Don't Expect Canadian Banks to Start Taking Over Their Troubled U.S. Counterparts ... Yet

 |  Includes: BMO, BNS, CM, RY, TD
by: Streetwise Blog

By Boyd Erman

One quarter of (relatively) good news on bad loans in the U.S. is little cause for optimism about the nation's banks, according to Moody's Investors Service, which goes some way to explaining why Canadian banks have still not deployed any of their mounting capital reserves.

Along with nerves about regulations and no clear outlook for just how much capital will be required, the sense is that balance sheets for U.S. banks are still sinkholes, albeit sinkholes with much better disclosure.

Moody's argues that while non-performing loans and chargeoffs declined for U.S. banks from the third quarter of last year to the fourth quarter, "these indicators remain near historic highs, and we do not rule out the possibility of a reversal of the positive trends experienced in the fourth quarter for larger banks, especially considering the unknown impact of modification programs on the residential mortgage trends."

Moody's estimates that U.S. banks it rates are on the way to writing off $536 billion of loans in the period between 2008 and 2011, when there's a chance bad loan levels will return to normal. That means capital levels are going to keep falling.

While residential mortgages are well known trouble spots, only about half the likely losses have been taken, said Moody's. What's more, commercial real estate is still deteriorating "rapidly" and banks have only recognized about a third of the likely losses there, the ratings agency said.

In that environment, not many executives are comfortable making a big bet, especially given that even in good times no Canadian bank has yet to make a rate of return in the U.S. that comes close to what it can at home.

Rick Waugh, CEO of Bank of Nova Scotia (NYSE:BNS), is only really looking at small acquisitions, he told shareholders this week.

Similarly, the head of RBC's (NYSE:RY) U.S. operations is on the record saying he'd look at acquisitions, but all indications are that they would be relatively small. (Here's a link to a Bloomberg story on that.)

That means that even once the other barriers to buyouts are lowered, such as executives getting clarity on capital levels, investors are as likely to see much of the Canadian banks' excess capital mailed out in dividends or share buybacks as they are to see the money deployed in takeovers of U.S. lenders.