Invest in Canada

Canada’s Banks are Finally Getting Some Respect.

by investor on 07/03/09 at 2:44 pm

Derided for years as meek and mild while banks around the world expanded wildly, suddenly the reputation of Canada’s big lenders as prudent and sometimes downright boring has become an asset instead of a liability.

U.S. President Barack Obama has heaped praise on the management of this country’s financial system. Ireland is considering overhauling its system to look more like Canada’s. Financial papers around the world are running headlines such as “Canada banks prove envy of the world.”

Since the credit crunch began in the summer of 2007, the Big Five banks have booked a total of $18.9-billion in profits.

Royal Bank of Canada

TD Bank

Bank of Nova Scotia

CIBC

Bank of Montreal

Whether measured by market value, balance sheet strength or profitability, Canada’s banks are rising to the top. Since the credit crunch began in the summer of 2007, the Big Five banks have booked a total of $18.9-billion in profits.

In roughly the same period, the five biggest U.S. banks have lost more than $37-billion (U.S.). One, Wachovia Corp., was forced to sell out to avoid failing. Another, Citigroup Inc., long the world’s largest bank, may have to be nationalized and this week became a penny stock. The picture is similar in Britain.

The U.S. has spent most of the $700-billion the government earmarked for bank bailouts, and there are estimates that the final tally could be more in the trillions of dollars. The head of the Bank of England said last month that it’s “impossible” to know how much money it will take to fix his country’s banks.

Canada, by contrast, has not had to inject capital directly into banks, other than starting a program to buy from banks $125-billion (Canadian) of insured mortgages – any losses from which the government was already on the hook for anyway.

The reason comes down to a fundamental conservatism. From lending practices to bets on trading to financial reserves and takeovers, the Big Five banks have long tended to be more careful than their global peers. And when they did want to get aggressive, government and regulators held them in check.

“The Canadian banks were under a significant amount of pressure from both the analysts and the marketplace in general to be more aggressive in expanding into international markets, particularly the United States, and I think to some degree resisted partially because of a more conservative approach,” says RBC chief executive officer Gordon Nixon.

Still, the industry has had stumbles, most notably Canadian Imperial Bank of Commerce’s misadventure in derivatives, which led to a $2.1-billion loss for 2008.

And shareholders in Canadian banks have been battered. As a group, the banks’ shares are down almost 50 per cent since Aug. 1, 2007, with most of the decline in the past six months as the economy worsened.

The concern weighing on these bank shares, for starters, is that profit growth in general is a thing of the past until the economy picks up. Most analysts say the banks’ profits will shrink in coming quarters as more loans go sour and margins on lending tighten up. There’s also nagging doubts that dividend payments are unsustainable and that something bad is still lurking on balance sheets.

More writedowns are likely in store for banks such as Toronto-Dominion Bank and Royal Bank of Canada, both of which made big acquisitions in recent years that now look overpriced.

Still, bank bosses such as Rick Waugh, CEO of Bank of Nova Scotia, say the banks are insulated from lingering problems because they have profits rolling in from many sources.

“We have made mistakes,” he says, “but we made sure that we were well diversified.”

That’s a result of a conservatism not just among executives. That same approach extends to consumers, helping the banks sail along on the strength of their domestic lending businesses.

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