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…
Insights & Commentary
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…
U.S. Banks Feel the Pressure from Low Oil Prices; Reserve Builds Continue
Last week, Wells Fargo (WFC), one of the largest banks in the United States, announced significant increases in reserves and charge-offs for energy loans as part of the company’s Q1 2016 earnings release. WFC increased its reserves-to-loan ratio to 9.3% of total outstandings[1]. The bank attributed this change to deterioration in financial performance and collateral, driven by lower energy prices (it also disclosed that just 7%…
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?”.
Another U.S. Bank Pre-Announces Large Increase in Energy Reserves
Yesterday, Hancock Holding Company (“HBHC”) pre-announced significant increases in provisions for energy loans. HBHC, a $22.8 billion (assets) bank which is based in Mississippi and has large operations in Texas and Louisiana, now expects that its provision for losses in the first quarter will total approximately $58-$62 million, potentially bringing the reserve up to ~8.5% of energy loans. Just over two months ago, HBHC management guided…
Part #1 of 2: Why the Global Investment Banking Model is Under Siege
If you follow or own JPM, C, BAC, MS, GS, or European ADRs CS, UBS, DB, you have no doubt observed the relentless stream of negative headlines/announcements underscoring the very challenging operating environment of the global investment banks. In our view these challenges are structural, not cyclical, and we believe that global investment banking model is effectively under siege. In this Insight, we discuss the immense…
Notes from NYC: For Global Investment Banks, Legacy Issues and Volatile Markets Creating Challenges
Along with a group of other investors, we recently attended meetings in New York City with executives from global banks (7 banks, including 6 international). Many of the conversations were focused on the investment banking businesses of these firms and how they are dealing with structural changes to the business model and regulatory environment, which are contributing to the ongoing headlines highlighting the challenges facing the…
March 2016 Update | Australian Banks: Profitable Banking Sector in a Wealthy Country
In this note, we provide a review of the Australian economy and banking system, highlighting the most important issues facing the sector. Australia is a wealthy country with an oligopoly banking sector, with banks known for their profitability, strong credit metrics, and high dividend yields. Current headwinds facing the economy, which will impact the banking system, include elevated real estate prices and a downturn in the…
European Bank Reported Earnings Up ~54% in 2015 (after Rising ~55% in 2014)
Although obscured by the very difficult market sentiment, reported earnings[1] for the largest publicly traded European banks, representing total assets of over €25 trillion, rose by ~54% in 2015, almost exactly the same as the 55% increase the sector experienced in 2014. ‘Core’ earnings[2] – i.e., excluding unusual items – rose a very consequential ~20% in 2015, after rising ~43% in 2014 (see chart below).