U.S. vs. Canada: Banking Edition

Much has been made about the differences between Canadian banks and their U.S. counterparts during the financial crisis (here's a recent study) – with observers generally heaping praise on the Canadian banks for their more conservative approach, which has allowed them to stay free of government bailouts.

On Thursday, the differences were underscored.

In Canada, Royal Bank of Canada (RY) and Toronto-Dominion Bank (TD) produced earnings of $1.6-billion and $912-million, respectively – topping analysts’ estimates. The shares surged, taking Royal Bank to within 7 per cent of its record high in 2007, and taking TD within 11 per cent of its record high.

In the United States, the picture wasn’t as sunny. There, the Federal Deposit Insurance Corp. released its quarterly banking profile for the second quarter, with numbers illustrating just how fragile the financial system remains.

According to the FDIC , there were 416 “problem banks” (of the more than 8100 banks insured by the FDIC) with total assets of $300-billion (U.S.) in the second quarter, up from 305 problem banks in the first quarter and 252 problem banks in the fourth quarter.

“Not all problem banks will fail – and not all failures will be from the problem bank list – but this shows the problem is significant and still growing,” said the blogger Calculated Risk .

In terms of earnings, U.S. banks also mark an interesting contrast with Canadian banks. FDIC reported that U.S. banks insured with the corporation lost a net total of $3.7-billion during the quarter – due largely to increased expenses for bad loans. Indeed, loan-loss provisions jumped by nearly $67-billion, massive compared to the situation in Canada.

Although many U.S. financial stocks have been bouncing impressively from their lows earlier this year, the U.S. overall performance lags Canadian financials just about any way you slice the numbers.

U.S. financial stocks in the S&P 500 are down 26 per cent over the past 12-months, after dividends are included (in U.S.-dollar terms). By contrast, Canadian financial stocks in the S&P/TSX composite index are up 2 per cent (in Canadian-dollar terms).

Over the past three years, U.S. financials have fallen 54 per cent, while Canadian financials have fallen just 12 per cent. And year-to-date, U.S. financial stocks have risen 18.6 per cent, versus the 42.4-per-cent gains for Canadian financial stocks.

Comments

[john s. gordon:]

uncle - there are canadian forces participating in NATO's afghan riot control.
> jack

Aug 28 10:02 AM

[Donald Ingram:]

Unlike their American counter part, Canadian home owners CANNOT walk away from their mortgages, or for that matter ANY debt. It will follow you. This provides great impetus to sort out your financial problems before taking drastic steps. Bankruptcy is only used as that drastic last step. That being said, Canadian personal bankruptcies are up year over year. As for housing prices - they have come down from their highs and seem to be leveling off, indeed in some areas of high demand real estate has seen some price increases. Oh, by the way, we put our bankers in jail for the 'shenanigans' that your bankers get away with!


On Aug 28 07:42 AM Davewmart wrote:

> Canadian banks do look relatively good, but I am unsure about some
> of their underpinnings, specifically in house prices.
> Drops so far have been modest, I believe, and prices relative to
> incomes in many areas relatively high.
> A major correction would take a lot of the gloss off of the Canadian
> banking sector.
> Comment from those with greater knowledge of the position in Canadian
> housing would be appreciated.

Aug 28 10:14 AM

[Maple Leaf:]

I think there is a lot of hype about Canada having this great banking system. But the bankers were complaining about it up until the crash in the US. So maybe it is better. But I wouldn't be so quick to paint with that brush.

As a Canadian, I can say that sometimes we hold ourselves in high esteem, as everyone does, but it blinds us to our own misgivings. Of all the hard hit places I travelled in 2007 (US, England, Ireland, Germany, etal), there was no difference in the spending to that of your average Canadian. House prices in Canada had the same upswing while real wages remained flat. On an affordability level, things have never looked sooo bad. People are extending their mortgages to 35 years just to get into the market!?!? Now I know there is an assumption that your wages will rise, but they haven't much over the past 15 - 20 years... so I think that could be a big assumption. And after 35 years, Im past retired. So when do I save?

