Canadian Banking System: An Oasis of Financial Calm

by Dr. Mark Skousen

The U.S. financial system is a mess - according to the World Economic Forum, the United States ranks 40th among banking systems around the world. Without federal bailouts, the two largest banks in the country, Citibank (NYSE: C) and Bank of America (NYSE: BAC), would be in bankruptcy, and the good old USA would be headed for the Greater Depression, as my friend Doug Casey likes to call it.

You’ll never guess where the world’s No. 1 banking system is. No, it’s not fabled Switzerland, nor booming Hong Kong. While the central banks around the world are desperately trying to stem the flow of red ink, this country’s red is emblazoned on its iconic mounted police force. It’s right next door: Canada. The land of hockey and moose has the world’s soundest banking system. While European and Asian banks are collapsing, Canada stands out as an oasis of financial calm.

Canadian Banks Receive Highest Rankings

According to the Global Competitiveness Report, Canadian banks received the highest ranking, a 6.8, out of a possible 7.0 (healthy, with sound balance sheets). The lowest ranking of one means insolvent and possible government bailout.

Canada’s stock has been rising quietly - the Canadians are known for their modesty and self-restraint - as American financiers and media are astonished to find that their northern neighbors have somehow avoided the subprime lending scandal and the housing market mess.

What’s Canada’s secret? With the exception of oil-rich Alberta, Canada did not have a strong construction surge as the United States did during the boom years, and mortgage interest is not tax deductible in Canada.

Canadian banks are national in scope. The top five banks have branches in all 10 Canadian provinces, making them less susceptible to downturns. They have large numbers of loyal depositors and a more solid base of capital, and are regulated more tightly than their U.S. counterparts – they are more liquid and less leveraged.

Canadian Banks - Four of The Top 10 Largest North American Banks

Among the top 10 largest banks in North America, four are Canadian banks:

• Royal Bank of Canada (NYSE: RY)
• Bank of Nova Scotia (NYSE: BNS)
• Bank of Montreal (NYSE: BMO)
• Toronto Dominion (NYSE: TD), which bought Commerce Bank last year

Canadian bank executives don’t have to be excoriated by Parliament before taking a pay cut. The CEOs of Canada’s three-largest banks have all voluntarily cut their own pay in response to the global economic crisis.

Canada has its share of problems - being linked to commodity prices - but financially, it’s done a better job than its southern neighbor has. While the Bush administration ran up massive deficits year after year, Canadian officials finally pushed through a stimulus package that resulted in the government’s first deficit in a decade!

Right now, the Canadian banks are selling at incredible bargains. With operating margins exceeding 30%, and dividend yields between 6% and 8%, Canadian banks are selling at only around eight times earnings. Bank of Montreal is my favorite - it’s selling for only six times this year’s expected earnings, and is yielding 10%.

During a crisis, the good investments are hit like the bad ones. However, when the markets recover, the good bank stocks will skyrocket, especially those across the border.

Comments

[jerbare:]

Dr.Skousen is NOT an analyst. Or, he is not paying attention. Or (worse yet, he's being prompted) He has yet to note that Canada's secret government -- the corporations and the banks have seen to it that
war-making becomes permanent ($half a trillion to double the national debt), $75 Bn to buy questionable mortgages from the shadow bankers AIG and GE. Changing the rules for Canada's Publicly owned central bank to provide "cash for trash" --365 days instead of just overnight with
top collateral. Why would this be arranged ? To accommodate the Goldman Sachs governor of the Bank of Canada.

Feb 26 08:51 AM

[Aristophanes:]

Canadian banks are not the gems they appear to be. Ironically, if they'd had their way with current management, they'd have merged into perhaps 3 banks in order to (and I quote from one of the Executives who was lobbying Parliament to allow mergers) "Become bigger so that Canadian financial institutions can become real players in the world of new financial instruments."

Some of the Execs still running the show up North were totally convinced a few years ago that they were missing out on the great derivatives boom and that the politicians were holding them back. Now it looks like the bureaucrats were right after all and that smaller banks would be more responsible with their capital and more responsive to their primary market.

Also, according to the national house price index (www.housepriceindex.ca) from the outlier National Bank of Canada, the Candian housing market is only starting its purge of over-priced assets. This will weigh heavily on the banks in the months to come.

These are not under-valued stocks right now. The markets have not future-priced their fundamentals because the trends are only just emerging. Caution. Caution. Caution.

Feb 26 09:14 AM

[Nick Waddell:]

Still, in the midst of this gutting we are in, the results from The Royal Bank and CIBC this morning are pretty surprising....

Feb 26 09:44 AM

[2banana:]

Canada has a huge housing bubble that is just beginning to deflate...

