You can bank on Canada - Tilted Forum Project Discussion Community

Baraka_Guru · 03-25-2009, 08:37 AM

Quote:

You Can Bank On Canada (RY, TD, BNS, CM, BMO)
March 24, 2009 | by Will Ashworth

Seventeen banks have failed in the U.S. in the first three months of 2009, giving banking counterparts north of the border unprecedented opportunity. Four out of the top 10 North American banks by assets are now Canadian. They've come a long way since 1999, when not one qualified in the Top 10. Back then, Canadian banking executives argued that they should merge to become more competitive with their larger U.S. counterparts. The Canadian government said no, and it has worked out well. According to the World Economic Forum, held last October, Canada's financial system is the best in the world, while the U.S. ranked 40th. The experts suggest you can bank on Canada. But should you?

Exceptionally Profitable
Canada's six biggest banks all made money in the first quarter ended January 31, 2009. The top five banks' earnings totaled $2.8 billion. In comparison, Citigroup (NYSE:C) lost $17.3 billion, Wells Fargo (NYSE:WFC) lost $2.55 billion and Bank of America (NYSE:BAC) lost $1.79 billion in their most recent quarters. Bank of Nova Scotia's (NYSE:BNS) return on equity topped the Canadian banks at 16.9%, while the Canadian Imperial Bank of Commerce (NYSE:CM) was the lowest at 4.0%.

Scotiabank's CEO, Rick Waugh, had this to say about its future in 2009 and beyond: "We are in good shape not only to weather this unprecedented storm, but to come out in a very strong position with the ability to capitalize on growth opportunities relative to many of our global competitors." Translation: It's taking market share in those countries where it competes. America's loss is Canada's gain. (Be sure to check out the Return On Equity section of our Profitability Indicator Ratios Tutorial to learn more about these measures.)

How Did It Happen?
Canada's banks have outperformed their U.S. counterparts in part due to tighter regulations. Conservatively managed, their average asset-to-capital ratio of 18-to-1 is half that of some American banks and less than a third of some European banks. Add to this, Tier 1 capital-to-risk-adjusted assets of 9.8%, higher than its American and European competitors, and you have the ingredients for safe, successful banking.

Royal Bank (NYSE:RY) and Toronto-Dominion Bank (NYSE:TD) are two of Canada's oldest financial institutions, both paying annual dividends since 1870. However, Canadian banks are more risk-averse, not to mention more expensive, than those south of the border. For example, Canadian bankers (I say this only half-joking) will lend you a dollar, but only if you give them two; and they have little reluctance service charging customers to death. (For more on bank service charges, be sure to read The Ins And Outs Of Bank Fees.)

[...]

Solid For Now
As a group, they've added $7.3 billion in equity to their balance sheets over the last six months, including $161 million for the Royal Bank in early March - and none has yet to take aid from the Canadian government. In fact, Royal Bank and Toronto-Dominion both have triple-A ratings from Moody's, two of only seven anywhere in the world. They're in good shape as long as the recession ends sometime in 2010. Even the best banks would have trouble surviving another two years like the last two.

In terms of actual first-quarter earnings, Bank of Nova Scotia did the best, increasing net income 15% to $842 million with over half generated outside Canada, Mexico and the U.S. It's definitely the most international Canadian bank. The other first-quarter success story was at CIBC, where net income was $147 million, a huge turnaround from a loss of $1.46 billion in the same quarter last year. It seems the sub-prime troubles from its U.S. operations are mostly behind it. The remaining three banks, including the biggest, Royal Bank of Canada, all saw their earnings decline in the first three months of the fiscal year, although profits averaged $662 million, which is nothing to sneeze at.

Bottom Line
The five Canadian banks' stocks are down an average of 44% in the past 52 weeks. Traditional yields are 3-4%, making their current returns unusually high. Some believe they will cut or suspend dividends in the near future to preserve capital should the economy worsen - hence the lower stock prices. It's a great theory, but one I find very difficult to swallow. You don't stop paying dividends after 138 years of doing so. You just don't.

Read Is Your Dividend At Risk? to learn of several telling factors that can help you answer this question and avoid losses.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work. At the time of writing Will Ashworth did not own shares in any of the companies mentioned in this article.

You Can Bank On Canada (RY, TD, BNS, CM, BMO) | March 24, 2009 |By Will Ashworth - Investopedia Advisor

Within just 10 years, 4 Canadian banks are now amongst the top 10 banks in North America. This is, in part, due to the failure of some (to the tune of 17 so far in 2009) banks in the U.S., but it is also because of Canada's conservatively regulated banking system, which is ranked the best in the world by the World Economic Forum (the American system is ranked 40th).

