt and interest payments for the next year (the ability to service debt). Each bank has a rating system to measure the likelihood of default and the expected loss if a default were to occur. This is calculated via a bank’s internal risk rating models.

Usually, the annual review will follow this format:

  • Executive Summary – This outlines the ask for risk management and may summarize existing credit extended to the client
  • Credit Proposal – Usually the annual review does not have a specific credit proposal. If the loan is getting extended, this will be written here. If there is an upsize, this will be written here. The portfolio manager will have to write the rationale for extending more credit (good customer, within risk limits).
  • Borrower Profile – A refresher on what the company does and where it fits into its industry
  • Industry Profile – An overview of the industry the company operates in and some recent trends that are hopefully positive
  • Credit Analysis – This is the meat of the analysis and will look at the financial performance of the company over the last year and how that measures against common ratings metrics (see below). A forecast may also be plugged into the same variables to project how the company will perform going forward.
  • Risk Rating – The risk rating is based off the bank’s proprietary ratings models that are built by quants in another division and will take into account the previous three sections as well as where the loan falls on the capital stack.  For instance, if there are other loans that are senior to the bank’s loan, this will affect the loss given default. Structural subordination issues (if the bank has recourse to a subsidiary on par with other lenders at that level) will also be discussed here.

Ultimately, the risk rating will spit out a rating that represents a) the expected default rate; b) the loss given default; and c) the expected loss, which is a x b.

Commercial Banking Lending Ratios

In order to get to a holistic internal rating, a credit report that is cleared by the credit risk division will take into account various quantitative and qualitative metrics. Quantitative ratios will depend on industry, but will usually focus on some iteration of:

  • Debt Service CoverageEBITDA/Debt Payments (principal and interest payments – excluding final bullet payments of principal)
  • Interest Coverage Ratios – EBITDA/Interest, EBIT/Interest
  • Fixed Charge Coverage Ratios – EBITDA/(Debt Service + Leases + Rent)
  • Working Capital Ratios
  • Leverage Ratios – Debt/Equity, Debt/EBITDA, Debt/EBITDAR, Debt/Capitalization (capitalization = debt + equity)

Analysts can only make recommendations on deals while their managers and the risk departments adjudicate these deals. This is not necessarily an outright decision – a loan may be approved but for less than the requested amount if a certain capacity is all that the risk management team has the appetite for.

If a file becomes too risky or the likelihood of default increases to a certain level, clients are sent to a different division that specializes in managing high risk files. In this special division risky clients either have their security realized on, move to another bank, or work with the division to improve their financial situation and move back to the regular commercial bank.

What A Commercial Banker Does – Relationship Manager (RM)/Sales Side

When drinking with clients, relationship managers have to sell new products, cross-sell trading activity via interest rate swaps or FX hedging, and try to solicit more deposits.

Internally, to get loans approved, the relationship manager will have to get their loans adjudicated from a business perspective instead of a credit perspective.

Depending on how risky a client is, the bank has to hold certain provisions for credit losses. The riskier the client, the more capital the bank has to put up against it. The bank demands a certain return for their shareholders as measured by return on equity, return on risk weighted assets (RWA), return on assets and return on tier 1 capital (regulatory capital). When comparing the return against the capital put up, the business adjudicator will choose whether or not to approve the loan.

An unsecured loan is the most risky, but even risky clients can be credit enhanced through collateral, guarantees and priority/seniority on assets for the bank.

If the loan is undrawn, which may be the case for lines of credit, if the line is committed, the bank will still need to fund even if the client is in trouble. So lines of credit can be very punitive to a bank’s capital.

Banks make money via the spread between their cost of funds and the revenues from lending to clients (the price) and the dollar value of their loans outstanding (the volume). Deposits are the cheapest funds as the interest rates paid on deposits are very low – bankers solicit deposits to widen the spread. If the bank runs out of deposits, they borrow from internal treasury at the bank which borrows from the capital markets – this is much more expensive and the cost of lending will go up.

