The "DOPE-DUD" Phase For Canadian Banks?

Is it the Canadian banks’ turn to implode? It’s almost unimaginable to pose this question of the worlds’ soundest banking system, but could their stocks be on the verge of collapsing like the U.S. banks did?

Up to now, shareholders have consoled themselves with the thesis that the Canadian banks were prudent lenders and didn’t have a housing bust to pull them down. But house prices are falling all the same, with the Canadian Real Estate Association reporting a decrease of 4.5% over the year to November, according to its new methodology. And TD Bank (TD) and Bank of Montreal (BMO) have about a quarter of their loan portfolio at subsidiaries in the U.S.

Moreover, Canada did have a commodity boom and it is now unwinding. Plus, there is recession elsewhere, notably in auto manufacturing. The Canadian industry is concentrated in Ontario, where the banks have half their loan portfolios.

The recent round of equity issues from Canadian banks is reminiscent of what occurred before the U.S. meltdown. It’s not a comforting sign when equity is issued after a 40% decline in prices and when dividend yields are in the unheard of range of 5% to 8% (earnings will be reduced by the dividends to be paid on the new shares).

Dividend payout ratios are rising too. TD has climbed from 36% last year to just below 50%. The worse case, BMO, is currently at 75%. With its dividend yield now over 8%, speculation seems to growing that BMO will be the first to slash its payout.

Will this turn out to be the “DOPE-DUD” phase? Francis Chou called it the DROP phase when he applied it to US banks in early 2008 but I like the DOPE-DUD nomenclature, which stands for: Dribbling the bad news out slowly with the most Optimistic Projections while raising as much money as possible from Every investor (DOPE), followed by Divulging all the Unpleasant news and Dousing (DUD) investors with a big bath.

Comments

[slickvguy:]

Just what we need. More fearmongering without facts. Well done.

2008 Dec 17 05:41 PM

[specks:]

About time someone gave Canadian banks a reality check. They've been lieing to us so far but have "raised" capital making it sound positive for the grandmothers whilst they dilute investors values.
Thank-you.

2008 Dec 17 05:51 PM

[abcde_98:]

Larry, you could be correct. The major banks' (RY, TD, BNS, BMO, CM) stock prices have been declining recently and without major rally advances.

How is the price action on the Bonds of RY, TD, BNS, BMO, CM ?

And, what is a good source for price quotes on the bonds? I would like to conduct price movement analyses.

2008 Dec 17 08:03 PM

[crew321:]

"(earnings will be reduced by the dividends to be paid on the new shares)." Actually additional shares reduce earnings, dividends to not reduce earnings, eps includes dividends. Preferred Share dividends do reduce eps for common shares. This statement is unclear.

Larry notes that the Cdn banks have been put on pedastol, for concrete banks they have fallen substantially.

If Larry thinks Cdn banks share prices are going to start looking like Citigroup and Bank of America's share prices he is mistaken.

Housing Prices have fallen 10% versus 33% in the US. Cdn banks require minimum of 10% down in most instances. The average household has 30% plus equity in their home in Canada very different from the US.

2008 Dec 17 09:25 PM

[DRumsfeld:]

I have been studying and investing in the markets for a good few years now. Never before I have I ever felt so overwhelmed by the shere magnitude of a poblem.

Where the hell is my money safe? I actually wish that all my money was in gold. I have gold but boy oh boy I wish it was in that 'relic'. I thought that the Canadian Dollar was good but now I just do not know.

2008 Dec 18 01:56 AM

[pitaking:]

Globe and Mail has had several interesting articles about the coming version of sub prime, the 40 year mortgage that will explode in 09. A scary but worthwhile read for all canucks.

2008 Dec 18 02:08 AM