At present, the Canadian banks have outstanding asset quality. Although provisions rose notably for the second consecutive quarter in Q2, provision and gross impaired loan ratios remain below long-term averages. With Q3 reporting beginning August 23rd, we believe the market will be focused on two areas of potential deterioration: (i) energy loans (which have been driving higher loan losses), and (ii) Alberta consumer, particularly uninsured.
Insights: Canada
On Capital, Canadian Banks Continue to Lose Ground vs. Global Peers
In our Insight, “Canadian Banks – Are Falling Global Reserve/Capital Rankings Increasing Regulatory Risk?” (April 27th, 2016), we highlighted that on the most important capital ratio, CET1, the Canadian banks have an average ratio of ~10%, which is well below the average of ~13.5% for the banks in 35 “major” countries (ranking 34th out of 35). We also explained in that Insight that we believe the…
Part #3 of 3: Canadian Banks – Are Falling Global Reserve/Capital Rankings Increasing Regulatory Risk?
In our three-part series, Canadian Banks: How Worried Should You Be (about Rising Energy Losses, Low Reserves, and Recessionary Alberta)?, we have been reviewing the challenges facing the sector. In this Insight, we discuss another potential issue facing the Canadian banks: rising regulatory risk. With the sector near the bottom of global rankings for key capital and reserve ratios, we discuss the potential for policy makers to…
Part #2 of 3: Canadian Banks – How Worried Should You Be (about Rising Energy Losses, Low Reserves, and Recessionary Alberta)?
With a 20% rise in loan losses in fiscal Q1, it would appear that Canadian banks are entering at least a mild credit cycle. In our view, the magnitude of provisions for credit losses taken over the next several quarters will be influenced by three issues: (i) an over 50% decline in the price in oil is placing stress on more than $100 bln in drawn/undrawn…
Part #1 of 3: Canadian Banks – Are Sectoral Allowances the Solution to Low Reserve Ratios?
The Canadian banks have very low reserves-to-loans ratios (“reserve ratios”). Why? The banks are generally restricted by accounting rules from setting aside specific reserves until after there has been some form of impairment/loss event (often referred to as an “incurred loss” model). This makes it very difficult for the Canadian banks to set aside allowances/reserves for impaired loans in advance of loans going “bad”. The result,…
On HBG, Adding LB to Reduce Energy Risk, Retain 5% Tax Efficient Yield
We recently replaced a large-cap Canadian bank with Laurentian Bank (LB) in Hamilton Capital Global Bank ETF (HBG), in order to reduce the ETF’s exposure to energy lending. LB has a 4.9% dividend yield and at the time of writing, trades at 8.4x f2016 earnings, or a ~20% discount to the Big-6 average. Investors familiar with LB might question the switch, as most are aware that…
Reducing Energy Exposure; Going Modestly “Underweight” Canadian Banks
As explained in Hamilton Capital Global Bank ETF (HBG)’s prospectus, it is anticipated, over time, that HBG’s geographic mix will roughly represent: 50% North America, 25% Europe and 25% other countries. Although completely flexible, within the 50% allocation to North America, we generally aspire to a geographic mix of Canadian banks (15%) and U.S. banks (35%). Given our concerns over rising direct/indirect losses from energy lending,…
Part #2 of 2: Why the Canadian Investment Banks Largely Avoided the Painful Global Restructuring
In Part #1: Why the Global Investment Banking Model is Under Siege, we discussed why the global investment banking model is undergoing a painful restructuring. Hardly a day goes by without bad news of the challenges facing the global investment banks. In this Insight, we address the obvious question: “With their large investment banking operations, how have the Canadian banks largely avoided this painful global restructuring?”.
Notes from the Field: BofAML Insurance Conference 2016
We recently attended Bank of America Merrill Lynch’s 2016 Insurance Conference in New York, where we took in presentations by 27 insurance companies, with representatives from the life, property and casualty (P&C), reinsurance and mortgage insurance sub-sectors. Most of the companies presenting were U.S.-based (and listed), with several Bermuda and Europe-domiciled reinsurers, and a Canadian P&C insurer also in attendance. Notwithstanding the location of their headquarters,…
Global Growth – Economists vs. the Markets
In this comment, we discuss the seemingly large gap between economists’ growth expectations for the global economy and those of the market. The former is forecasting comfortably positive growth, while the latter’s worries have prompted a global sell-off in equities. We also address the most likely trigger of a global downturn, while reviewing the impact of the European sovereign debt crisis.
Why AGF Should Sell Itself in 2016
Since 2013, we have travelled throughout Canada giving a research presentation entitled “Canadian Banks – the End of an Era?”, which is based on an essay we wrote in 2011 (and reprinted in the Globe). In this presentation, we reviewed the evolution of the banks over the previous 20+ years and provided a 5 to 10 year outlook for sector.
In Person: The Future of Canadian Financial Services – A Mid-Cap Perspective
Today, we hosted “The Future of Canadian Financial Services – A Mid-Cap Perspective” at One King West’s Grand Banking Hall in Toronto. We held a fireside chat with three CEOs of Canadian financial services companies to discuss the most important fundamental and macro themes facing the financials and markets in Canada.