Which brings me to my conclusion and what I alluded to in the first paragraph. Are we really in that much better shape than others? The Canadian Government (besides appointing someone who just learned to read to our senate) has said that they will take drastic measures (Quantitative Easing) to prevent a rising Canadian dollar to prevent a collapse of our manufacturing sector. So its big inflation, or big loss of jobs.

But this article is about the banks. A commentator above stated that he felt that our banks success is due to the fact that we haven't seen house prices fall. I see some truth to that. Whether our housing market falls or not, thats anyones guess.

Aug 28 10:58 AM

[Trane250:]

There is a program on the H&G cable network called "Property Virgins" that mainly deals with Toronto area real estate. In my opinion, Toronto housing prices (even in CA dollars) are grossly inflated. With the slow down in the Canadian economy and the decreasing value of housing, I can't help but think that CA banks will be forced to take every increasing writedowns (CA bankruptcy laws notwithstanding).


On Aug 28 10:14 AM Donald Ingram wrote:

> Unlike their American counter part, Canadian home owners CANNOT walk
> away from their mortgages, or for that matter ANY debt. It will follow
> you. This provides great impetus to sort out your financial problems
> before taking drastic steps. Bankruptcy is only used as that drastic
> last step. That being said, Canadian personal bankruptcies are up
> year over year. As for housing prices - they have come down from
> their highs and seem to be leveling off, indeed in some areas of
> high demand real estate has seen some price increases. Oh, by the
> way, we put our bankers in jail for the 'shenanigans' that your bankers
> get away with!

Aug 28 11:07 AM

[Davewmart:]

Donald said:
'Oh, by the way, we put our bankers in jail for the 'shenanigans' that your bankers get away with! '

I dunno if you think I am American, but actually I live in the UK - we used a completely different bucket of whitewash for our bankers! :-)

Maple Leaf said:
' The Canadian Government (besides appointing someone who just learned to read to our senate) has said that they will take drastic measures (Quantitative Easing) to prevent a rising Canadian dollar to prevent a collapse of our manufacturing sector. So its big inflation, or big loss of jobs. '

The problem with trying to use QE to prevent a rise in the Canadian dollar is that everyone else is playing that game, so extraordinary amounts of money would need to be printed to match the US, Canada's biggest trading partner.

And:
'House prices in Canada had the same upswing while real wages remained flat. On an affordability level, things have never looked sooo bad.'

It seems to me that something has to give to rebalance the Canadian economy.
My guess is that deflationary forces are too strong for the present to be overcome by money printing, and that the velocity of money will simply contract to balance easing.
This is not to say that inflationary pressures may not break through at a later time.

Aug 28 11:21 AM

[Maple Leaf:]

Davewmart,

I agree with your comments. Re: QE - I think the Canadians want to inflate at the same or similar level so were not too expensive. But relative framing is necessary.

Im glad someone brought up Deflation. Who on this board has actually experienced deflation... and in what???

(don't say house price or share prices because they aren't included in inflation)

Aug 28 12:02 PM

[souelle6:]

Why is this a front page story... There is zero analysis here... am I missing something?

Aug 28 12:06 PM

[engineering...:]

The Canadian real estate asset bubble has not popped appreciably, but the banks here aren't too terribly exposed. The federal government's mortgage insurance agency (CMHC) carries the underwriting risk on residential real estate to the tune of $680-plus billion with an insanely high leverage ratio on actual assets. I also believe that Canadian banks had much lower mark-to-market pressures which allowed them to largely side step the credit/financial crisis.

Aug 28 12:21 PM

[bob adamson:]

In the depths of the global credit freeze up last winter the Canadian banks were well capitalized but, like their counterparts worldwide, had difficulty obtaining assured access to short term interbank loans at reasonable rates. This threatened to significantly reduce credit for businesses and households. The Canadian Government therefore purchased a large portion of the residential mortgage portfolios of the banks. This gave the banks ample liquidity for lending purposes but it was also a sound investment for the Canadian Government because the purchased mortgages were solidly backed by conservatively calculated real estate equity. This followed from the fact that the large majority of residential mortgages held by the banks are insured by a Federal Government agency, CMHC, which will only insure a mortgage having adequate equity backing. In short, the banks gained liquidity and the government acquired a sound investment (one it had, in any case, already guaranteed).

