Canadian Banks

Canadian Banks

Canadian Banks are difficult to gauge.

They function within a concentrated banking market within a developed economy and a sound banking regulatory structure.

While fundamental metrics remain sound, seemingly stronger than in the US, and valuations are more attractive, one cannot escape from the realities of the credit/GDP level, house prices, particularly in Toronto and Vancouver, and the record level of household debt. (Australia shares similar issues though not so the credit-to-GDP-gap).

The macro narrative in recent years has been galvanised by residential investment and consumption. Initiatives have been undertaken though to cool the real estate market such as tighter requirements for mortgage insurance,  tax changes and regulation.

The Canadian Mortgage and Housing Corporation guarantees 50% of total Canadian residential mortgages. CIBC, Scotia, and TD are the most reliant on mortgage lending. (BMO and NBC are less exposed). Canadian mortgages (50% insured, 50% uninsured carry 50% loan-to-value ratios) are less opaque and better than in the US. Subprime crisis losses in the U.S. were 10-15%, but Canada's mortgages-in-arrears ratio is 25 bps. The system appears less-leveraged and better-capitalized than US banks in 2007.

Consumer debt to disposable income stood at 169.9% at mid-2017.

And rates have begun to move higher. RBC, BMO and TD will likely see the largest near-term benefit from higher US interest rates, given their US dollar-denominated assets. National Bank of Canada and Scotiabank may gain from a relatively large proportion of short-term loans as Canadian rates move higher.

The top 4 (combined) command a  high PH Score™ (though CIBC is markedly weaker) which points to an above-average return. But one cannot be at least mindful of the headwinds out there. One wonders whether the metrics have been inflated in an unsustainable way and the real underlying picture is not so rosy.

A combination of earnings absorption and relatively high capital ratios implies banks should maintain adequate regulatory levels.

Difficult to gauge.