So what I'd like to explore here is the contrast between the Canadian and American systems. What is probably amongst the biggest differences between the two systems is related to regulation. I'm not about to go down a laundry list of comparisons in detail, but what I'd put forth here is that the right kind of regulation is a good thing. Regulation in this context is the regulation of risk for the benefit of stability and security. Canadian banks have weathered this economic storm relatively well so far.

Do you think the current status of American banking is a result of weaknesses in the banking system or is it mainly due to wider economic factors?
Should the American system take a chapter (or far more) out of the Canadian system?
Within such an economic juggernaut as the American economy, why is the American system ranked 40th by the World Economic Forum?
If the American system had been akin to the Canadian system, would those 17 banks have failed by this point?
Does this article change your opinion of regulation? How or why not?

tisonlyi · 03-25-2009, 10:03 AM

The 17 US banks that have failed this year (plus two corporate credit unions - that is credit unions for corporations) have all been pretty small outfits, relatively speaking. The US banking system is set up for some banking failures on an ongoing basis, in-keeping with the high-risk, high-reward nature of the system. As the story goes.

Even during the good years, a number of banks would generally fail.

The problem in the US isn't with the banks that have failed so far this year, they've been resolved pretty quickly and painlessly from what I've seen - you know about the FDIC, right?

No, the problem is with the banks they haven't allowed to fail by govt fiat.

With proper regulation would those banks be healthy? Probably. Smaller? Definitely. Would the US have had any/much growth since the collapse and bailout of Long Term Capital Management, maybe even go back to the S&Ls, without the merger and deregulation binge? Doubtful. Certainly nowhere near what was had. Including tech revolutions.

Willravel · 03-25-2009, 11:00 AM

- Do you think the current status of American banking is a result of weaknesses in the banking system or is it mainly due to wider economic factors?
Both. Personally, I've hated the banking system since I've learned of it's basic functions. It's a very, very, very dumb way of storing money. As far as the business part, it's completely unstable. That said, the collapses were certainly hurried along by economic factors such as the sub-prime debacle.

BTW, have we decided on a name for that yet? I feel like a cartoon villain calling it a debacle. A dastardly debacle!
- Should the American system take a chapter (or far more) out of the Canadian system?
No. Canada is certainly doing a better job, but I still see it as the same basic systemic problems, only in smaller quantities due mainly to increased regulation. Banks should be nationalized and should not make a profit. They should be for storing and accessing your own money, should be 100% backed, and should be paid for in taxes (and judging by Medicare, the administrative costs shouldn't be anywhere near as high as they are in the private sector). If you want to invest money, you should remove your money from your bank and invest it elsewhere. Had we used this model back in the 1920s, we would have avoided the depression almost completely.
- Within such an economic juggernaut as the American economy, why is the American system ranked 40th by the World Economic Forum?
We're getting the blunt of neoliberal consequences.
- If the American system had been akin to the Canadian system, would those 17 banks have failed by this point?
By this point? Probably not. Eventually there would have been problems, though.
- Does this article change your opinion of regulation? How or why not?
Nopers. Regulation is necessary in banking. Always has been, always will be.

tisonlyi · 03-25-2009, 03:30 PM

The subprime debacle was a symptom, not a cause.

The cause was massively over-leveraged banks and hedge funds pushing incredible numbers through each and every facet of each and every market with the intention of gaming/cornering/etc, which they were allowed to do because of irresponsible deregulation, which was pushed through due to hopelessly corrupt political systems in the heart of most of the world's financial centres.

The old term for economics was 'political economy'. I think the term should be revived.

EVERYONE should know that when a person speaks about an economic system, they ALWAYS have a particular ideological axe to grind.

Political economy uses numbers, narratives and philosophy to explain observed phenomena... Econometrics, or statistical economics (statistical political economics), attempts to make predictions based on reductive models derived from an economic theory.

I mean, even if you take every nation on the planet... that's still less than 300 for a sample size. Not big enough to test or prove anything... as any social scientist will tell you.

Damn fools.

Banks should be mutuals or blended consumer/worker cooperatives and SMALL. then, no matter how light the regulation, the damage done couldn't hope to bring down a superpower.

Willravel · 03-25-2009, 03:38 PM

Quote:

Originally Posted by tisonlyi

The subprime debacle was a symptom, not a cause.

I know. See?

Quote:

Originally Posted by Willravel, the wise

That said, the collapses were certainly hurried along by economic factors such as the sub-prime debacle.

Hurried along, not caused by.

Quote:

Originally Posted by tisonlyi

The cause was massively over-leveraged banks and hedge funds pushing incredible numbers through each and every facet of each and every market with the intention of gaming/cornering/etc, which they were allowed to do because of irresponsible deregulation, which was pushed through due to hopelessly corrupt political systems in the heart of most of the world's financial centres.

