U.S. banks are taking it on the chin today after Dubai said it needs a six-month reprieve on paying its bills, specifically the $59-billion borrowed to build one of the most ambitious tourism destinations in history.
Canadian banks, however, are enjoying a day of gains, helping to drive the S&P/TSX upwards.
Is this a case of global investors perceiving greater safety in the Canadian financial system than in U.S. banks? Not really. It’s really part of an aberration arising from the U.S. Thanksgiving holiday on Thursday. With Wall Street closed, investors couldn’t respond to the news from Dubai until Friday. They let their opinions be known in the opening minutes of trading, driving down the valuations of Bank of America and Citigroup by 4 per cent.
U.S. markets closed at 1 p.m. ET Friday, and the banking sector index of the S&P 500 posted a loss of 3 per cent. Bank of America (BAC) shares closed down 3 per cent at $15.47 and Citigroup (C) declined 3 per cent to $4.06.
Canadian banks took their beating a day earlier, and even with their gains on Friday most are still trading below their valuations before Dubai dropped its bombshell. The financial subsector of the S&P/TSX is up 0.64 per cent in Friday afternoon trading.
Royal Bank of Canada (RY) shares are up 1.3 per cent Friday, but down 1 per cent since the news. Toronto-Dominion (TD) shares are up 0.4 per cent, but down 1.5 per cent since Wednesday. Bank of Nova Scotia (BNS) is up by 0.4 per cent, but down 1.9 per cent over the two trading sessions. CIBC and the Bank of Montreal (BMO), meanwhile, are about even.
Canada’s Big Five are saying that their exposure to Dubai is immaterial, although they are not unequivocal about any exposure, says Robert Sedran, a banking analyst with National Bank Financial.
The real burden of Dubai’s problems seems to lie with European banks. British banks have racked up $49.5 billion of the $87.3 billion worth of loans outstanding to the United Arab Emirates, according to the Royal Bank of Scotland (Dubai is one of seven emirates within the UAE.) French banks place second with $11.3 billion and German banks third with $10.2-billion.
“It seems like the Canadians have sidestepped another land mine,” Mr. Sedran says.