Feb 26 09:58 AM

[Bull Run:]

There is a number of reasons for Canda's strong banks, 1) Reserve requirements are 3 times higher in CDN, and Canadian banks actual reserves exceed that. 2) Canada has a Central bank, like all developed countries, unlike America's Mickey Mouse system of the Fed ad the Tresusry.The US Fed is a private comp. which issues Fed reserve notes to the Tresury, in exchange for Tresuries. The US government elects the Chairman, but not even Congress has the right or power to review the minutes of the Feds. The Fed even issues it's own debt. Should it be rated by fitch?The Fed and the Treasury have overlapping authority that No one seems to understand.Get rid of both of these jokes and bring in a Central Bank, tha's not privately owned..3)Canadian Banks didn't issue these wild morgages, sub-prime. 4) Canada doesn't have Wall Street pimps in their back pockets. It was Wall strret that took these morgages and turned them in investment vehicles in the US. CDO's and insusred them many times with CDO's.. That didn't happen in CDN, because CDN doesn't have Wall street pitchmen.5) CDN's are just not that greedy.

Feb 26 10:04 AM

[lavalyn:]

To jerbare: the Canadian bank "bailout" of buying Canadian mortgages from the banks... I see little issue with the government buying the mortgages of homeowners whose risk against default is insured by... the Canadian Mortgage and Housing Corporation, the wholly government-owned mortgage insurance company. If the taxpayer is already bearing the default risk because of the government-backed insurance, where's the bailout from buying them from the banks?

Feb 26 10:20 AM

[silverfox:]

As i have commented in previous articles, American banks have a long way to go to catch up to the Canadian banks voted as having the best balance sheets in the world.
If you let banks buy banks ( not allowed in Canada ) then sooner or later these corporations get out of control without government restrictions.
Remember smaller banks with healthy balance sheets are a pearl today
Who wants ( bac ) or (citi) that are bankrupt anyway.
And a good place to park cash today if you are worried about a financial collapse is the Credit Union System in Alberta.
this small banking system guarantees 100% of all deposits backed by the Alberta Government.
years ago this stabilization fund was set up to keep the credit unions solvent.
they also allow ( only money not guaranteed ) total10,000 shares in the bank @ $1.00/share & pay out 8 - 12 % annually.
I am a Canadian who has banked with Credit Unions all my life.
yes they are small but they know you when you walk in the door and they financed me for everything from a former mortgage to any other big ticket items.
remember small is beautiful if you like prsonalized service.

Feb 26 05:06 PM

[silverfox:]

Mr. Skousen pardon me if i am wrong but i disagree with your claim that the Toronto Dominion Bank owns the Imperial bank of commerce.
The Canadian Federal Government made it very clear years ago that these banks would not be allowed to merge.
It was tried and the feds bluntly said no ( no on our watch).
this has been a hot topic for years in Canada but like i said earlier.
these bank are not allowed to merge of buy out each other
Credit unions on the other hand have been allowed to merge to keep them competitive.
And in closing keep in mine that the bank of montreal ( bmo) pays the highest divident right now but some say dividend cuts are coming.
the big 5 Canadian Banks have never cut their divident but as the old saying goes never say never.

Feb 27 09:37 AM

[Bingo 2:]

Mr. Burge..Not True: BMO cut its dividend on 5/29/2008 and has been cutting it ever since. It has fallen roughly 22% since 5/29/08.

Feb 27 02:37 PM

[Chezfrederick:]

Good article. The point thar Canadian Banks are very healthy and are weathering the storm was clearly established last week when most Banks announced their first quarter results which exceeded analysts forecast handsomly. Mr. Bingo, review your facts please. BMO ans all other large Canadian banks NEVER cut their dividends since 1948 except for the smaller National Bank of Canada.

I am adding to my holdings with every dip, and expect when the economy turns around, they will skyrocket, while shorting US and European banks.

Mar 01 05:34 AM

[True North_:]

All financial companies are currently stressed; some more so than others. Canadian banks are doing well in a relative sense, but caution is warranted given that the global economic storm clouds ahead are hardly clearing. Most Canadian analysts have suggested that this will the the Banks' best quarter of the year and their results will deteriorate from here. Their Tier 1 capital ratios are generally pretty good (most have added to their capital bases over the fall/winter), and only BMO & CIBC have really material exposure to the toxic structured products markets. There is likely long term value, though as always the entry point can be a challenge. There are some tidy dividends and IF the earnings predictions are sound for 2009/10, they appear maintainable.

Two comments above: BMO has not cut its dividend; and the reference to the acquisition of Commerce Bank by TD was not (as suggested by Graham Burge: "Mr. Skousen pardon me if i am wrong but i disagree with your claim that the Toronto Dominion Bank owns the Imperial bank of commerce") a suggestion that they had acquired CIBC, but referred, of course, to their acquisition of US-based Commerce Bancorp announced in October 2007 and consumated in early 2008.

Mar 04 12:42 AM

[oldgringo:]

Naturalized U.S.citizen, born 1921 in U.K, retired Mfg Engineer, spent 16 yrs on the road travelling the No.American continent and one year travelling Southern & East Africa. Now a widower living in No.California.

May 05 07:28 PM