Actually, this is a symptom of developing an economic system around rewarding greed instead of contributions, competition instead of cooperation.

tisonlyi · 03-25-2009, 03:43 PM

Sorry Will. No slight intended, I think we're pretty aligned on most things... Love you!

I suppose it shows, but the baulking of the bond market is really panicking me.

More than usual.

Willravel · 03-25-2009, 03:52 PM

No slight perceived, just clarifying.

Don't panic, just save up a bit. I've been investing in tangible goods for about 3 years now and I'm really happy with it. It's a bit more difficult to become liquid overnight, but it's extremely stable.

tisonlyi · 03-25-2009, 04:27 PM

The reason for the panic, even over here in the UK and Europe, is the incredible fragility of modern day supply chains, the wafer thin inventories and the total reliance on petroleum products which, if there's a sudden run on currencies... it doesn't bare thinking about.

Most supermarkets in the US and UK will be stripped bare in under 3 days of _normal_ demand without deliveries.

I remember the Soros-inspired run on the Pound in the early nineties and the sudden jerk of its value in those days... down from around $1:80 or so to below parity, if memory serves, in very quick time. There was mild panic in the country, plenty of older folks went on a hoarding binge... they'd seen this sort of thing after the war...

Christ, the Irish Punt was was at 80p to 1 GBP for a good while... which was a crazy level. These were pre-tiger days. well... maybe it was a cub. (it's been hunted for its pelt as of now)

The situation now, the underlying situation, is a lot, lot worse than the relatively false position of the pound back then across the entire globe.

Ireland is melting down, Eastern Europe is on the verge of a full-blown, semi-continental currency crisis of epic proportions, the pound has lost about 35% versus the dollar, more versus the Euro, Japan's exports yoy are halved... HALVED... Similar story for Germany... China is lying through its teeth on the numbers and its economy (btw, have you noticed that every single govt statistic is being 'adjusted' negatively 6 weeks after being 'better than expected' this year?) every country is staring depression in the face and now... now the bond markets, which have trended to less and less coverage of t-bill/bond/gilt auctions over the past few months, well they seem to have had their fill.

The race to dollars and t-bills has been described as 'the last bubble'. If and when it pops...

If fuel prices were to rocket back up towards their prices of a year ago right now... either speculatively, or through a run on currencies...

Somehow, speculating on regulation just seems irrelevant.

03-25-2009, 10:03 AM	#2 (permalink)
tisonlyi Nothing	The 17 US banks that have failed this year (plus two corporate credit unions - that is credit unions for corporations) have all been pretty small outfits, relatively speaking. The US banking system is set up for some banking failures on an ongoing basis, in-keeping with the high-risk, high-reward nature of the system. As the story goes. Even during the good years, a number of banks would generally fail. The problem in the US isn't with the banks that have failed so far this year, they've been resolved pretty quickly and painlessly from what I've seen - you know about the FDIC, right? No, the problem is with the banks they haven't allowed to fail by govt fiat. With proper regulation would those banks be healthy? Probably. Smaller? Definitely. Would the US have had any/much growth since the collapse and bailout of Long Term Capital Management, maybe even go back to the S&Ls, without the merger and deregulation binge? Doubtful. Certainly nowhere near what was had. Including tech revolutions. __________________ "I do not agree that the dog in a manger has the final right to the manger even though he may have lain there for a very long time. I do not admit that right. I do not admit for instance, that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race to put it that way, has come in and taken their place." - Winston Churchill, 1937 --{ORLY?}--

03-25-2009, 03:30 PM	#4 (permalink)
tisonlyi Nothing	The subprime debacle was a symptom, not a cause. The cause was massively over-leveraged banks and hedge funds pushing incredible numbers through each and every facet of each and every market with the intention of gaming/cornering/etc, which they were allowed to do because of irresponsible deregulation, which was pushed through due to hopelessly corrupt political systems in the heart of most of the world's financial centres. The old term for economics was 'political economy'. I think the term should be revived. EVERYONE should know that when a person speaks about an economic system, they ALWAYS have a particular ideological axe to grind. Political economy uses numbers, narratives and philosophy to explain observed phenomena... Econometrics, or statistical economics (statistical political economics), attempts to make predictions based on reductive models derived from an economic theory. I mean, even if you take every nation on the planet... that's still less than 300 for a sample size. Not big enough to test or prove anything... as any social scientist will tell you. Damn fools. Banks should be mutuals or blended consumer/worker cooperatives and SMALL. then, no matter how light the regulation, the damage done couldn't hope to bring down a superpower. __________________ "I do not agree that the dog in a manger has the final right to the manger even though he may have lain there for a very long time. I do not admit that right. I do not admit for instance, that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race to put it that way, has come in and taken their place." - Winston Churchill, 1937 --{ORLY?}--

