Canadian Banks

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adrian2
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Re: Canadian Banks

Post by adrian2 »

AltaRed wrote: 17 Jun 2017 13:01 Added: Per George, I got about halfway through the CCPA link before I threw up. It wins a platinum star on misrepresentation....as it almost always does.
+1!

One of the reasons I bought Hydro One was to thumb my nose at the unions so vehemently opposed to its privatization. :twisted:
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Re: Canadian Banks

Post by randomwalker »

Per the CCPA report I think there are several questions.

1. DId the banks borrow money from the Bank of Canada and the Federal Reserve ?

2. Did CMHC purchase mortgages from the banks?

3. If the the answer to either or both of questions 1 and 2 are yes does that constitute a bailout?

4. Could the banks have continued with business as usual without taking either loans and/ or selling mortgages?

I get that people might not like the CCPA and unions etc but do we dispute the facts, figures and or conclusions in their report?
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Re: Canadian Banks

Post by AltaRed »

The way I see it is access to BoC liquidity is not actual borrowing, but is primarily a backstop to ensure money continues to flow without hoarding cash (holding cards close to one's chest). The CCPA spin gives them no credibility.

OTOH, I agree CMHC purchased mortgages to take them off banks' balance sheets to make them look more robust, but a lot of financial institutions buy/sell mortgages to each other. The difference here is CMHC stepped in for optics. Is this nefarious? Maybe but it is not a bailout. The mortgages likely did not need to be sold, but it stops potential 'runs'.

I think the banks would have uneqivocally survived but they may have frozen further lending for some years. That is my armchair quarterback view.
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Re: Canadian Banks

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AltaRed wrote: 17 Jun 2017 15:28 OTOH, I agree CMHC purchased mortgages to take them off banks' balance sheets to make them look more robust, but a lot of financial institutions buy/sell mortgages to each other. The difference here is CMHC stepped in for optics. Is this nefarious? Maybe but it is not a bailout. The mortgages likely did not need to be sold, but it stops potential 'runs'.
To paraphrase George's point, taking loans from the banks (that had not purchased CMHC insurance individually) would only pass the sniff test if there was adequate compensation to CMHC for that action.
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Re: Canadian Banks

Post by SQRT »

The mortgages (which were already insured) were purchased because the normal market for these mortgages had seized up. Banks and OSFI were concerned about banking liquidity. These deals were profitable for the Govt and helped ensure the Canadian financial system did not "crash". Bail out? I guess we need to define the term better but I dont think so, at least in the normal useage. Now, if you have an ideological position which paints the banks in a negative light, by all means call it a "bailout"
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Re: Canadian Banks

Post by Taggart »

If the Canadian gov't is going to bail out (or whatever you want to call it) the banks whenever they get into trouble, then when a buy and hold person actually invests in the financial sector as part of the portfolio, why take the risk of investing in any other corporations in that same sector? Perhaps I'm missing something.
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Re: Canadian Banks

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Taggart wrote: 19 Jun 2017 10:02 If the Canadian gov't is going to bail out (or whatever you want to call it) the banks whenever they get into trouble, then when a buy and hold person actually invests in the financial sector as part of the portfolio, why take the risk of investing in any other corporations in that same sector? Perhaps I'm missing something.
We tend to forget the speed and depth of the financial crisis of 2008-2009. Things happened so fast that every financial institution and other entity sharted hanging on to their cash and would not lend in case the world 'came to an end'. Human nature to hang on to your gun, ammo and bunker in the hills. The Feds essentially provided a means for FIs to continue lending without fear of losing 'new' money, i.e. new lending... and by CMHC buying mortgages, that gave the big banks better balance sheets.

Hence why post-crisis, the banks were forced to expand their capital ratios (more running room) and why we now have NVCC compliant prefs, etc. All for the purpose of wringing every last ounce of blood out of shareholders and debt holders before a 'rescue of last resort'. I agree that the big Cdn banks are too large to fail BUT that does not mean that the shareholder is not wiped out in the process. Do you want to take the risk of losing your entire equity holding in TD before the Gov't steps in to keep it afloat? That is what keeps the equity market honest.
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Re: Canadian Banks

Post by Taggart »

AltaRed wrote: 19 Jun 2017 10:15
We tend to forget the speed and depth of the financial crisis of 2008-2009. Things happened so fast that every financial institution and other entity sharted hanging on to their cash and would not lend in case the world 'came to an end'. Human nature to hang on to your gun, ammo and bunker in the hills. The Feds essentially provided a means for FIs to continue lending without fear of losing 'new' money, i.e. new lending... and by CMHC buying mortgages, that gave the big banks better balance sheets.