Residential housing prices have held up well in Canada and, while personal bankruptcies have increased, this increase to date is well below the levels experienced in the mid 1990s. Even if these conditions deteriorate in the coming months the negative effect on the banks will not untoward. As noted earlier, the Government now holds a significant portion of pre 2009 residential mortgages. Conservative CMHC insurance criteria coupled with the requirement that mortgagers give a personal guarantee also buttress this market for the banks.

Aug 28 12:25 PM

[specks:]

Last autumn, the sales valve was shut off for a few months only. Just enough time to replenish the bubbly! Now, when the USA decline finally gives our bottle a good shaking, what do you think will happen when our cork pops?

Aug 28 12:43 PM

[bob adamson:]

kmanm, your assessment is spot on. It is also significant that while the Canadian Chartered Banks engage in some investment banking, this is only one aspect (controlled and regulated as well) of their business. We don't have the division between retail and investment banking that applied in the US prior to 2007.

In short, Canadians have made a trade-off - boring but safe banking. The bankers and some promoters and potential borrowers complained before 2007 that this cramped their style somewhat (as it did), but we are benefiting significantly now. The US has different banking needs (as a financial and investment centre to the world, for example) so the Canadian model is not a panacea for the US by any means. It suites Canada well enough however.

On Aug 28 07:19 AM kmanm wrote:

> I think you got it wrong. It is not that the Canadian banks wanted
> conservative approach but rather a better bank system which prevented
> for Canadian banks to take unnecessary (bad) risk.
>
> www2.macleans.ca/2009/.../

Aug 28 12:44 PM

[bob adamson:]

As noted by others, Canada has been heavily engaged in Afghanistan for more than 7 years. It also had Federal and most Provincial Governments in annual budget surpluses during the decade before 2008 and its public retirement pension systems are well funded to cover growing future demand.

Against the plusses noted above and by others is the fact that the Canadian economy is relatively small, heavily dependent on international trade and not as diversified as most other G8 economies.



On Aug 28 08:46 AM Uncle Pie wrote:

> USA CANADA
> 2 wars going on no wars
> 1000 bank failures
> this year zero bank failures
> largest oil importer major energy exporter
> trade deficit trade surplus
> healthcare in crisis universal healthcare
> falling currency rising currency
> capital flowing out capital flowing in
>
> Where would you like to invest?

Aug 28 12:56 PM

[Davewmart:]

Bob Adamson,
thanks for your valuable comments on Canadian banking practices.

Engineering wrote:
'The federal government's mortgage insurance agency (CMHC) carries the underwriting risk on residential real estate to the tune of $680-plus billion with an insanely high leverage ratio on actual assets.'

This does not sound good! - although the fundamental Canadian financial position sounds relatively sound.
If the ratio of incomes to house prices has got out of line, than this sounds like a recipe for many, many years of a stagnant market, with very large actual falls perhaps not happening, but a sideways or gently down drift somewhat similar to Japan.
The demographics of Canada should be more favourable however.

Aug 28 02:00 PM

[football frank:]

Save the boarder bashing for another day. Two great countries,
who have two different systems. The Canadian banks were
growing at a snalls pace for many years, and ventured into
the US market to find growth, with mixed results. Yes, they are stronger at the moment, but that has not always been the case.
So American banks need better guidelines, and Canadian banks
need more growth. Which will be stronger in ten years, is up for discussion.
I own BAC, TD, RY, BMO, and C, so my fortunes will depend
on banks in both countries.
Demographics will be huge going forward, when all these
baby boomers, who are out of the house, kids, cars, stage
and into the invest for retirement part of their lives.
They need to put their money somewhere, and the pension
plans in BOTH countries are certainly not looking good going forward. No money in the system equals higher taxes to
service the committments of the people in the plan. Benefits
will shrink over time, and the age may rise also. You can't
borrow forever, the bill comes due somtime. At least
this article generated discussion.