03-25-2009, 03:43 PM	#6 (permalink)
tisonlyi Nothing	Sorry Will. No slight intended, I think we're pretty aligned on most things... Love you! I suppose it shows, but the baulking of the bond market is really panicking me. More than usual. __________________ "I do not agree that the dog in a manger has the final right to the manger even though he may have lain there for a very long time. I do not admit that right. I do not admit for instance, that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race to put it that way, has come in and taken their place." - Winston Churchill, 1937 --{ORLY?}-- Last edited by tisonlyi; 03-25-2009 at 03:46 PM..

03-25-2009, 04:27 PM	#8 (permalink)
tisonlyi Nothing	The reason for the panic, even over here in the UK and Europe, is the incredible fragility of modern day supply chains, the wafer thin inventories and the total reliance on petroleum products which, if there's a sudden run on currencies... it doesn't bare thinking about. Most supermarkets in the US and UK will be stripped bare in under 3 days of _normal_ demand without deliveries. I remember the Soros-inspired run on the Pound in the early nineties and the sudden jerk of its value in those days... down from around $1:80 or so to below parity, if memory serves, in very quick time. There was mild panic in the country, plenty of older folks went on a hoarding binge... they'd seen this sort of thing after the war... Christ, the Irish Punt was was at 80p to 1 GBP for a good while... which was a crazy level. These were pre-tiger days. well... maybe it was a cub. (it's been hunted for its pelt as of now) The situation now, the underlying situation, is a lot, lot worse than the relatively false position of the pound back then across the entire globe. Ireland is melting down, Eastern Europe is on the verge of a full-blown, semi-continental currency crisis of epic proportions, the pound has lost about 35% versus the dollar, more versus the Euro, Japan's exports yoy are halved... HALVED... Similar story for Germany... China is lying through its teeth on the numbers and its economy (btw, have you noticed that every single govt statistic is being 'adjusted' negatively 6 weeks after being 'better than expected' this year?) every country is staring depression in the face and now... now the bond markets, which have trended to less and less coverage of t-bill/bond/gilt auctions over the past few months, well they seem to have had their fill. The race to dollars and t-bills has been described as 'the last bubble'. If and when it pops... If fuel prices were to rocket back up towards their prices of a year ago right now... either speculatively, or through a run on currencies... Somehow, speculating on regulation just seems irrelevant. __________________ "I do not agree that the dog in a manger has the final right to the manger even though he may have lain there for a very long time. I do not admit that right. I do not admit for instance, that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race to put it that way, has come in and taken their place." - Winston Churchill, 1937 --{ORLY?}--

03-25-2009, 11:00 AM	#3 (permalink)
Willravel ... a sort of licensed troubleshooter.	- Do you think the current status of American banking is a result of weaknesses in the banking system or is it mainly due to wider economic factors? Both. Personally, I've hated the banking system since I've learned of it's basic functions. It's a very, very, very dumb way of storing money. As far as the business part, it's completely unstable. That said, the collapses were certainly hurried along by economic factors such as the sub-prime debacle. BTW, have we decided on a name for that yet? I feel like a cartoon villain calling it a debacle. A dastardly debacle! - Should the American system take a chapter (or far more) out of the Canadian system? No. Canada is certainly doing a better job, but I still see it as the same basic systemic problems, only in smaller quantities due mainly to increased regulation. Banks should be nationalized and should not make a profit. They should be for storing and accessing your own money, should be 100% backed, and should be paid for in taxes (and judging by Medicare, the administrative costs shouldn't be anywhere near as high as they are in the private sector). If you want to invest money, you should remove your money from your bank and invest it elsewhere. Had we used this model back in the 1920s, we would have avoided the depression almost completely. - Within such an economic juggernaut as the American economy, why is the American system ranked 40th by the World Economic Forum? We're getting the blunt of neoliberal consequences. - If the American system had been akin to the Canadian system, would those 17 banks have failed by this point? By this point? Probably not. Eventually there would have been problems, though. - Does this article change your opinion of regulation? How or why not? Nopers. Regulation is necessary in banking. Always has been, always will be.

03-25-2009, 03:52 PM	#7 (permalink)
Willravel ... a sort of licensed troubleshooter.	No slight perceived, just clarifying. Don't panic, just save up a bit. I've been investing in tangible goods for about 3 years now and I'm really happy with it. It's a bit more difficult to become liquid overnight, but it's extremely stable.