Hence why post-crisis, the banks were forced to expand their capital ratios (more running room) and why we now have NVCC compliant prefs, etc. All for the purpose of wringing every last ounce of blood out of shareholders and debt holders before a 'rescue of last resort'. I agree that the big Cdn banks are too large to fail BUT that does not mean that the shareholder is not wiped out in the process. Do you want to take the risk of losing your entire equity holding in TD before the Gov't steps in to keep it afloat? That is what keeps the equity market honest.
No, I haven't forgotten, but compared to what happened to the banks in both the U.S. and Western Europe, investors in Canadian banks came out of it rather well. They had to wait a few years for dividends in the big five to start increasing again, but that was about it.
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Re: Canadian Banks

Post by AltaRed »

Taggart wrote: 19 Jun 2017 10:27 No, I haven't forgotten, but compared to what happened to the banks in both the U.S. and Western Europe, investors in Canadian banks came out of it rather well. They had to wait a few years for dividends in the big five to start increasing again, but that was about it.
Exactly because Cdn banks had not overextended themselves in garbage securities and indiscriminate lending, not because of gov't bailouts. The irony though is had the big banks been allowed to merge to compete on the world stage like the rest of them, they could have just as easily found themselves in the same jar of pickles.
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Re: Canadian Banks

Post by SQRT »

Taggart wrote: 19 Jun 2017 10:27
AltaRed wrote: 19 Jun 2017 10:15
We tend to forget the speed and depth of the financial crisis of 2008-2009. Things happened so fast that every financial institution and other entity sharted hanging on to their cash and would not lend in case the world 'came to an end'. Human nature to hang on to your gun, ammo and bunker in the hills. The Feds essentially provided a means for FIs to continue lending without fear of losing 'new' money, i.e. new lending... and by CMHC buying mortgages, that gave the big banks better balance sheets.

Hence why post-crisis, the banks were forced to expand their capital ratios (more running room) and why we now have NVCC compliant prefs, etc. All for the purpose of wringing every last ounce of blood out of shareholders and debt holders before a 'rescue of last resort'. I agree that the big Cdn banks are too large to fail BUT that does not mean that the shareholder is not wiped out in the process. Do you want to take the risk of losing your entire equity holding in TD before the Gov't steps in to keep it afloat? That is what keeps the equity market honest.
No, I haven't forgotten, but compared to what happened to the banks in both the U.S. and Western Europe, investors in Canadian banks came out of it rather well. They had to wait a few years for dividends in the big five to start increasing again, but that was about it.
Right, because the Cdn banks didn't have the problems that banks from other countries had, not because of any "bail out".

Edit to add. Red beat me to it. I agree with him.
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Re: Canadian Banks

Post by kcowan »

I thought I would post this dividend growth summary here. It is in the thread on ETFs so might have been missed.

Canadian Banks 5-year growth in dividends:
BanksDivGr.jpg
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Re: Canadian Banks

Post by Wallace »

Interesting article on Canadian banks in the "Economist" June 15. Not sure if it's accessible without a subscription though:

http://www.economist.com/news/business/ ... -dont-face
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Re: Canadian Banks

Post by DavidR »

Wallace wrote: 28 Jun 2017 17:55 Interesting article on Canadian banks in the "Economist" June 15. Not sure if it's accessible without a subscription though:
I was able to read it without. It was interesting - thanks for posting it.
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Re: Canadian Banks

Post by AltaRed »

:thumbsup: Ditto as well. Provides a bit more perspective vis-a-vis the rest of the world.
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Re: Canadian Banks

Post by SQRT »

Yes an interesting and thoughtful article. Thanks for posting. The issue with the Canadian banks is indeed excess capital. Been this way for at least 20 years. When your domestic banking business earns ROE's in the 40% range but doesn't grow very quickly, it will throw off huge amounts of excess capital. Since the financial crises, efforts have gone into boosting capital levels which are now very high. So either, increase capital returned to shareholders (divs and buy backs), increase scope of business in Canada (difficult), or expand outside Canada. Most banks are doing the first and third. If they don't stumble in their foreign expansion (certainly not a given) it should continue to be pretty good for shareholders. Surprised they didn't mention tech disruption?
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Re: Canadian Banks

Post by Thegipper »

SQRT wrote: 29 Jun 2017 08:35 Yes an interesting and thoughtful article. Thanks for posting. The issue with the Canadian banks is indeed excess capital. Been this way for at least 20 years. When your domestic banking business earns ROE's in the 40% range but doesn't grow very quickly, it will throw off huge amounts of excess capital. Since the financial crises, efforts have gone into boosting capital levels which are now very high. So either, increase capital returned to shareholders (divs and buy backs), increase scope of business in Canada (difficult), or expand outside Canada. Most banks are doing the first and third. If they don't stumble in their foreign expansion (certainly not a given) it should continue to be pretty good for shareholders. Surprised they didn't mention tech disruption?
The three banks that have deployed capital into foreign expansion and have been successful are RY,TD and BNS. CM has a bad record in this area. BMO has mixed results. If foreign investment is the key to growth TD should be the best bet . Scotia's latin American exposure creates higher risk? RY has made some astute acquisitions in the USA and they are strong in the US capital markets.
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Re: Canadian Banks

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All I am really aware of is that ROE on ex-Canada acquisitions and operations seem to be lower than those in Canada. As long as they are consistently double digit, I suppose I can live with that.....whatever company it is. Other than that, give me back shareholder money so that I can invest it more profitably.
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Re: Canadian Banks

