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Thread: Complacency about Canadian banks

  1. #21
    Senior Member NorthernRaven's Avatar
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    Quote Originally Posted by james4beach View Post
    The fragilities can be seen in an IMF report, which calculated that Canada’s financial sector accounted for a stunning 500% of GDP in 2012. Today, the assets of the Big Six banks alone are more than double the size of the country’s economy.
    This is lazy hyperbole. What does this number indicate about the economy, and what is a "reasonable" range for this value? The 500% number in the IMF report PDF here)
    refers to assets, so that's our mortgages, our stock holdings, our RRSPs, and other accumulated wealth. If we reduce the ratio, where does this wealth go? Presumably different countries have different ratios of their wealth in the "financial sector" rather than counted elsewhere. And some countries (like Switzerland) will have large asset balance books in the financial sector from foreign asset management, pushing this ratio up. I couldn't quickly find a summary table of comparable IMF numbers for other countries, but France is also in the 500% ballpark I think, and Germany at least 300%? Unless someone wants to actually break down what is going into our 500% figure and point out the risky bits, this is just a "scary large number" without much context for me, although it may incorporate whatever problems we may have with consumer debt and mortgages.

    Quote Originally Posted by james4beach View Post
    - As David Macdonald demonstrated in a paper for the Canadian Center for Policy Alternatives, Canada’s Big Banks benefited from nearly $114 billion in cash, liquidity, and other bailout help from both local and US sources following the financial crisis.

    - “Three of Canada’s banks – CIBC, BMO, and Scotiabank – were at some point under water,” Macdonald writes. “With government support exceeding the value of the company.” (link to report)
    I've seen this one before - something like CCPA is going to have its own particular slant on things, but I'd want some sort of reliable evaluation of the use of "under water" and some of the other rhetoric, and what would be considered aggressive liquidity support. Perhaps the banks should have "paid" more for support, but I'm not convinced that there was some huge giveaway. The government is the lender of last resort, and no-one in 2008 was interested in providing less than adequate support in a fairly unprecedented crisis.

    In the US, the Fed was taking all sorts of toxic assets across its discount window - American subprime mortgages, already shaky by Canadian standards, were turned into weird derivative products that were effectively guaranteed to fail given a pervasive national downturn in housing prices, which the modelling implicitly didn't account for. Canadian mortgage securities are much more "vanilla" (as I understand it), and weren't at the time (and didn't turn out to be) that sort of insolvency risk.

    Quote Originally Posted by james4beach View Post
    - “Canada’s Fannie Mae” (the CMHC) has guaranteed more than $500 billion in mortgages; almost as much as the US GSEs did relative to GDP prior to the 2008 crisis.
    One has to be careful about comparing apples and oranges. The US mortgage market had a substantial amount of completely unjustified mortgages, even with flat house prices. Those weird option-ARM mortgages, teaser rates and ninja no-docs had a chunk of the market that needed increasing house prices just to keep refinancing these untenable terms. Assuming Canadian equivalents are much less prevalent, absolute levels at CMHC (and equivalent govt guarantees on their private competitors) could approach the US GSEs without necessarily being some sort of red flag.

    Quote Originally Posted by james4beach View Post
    - Because Canadian real estate prices never collapsed during the 2008 financial crisis to the degree they did in the US and the UK (let alone Japan), regulators, investors and analysts are totally unprepared for any such eventuality.
    I doubt our regulators have been sitting by like Mr. Magoo just because we didn't have our own catastrophe. Whatever our state of readiness, 2008 will have provided a sharp wakeup call and at least some shaking out of potential problems.

    Quote Originally Posted by james4beach View Post
    - Canadians are in debt up to their eyeballs. According to Statistics Canada the ratio of household credit market debt (this excludes government, financial and business debts) reached a record 166.9% of disposable income in the third quarter of 2016.
    This, and whether there could be a serious "hard landing" in the housing market, is the main question, isn't it.

    Quote Originally Posted by james4beach View Post
    - Almost unnoticed during the 2008 financial crisis, was that Big Four audit firms all happily signed the financial statements of global big banks, including those in Canada, which only months later proved to be insolvent.
    If that means "insolvent banks in Canada", that would certainly be hyperbole.

    Last edited by NorthernRaven; 2017-03-25 at 12:03 AM.

  2. #22
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    Quote Originally Posted by 30seconds View Post
    James why Suncor over a pipeline?
    I choose the largest weight in each XIU sector. At my last rebalance, Suncor was the heaviest weight in the XIU energy sector. However today I see Enbridge has become the heaviest weight so it will replace Suncor at the next rebalance, if things remain like this.

    And why no consumer products like you had listed in your Slice and Dice?
    I didn't like what it did to risk vs return. Consumer stocks added volatility but did not add more return in my back test. I've eliminated them entirely, like Tech and Pharma.

  3. #23
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    1 that's why cap weighted indices have an advantage. The need to trade is generated only when companies join or leave or (rarely) to rebalance and the level is minimal.

    2. Having largest companies by sector introduces the Valeant/Enron/Lehman type risk.

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  5. #24
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    Quote Originally Posted by mordko View Post
    2. Having largest companies by sector introduces the Valeant/Enron/Lehman type risk.
    True, and my back test included the years where BBD.B collapsed (-29% in 2001 followed by -67% in 2002). The back tested portfolio held Bombardier while it crashed 80%. And yet, my equal weighted portfolio still beat XIU in both 2001 and 2002. It did however lag in 2003, the recovery after the bear.

