I merely mentioned it in passing at the time (see prior post “Are Banks choosing Provincial bonds over Commercial loans?” January 5, 2012), but it was during a chat on air with BNN’s Kim Parlee last week that I realized it deserved more that just a few words.
Between October and November 2011, Canadian chartered banks sold C$81 billion of Federal government bonds, representing 37% of the bank’s entire such holdings, according to data published by the Bank of Canada. I find this fascinating for a couple of reasons, at least. Banks put their cash in a few places when they aren’t lending it to consumers or entrepreneurs. One of those places is government bonds, since they are the most liquid security and easily saleable should cash need to be raised quickly for another purpose (and Regulators require a certain level, too).
As of October 2010, Canadian chartered banks held C$218.2 billion of Canadian government debt with a maturity of more than a year, C$39.2 billion of T-bills and C$4.2 billion of currency. Fast forward a year, and the figures hadn’t changed a lot: C$220.9 billion of Canadian government debt with a maturity of more than a year, C$33.7 billion of T-bills and C$4.4 billion of currency. With C$608.4 billion of total Federal bonds and T-Bills outstanding as of November 30th, the banks owned 43% of Ottawa’s issued debt at the time (ignoring the Crown Corps). That’s big.
But one month later (following the end of the 2011 fiscal year) in November, there was a huge change: Chartered banks held just C$139.5 billion of Canadian government bonds, C$35.3 billion of T-bills and C$4.6 billion of currency. Some C$15 billion of that C$81 billion of “newly available” capital went into increased credit card lending (yikes), while another C$5 billion went to reverse repos, loans, mortgages and personal lines of credit.
But with some modest selling of corporate bonds and (I assume) OSFI concurrence, banks added C$260.5 billion of residential mortgages to their collective balance sheets in November. A 46% increase in just a single month. I assume that “paper” came from CMHC, as there can’t be another entity in the country that could have been warehousing that amount of resi mortgage paper. Unless, or course, the Bank of Canada swapped it. Or this is IFRS standards at work. You can be sure that Canadians didn’t take out quite that many new mortgages in a single month, no matter how hot the Vancouver real estate market got last Fall.
Even if the average Canadian mortgage is paying 4 or 6%, you can imagine why banks would rather hold them as investments than Federal bonds that have dramatically increased in value over the past year and are now paying peanuts on a relative basis: A rate of 0.96% (for a 2 year bond), 1.0% (3 year bond), 1.27% (5 year bond), 1.94% (10 year bond), or 2.49% (30 year bond). Talk about a free earnings pick-up for the banks. Same capital base but a far better yield on your existing assets.
I’d also love to know who bought the C$81B of bonds that the banks were allowed to sell to buy the mortgages. But, that’d be hard to find out. What might be easier for our friends at Bloomberg, Reuters or the DTM to do is to call up the various bank Public Affairs departments and find out a) why these changes took place and b) what it says about OSFI’s view of the health of the global banking system (positive, no doubt), and c) what these new higher-yielding bank assets could mean for 2012 earnings (unless its just IFRS hocus pocus).There’s also BMO bank analyst John Reucassel to rely on, too.
A figure of C$260.5 billion times 4% (the net interest rate pick-up of owning mortgages vs. bonds?) is C$10.42 billion of collective “found” earnings for the banks. That’s meaningful juice.