Canadian Banks: Why U.S. Mid-Caps are Easier to Acquire (than 10 Years Ago)

In the Hamilton Capital Global Bank ETF (HBG; TSX), we generally seek to hold 50% North American banks, with an emphasis on the ~200 publicly traded U.S. mid-cap banks (those firms with <$100 bln in assets). As of the time of writing, HBG had exposure to 23 U.S. banks representing 43% of the ETF’s net asset value. Read More»

Canadian Banks: Revisiting our “End of an Era” Thesis (Five Years Later)

In May 2011, we wrote an essay entitled “The Canadian Banks – The End of an Era”. In this essay – which was excerpted in the Globe and Mail – we explained why the Canadian banks were entering a period in which their two-decade period of double digit EPS/dividend growth was ending. Specifically, we identified three reasons supporting this thesis: (i) the drivers of the sector’s tremendous growth from 1989 to 2010 were fading/gone, (ii) with domestic consolidation nearly complete, capital deployment would shift decisively to foreign acquisitions, which have historically been more dilutive to EPS growth and ROE (than domestic targets), and (iii) that regulatory risk was likely growing, including higher mandated capital levels. Taken together, we concluded that the result would be more “normal” EPS growth of mid-single digits; good, but a large step-down from the 10%+ achieved by Canadian banks in previous two decades. Read More»

Canadian Banks: Housing Correction Concerns Increasing Regulatory Risk

As we have highlighted in numerous Hamilton Capital Insights, regulatory risk is a key risk in global banking, and one we attempt to minimize our exposure. It is most intense for the mega-banks in the U.S. and Europe, particularly those with global investment banking operations (i.e., C, BAC, JPM, CSGN.VX, UBS.VX, DBK.GY, BARC.LN). Although post-crisis, those global banks have been the epicentre of regulatory risk, the recent troubles facing WFC suggest the focus of regulators is shifting into commercial and consumer banking Read More»

Canadian Banks: More Risky vs. Less Risky Loans in One Chart

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. Read More»

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 Canadian banks are appropriately capitalized, but that the sheer size of this difference is an important issue for investors, since it could mean regulatory risk for the Canadian banks is rising. Read More»

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 seek to close this difference. Read More»

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 oil and gas exposure, (ii) Alberta, which represents 20% of the Canadian economy, is in year two of a recession, placing pressure on consumer loans, and (iii) the sector’s very low (and low quality) reserves. In this Insight, we discuss the implications of these three important issues, as we attempt to answer for Canadian bank investors, “how worried should you be?” Read More»

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, given that the sector has – for now – extremely good asset quality, is that the banks also have very low reserve ratios compared to U.S. banks, global banks and their own recent history. In this Insight, we discuss why we believe the abrupt rise in loan losses in Q1, combined with very low reserve ratios, is increasing the potential for the banks to build reserves through the rarely used sectoral allowances. Read More»

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