  6. #25
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    I am kinda sceptical of the value of backtesting fullstop. Forward testing is a far superior technique.

  7. #26
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    Quote Originally Posted by james4beach View Post
    Using Argo's style of equal weight Canadian exposure has worked out well for me. I switched away from the TSX index late last year once back-testing this over 10 years convinced me that equal weighting is a better approach. My primary portfolio is now { BCE, CNR, FTS, RY, SU } based on the top stocks in each XIU sector.

    Since Sept, the total return of the equal weighted group is 11.5% vs 8.7% for XIU, so it's not like I'm suffering due to my lower financials weighting.
    +1 Work your way up to a 12-pack or eventually a "24" and own the top 3-5 "TULF" stocks directly. (Telcos, Utilities, Low-Yield Dividend Growers (e.g, CNR, CP), Financials). Then you'll really be cooking with dividends and appreciation
    Hidden Content - Working on a $1 million portfolio and $30k per year from it.

  8. #27
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    Quote Originally Posted by james4beach View Post
    ...


    - As David Macdonald demonstrated in a paper for the Canadian Center for Policy Alternatives, Canada’s Big Banks benefited from nearly $114 billion in cash, liquidity, and other bailout help from both local and US sources following the financial crisis.

    - “Three of Canada’s banks – CIBC, BMO, and Scotiabank – were at some point under water,” Macdonald writes. “With government support exceeding the value of the company.” (link to report) ...
    That is an interesting "spin" on what actually happened in 2008-2010. My, how people's memories are short, or clouded by ideological bias.

    In the normal course of business, the banks would "bundle" mortgages (as mortgage- backed securities, or Mortgage mutual funds, or some other vehicle); and resell them on markets to raise more operating capital. But due to the International financial crisis (started in large part by sub-prime lending in the US) there were suddenly no buyers, because their US and international customers were too busy paying off their bad debts, and had no money to invest in Canadian mortgages. So the government stepped in and bought those investment vehicles instead to solve the banks' liquidity crisis. The alternative was for the banks to stop mortgage lending, bringing all construction to a halt, and probably producing a general real estate collapse. The taxpayer never lost a dime on these "bailouts", which were sound short-term investments.

  9. #28
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    Isn't it great how the words change meaning over time? Investment used to mean putting a dollar into a project and expecting 2 dollars back a little later. Now the government is "investing" in childcare, affordable housing plus millions of dollars for people to sit and talk about gender equality.

    Saving Canadian banks may have been worthwhile but it was not "investment". The taxpayer took on the risk for no payment whatsoever.

  10. #29
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    I'll just point out that under-weighting the Canadian banks has been a poor investment strategy for at least 40 years, as the long term average return has exceeded that of the TSX. Past performance/future results caveat of course. Despite the so-called "run-up", some Canadian banks, like NA and CM, are *still* trading at discounts to historical averages. CIBC has been growing its earnings so quickly, despite ~25% year over year return, the stock has slipped below a 10 P/E. NA at about 10.4. I would add to both today.

  11. #30
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    Quote Originally Posted by OhGreatGuru View Post
    That is an interesting "spin" on what actually happened in 2008-2010. My, how people's memories are short, or clouded by ideological bias.

    In the normal course of business, the banks would "bundle" mortgages (as mortgage- backed securities, or Mortgage mutual funds, or some other vehicle); and resell them on markets to raise more operating capital. But due to the International financial crisis (started in large part by sub-prime lending in the US) there were suddenly no buyers, because their US and international customers were too busy paying off their bad debts, and had no money to invest in Canadian mortgages. So the government stepped in and bought those investment vehicles instead to solve the banks' liquidity crisis. The alternative was for the banks to stop mortgage lending, bringing all construction to a halt, and probably producing a general real estate collapse. The taxpayer never lost a dime on these "bailouts", which were sound short-term investments.
    Totally agree with your comments and the government providing liquidity to the banks is certainly not a bailout but only performing a function of what the institution was designed for. See http://www.bankofcanada.ca/markets/m.../?#market-wide
    In my previous life running a smaller financial institutions (a credit union) we too would occasionally start to be a little tight on liquidity and would bundle up mortgages and sell them to a credit union that needed mortgages and it was a win win for both institutions. F/I's are required to keep a certain minimum level of liquidity (used to be 10% when I worked) and they usually have an internal target of something higher (ours was 12-15%). We also had back up credit lines at a chartered bank and the Central Cr. Union. I believe the latter had access to additional credit facilities through the B of C. Internally, managing liquidity was performed by increasing rates on loans and mortgages to discourage lending or increasing GIC rates to attract more deposits. It was a bit of a balancing act that have to be managed closely; however, the term "bailout" is not correct. In a worse case scenario the F/I's could simply call some of their demand loans but then think of the mess the country would be in. As I retired in 2001, I have not delved into the 2008 crisis I suggest the Bank of Canada was just doing what is was designed to do. No big deal in my opinion and do not agree that is was "saving the Canadian Banks" which happen to comprise 45% of my stock portfolio. I love them.


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