Post by SQRT »

Thegipper wrote: 29 Jun 2017 11:00
SQRT wrote: 29 Jun 2017 08:35 Yes an interesting and thoughtful article. Thanks for posting. The issue with the Canadian banks is indeed excess capital. Been this way for at least 20 years. When your domestic banking business earns ROE's in the 40% range but doesn't grow very quickly, it will throw off huge amounts of excess capital. Since the financial crises, efforts have gone into boosting capital levels which are now very high. So either, increase capital returned to shareholders (divs and buy backs), increase scope of business in Canada (difficult), or expand outside Canada. Most banks are doing the first and third. If they don't stumble in their foreign expansion (certainly not a given) it should continue to be pretty good for shareholders. Surprised they didn't mention tech disruption?
The three banks that have deployed capital into foreign expansion and have been successful are RY,TD and BNS. CM has a bad record in this area. BMO has mixed results. If foreign investment is the key to growth TD should be the best bet . Scotia's latin American exposure creates higher risk? RY has made some astute acquisitions in the USA and they are strong in the US capital markets.
Agree. Will be interesting to see how the CM acquisition goes. They have historically been poor at execution. Ry did stumble in their purchase of that retail bank (forgot the name) in the south east. I have always thought that the Scotia strategy was more risky or at least more volatile. I suspect their investments in Latin America are initially cheaper though.
Last edited by SQRT on 30 Jun 2017 07:15, edited 1 time in total.
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Re: Canadian Banks

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AltaRed wrote: 29 Jun 2017 12:46 All I am really aware of is that ROE on ex-Canada acquisitions and operations seem to be lower than those in Canada. As long as they are consistently double digit, I suppose I can live with that.....whatever company it is. Other than that, give me back shareholder money so that I can invest it more profitably.
Right they are much less than 40%. TD just broke through the 10% ROE level last quarter, As long as they can earn in excess of their cost of capital, they will create value for shareholders. Cost of capital would be around 9% I estimate, maybe lower. Problem is it takes quite a while to earn this after an acquisition. I would estimate that TD is just started earning in excess of its CoC. They started buying in the US in 2004.
Last edited by SQRT on 30 Jun 2017 08:42, edited 3 times in total.
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Re: Canadian Banks

Post by Mordko »

When the discussion goes like "banks are earning too much profit. However can poor things spend it???", we know that:

1. The cards are marked. Canadian consumers are being screwed and the system needs a shake-up to ensure there is real competition.

2. There is something we don't know about lurking on the horizon that will change the discussion quite dramatically.
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Re: Canadian Banks

Post by AltaRed »

Maybe. Equity shareholders of blue chips 'should' have an expectation of double digit returns on shareholder equity, given the risk they take as owners of a business. I don't ask for a lot.... consistent (on an aggregated rolling forward basis) 10-15% returns will do just fine. I'd expect more than 15% from speculative investments (if I made them), i.e. return expectations commensurate with the risk.
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Re: Canadian Banks

Post by JaydoubleU »

Agreed that it was an interesting article Wallace posted the link to. Over in this house, where everyone owns bank shares, we all agreed we'd like to see stronger dividend growth, especially from the likes of BNS, where growth has slowed from 7 ~ 5% (roughly). We'd prefer this to buybacks. Ideally, a combination of smaller, bolt-on acquisitions together with higher divvies...... :)
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Re: Canadian Banks

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AltaRed wrote: 30 Jun 2017 09:40 Maybe. Equity shareholders of blue chips 'should' have an expectation of double digit returns on shareholder equity, given the risk they take as owners of a business. I don't ask for a lot.... consistent (on an aggregated rolling forward basis) 10-15% returns will do just fine. I'd expect more than 15% from speculative investments (if I made them), i.e. return expectations commensurate with the risk.
Don't forget the cost of capital includes all types of capital, not just common equity. Cost of equity would be the highest for sure.
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Re: Canadian Banks

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That is the whole point. Debt is/has been cheapest for a long time. Thus the tendency for corporations to load up on debt. We used to calculate it regularly. Example only: (A%debt x 5%) + (B% equity x 15%) = Cost of Capital where A + B = 100% and 5 (or whatever number) represents aggregated interest rate on debt and the 15 (or whatever number) representing expected return on equity. Pretty straightforward.
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Re: Canadian Banks

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AltaRed wrote: 30 Jun 2017 15:18 That is the whole point. Debt is/has been cheapest for a long time. Thus the tendency for corporations to load up on debt. We used to calculate it regularly. Example only: (A%debt x 5%) + (B% equity x 15%) = Cost of Capital where A + B = 100% and 5 (or whatever number) represents aggregated interest rate on debt and the 15 (or whatever number) representing expected return on equity. Pretty straightforward.
Of course, but we are talking about the banks who have actually loaded up on equity(mostly) because of more onerous capital rules. My point was simply that cost of capital will be generally under 10% with the risk free rate of interest being so low. You, of course, can set your personal CoC anywhere you like. Given the consensus for low real returns in the future though, it would surprise me if many people would have such a high hurdle rate for investing in equities.
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