These business memos that include returns on lending will be sent out when new credit is requested.

Outside of business memos, the relationship manager will prepare account plans for clients that outline the products that the client uses as well as potential business in the future.

Major Commercial Banking Lending Products

  • Term Loan – A sum of money that can be used for a variety of corporate purposes, whether expanding the business or constructing a new factory. These will usually follow an amortization schedule
  • Commercial Mortgage – A mortgage against a property for the commercial business – as these do not have the government incentives that personal mortgages or personal guarantees, interest rates tend to be higher; as with all mortgages, there is an amortizing schedule with identical payments with a different blend of interest and principal in each one
  • Construction Loan – Companies draw on the loan as they construct a factory or building, with interest being paid on what is drawn and a ticking fee paid on what is not drawn – once the funding is complete, they can no longer draw and begin paying it down
  • Revolving Line of Credit – For operating and working capital cash flows, these are company credit cards that can be drawn and repaid immediately

As with all loans, pricing will depend on tenor, amortization schedule, security/collateral, and the company’s credit profile.

Commercial Banking Jobs in Canada

The big 5 banks in Canada (TD, CIBC, Scotiabank, BMO, RBC) dominate commercial banking in Canada and offer the largest suite of services. These banks will take a business from its beginnings to a mid-sized company before possibly moving coverage to the corporate bank if the business becomes large enough to tap into the capital markets.

Even with the large banks having a large footprint across Canada, regional lenders also have a sizable presence such as National Bank and Laurentian Bank in Quebec and Canadian Western Bank in Western Canada with a very large oil and gas focused loan book.

Credit unions are very prominent in Canada, especially in Quebec and British Columbia. Desjardins, VanCity and Coast Capital Savings have enormous deposit volumes, although an order of magnitude less than the banks. Although their deposit rates are higher for members, they have enormous untapped lending potential.

Some international banks such as HSBC also have lending divisions in Canada – HSBC is very large in Western Canada having previously acquired a BC based lender and services international clients and the large Chinese demographic in Canada. Other Asian banks have been growing their operations, with many branches of Chinese State-Owned Banks such as the Bank of China (Canada) and China Construction Bank springing up in large urban centres (Toronto, Vancouver).

Why Commercial Banking?

Hours in a commercial bank can vary depending on your position and location – although hours are much closer to a normal corporate job than a capital markets role.

Sales personnel usually work longer hours on average if client entertainment is included. Drinking with clients is frequent and covered by the bank’s expense account. The smaller the city, the more drinking commercial bankers will have to do. Excluding client entertainment, the sales team usually works 9-5 unless they are trying to push something through.

Portfolio management/credit analysts usually put in longer hours during expiry season when the bulk of their annual reviews are due. Usually reviews are concentrated at certain points of the year and the team has to push credits through the risk management team in a short period of time. Late submissions will affect performance reviews.

Work load also differs depending on the size of the commercial banking team’s portfolio and geographic region. Positions in the Greater Toronto Area generally put in more hours as the work culture there is more diligent.

Commercial banking is appealing in comparison to investment banking roles as that commercial banking associates can get client exposure at a much earlier stage in their career. Work life balance is much more reasonable in commercial banking with an average week anywhere from 37.5-60 hrs depending on the season and what workload is like. There is not a large face time culture in commercial banking.

Commercial Banking Compensation and Exit Opportunities

Commercial banking professionals fit somewhere between retail banking and corporate banking, and are compensated accordingly. Base salaries are ~$60,000 (+$5,000 bonus) base for entry level associates. For account managers, base salaries are ~$70,000, with a significantly higher bonus.

Exit opportunities for commercial bankers are good, as you do get some experience with credit analysis and/or sales. Corporate banks sometimes hire from commercial banks, and from corporate banking you can exit to debt capital markets or investment banking.

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