Aug 28 05:22 PM

[Davewmart:]

football frank,
I can't believe that you are serious in trying to equate the health of US and Canadian banks, solely on the grounds that they may draw level at some unspecified point in the future under unspecified conditions.
The extra 'growth' the US banks have had has plainly been the result of lending imprudently, and but for the grace of the US taxpayer most of them would not now exist.
In addition to this, no effective reform has been carried out and the pressures which led to such imprudence are now if anything increased, since some of the institutions now know that they are too big to be allowed to fail, and bonus systems still mean that executives are incentivised to take wild gambles.
There surely are pressures on Canadian pension funds and from housing prices, but I can't think off-hand of a problem Canada has which the US does not have worse.

Aug 28 05:55 PM

[Albertarocks:]

When Obama visited Canada he stated that he was impressed with the fact that Canada's banks had not only survived, but were not even close to being in trouble. The US media picked up on that and sung the praises of CDN banks as did the IMF who, I'm sure you've heard by now, ranked Canadian banks as the most solid in the world. Boring, but solid. It's never really been "easy" to borrow money in Canada.

When the question was asked "how did they do it?", and when the answer was given by none other than Fareed Zakaria as "they use common sense".... it was never spoken of again in American media... as far as I know.

Aug 28 06:52 PM

[bob adamson:]

Davewmart:- I think you have misconstrued 'Engineer's' comment about the quality of the $680 billion (Engineer’s figure, I don’t have the actual amount at hand) asset purchase by the Canadian Government from our Chartered Banks. He, of course, is the proper person to respond but my take is that there is a particularly deep equity cushion protecting the Government if the value of residential properties falls. Further, if the economy deteriorated further (something I don’t currently foresee happening in the near future), it would be unlikely that the Canadian Government would aggressively foreclose systematically into a falling market (bad economics and bad politics) and thereby depress residential property prices (and the equity cushion it and the banks enjoy) further. In short, the fact the Government holds a major stake in the mortgage market on a long term basis is a stabilizing factor.

On Aug 28 02:00 PM Davewmart wrote:

> Bob Adamson,
> thanks for your valuable comments on Canadian banking practices.
>
>
> Engineering wrote:
> 'The federal government's mortgage insurance agency (seekingalpha.com/symbo...)
> carries the underwriting risk on residential real estate to the tune
> of $680-plus billion with an insanely high leverage ratio on actual
> assets.'
>
> This does not sound good! - although the fundamental Canadian financial
> position sounds relatively sound.
> If the ratio of incomes to house prices has got out of line, than
> this sounds like a recipe for many, many years of a stagnant market,
> with very large actual falls perhaps not happening, but a sideways
> or gently down drift somewhat similar to Japan.
> The demographics of Canada should be more favourable however.

Aug 28 08:44 PM

[bob adamson:]

A further factoid that will be of interest to some, I believe that only two Chartered Banks have failed in Canada since around 1920.

Aug 28 10:19 PM

[Canuck Econ...:]

About the Canadian Housing and Mortgage Corporation....it requires a minimum of 10% equity (except for a small period when the govt as a copy cat of Bush's sillyness allowed 5% - but not for long); also note that CHMC is a government entity, it is backed directly by the govt. No pretense that there is a private investor holding the bag. It does not spin mortgages on unsuspecting investors that would create a falling dominoes effect. Yes, this is in part why the Canadian realestate market is also more stable - large numbers headed out of the burning building and all that. Are there lessons in this "regulatory" set up?

and yes, Canada has carried more than its fair share of the load in Afganistan - in human and financial terms.

Aug 28 10:20 PM

[bob adamson:]

As of October 28th, the market value of shares of Canadian banks have increased significantly. If there is a double dip in the current recession, however, expect some of those gains to be lost; particularly through deterioration in commercial mortgages.

Oct 28 06:56 PM