Complacency about Canadian banks
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Thread: Complacency about Canadian banks

  1. #1
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    Complacency about Canadian banks

    I think it's good to be critical of the Canadian banks. Their performance has been incredibly good in the last few years and many investors over-weight them. I continue to keep my bank exposure less than 20%, much less than their whopping 40% weight in the TSX 60 index.

    http://etfdailynews.com/2017/03/23/c...-deep-trouble/

    Here are some points the article raises about Canadian banks:

    - 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.

    - 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)

    - “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.

    - 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.

    - 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.

    - 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.


    This doesn't mean that bank stocks are going to fall, but I think it's good context to have. I do have some Canadian bank exposure.

    Last edited by james4beach; 2017-03-24 at 10:06 AM.

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    Good post and will be a good thread.

    Just some quick comments...more floating in my head

    1. We all want banks to succeed to a great degree. They underpin our economy.
    2. Agreed - banks have provided great returns and likely always will given their business, however, I wouldn't want to be overweight in them either - I think whatever the index calls for (in VCN, XIU, XIC, ZCN, etc.) is just fine (30-40% weight) but not much more. I wouldn't go over 50% let's put it that way. (I don't).
    3. "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." While a good fact, blaming banks is not the issue. It's like saying people are too fat because there are too many McDonald's. Really? Adults need to use their brains
    4. I do care about the falsification of any records but I have no control over this activity, other than voting with my ballot and wallet to the extent possible.
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    Big Four happily signed the financial statements of big banks because the statements were correct. Some of the products and assets proved to be toxic and wrongly ranked by the rating agencies but I don't see how an accountant can possibly be held responsible for that. It's not an accountant's job to judge whether derivitives are going to make or lose money or whether the rating agency misjudged risks for a particular bond.

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    But the debt issue is an interesting one. Are we the most endebted country in the world if one were to add the debt of all citizens and various levels of governments? Not sure but we are certainly up there. Has to be a massive risk. Still, fire won't start without a sparkle.

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    Quote Originally Posted by james4beach View Post
    I think it's good to be critical of the Canadian banks. Their performance has been incredibly good in the last few years and many investors over-weight them. I continue to keep my bank exposure less than 20%, much less than their whopping 40% weight in the TSX 60 index.
    Good thing on the ETF front, I'm using XIC ... though I'm pretty sure I'm more conservative at I think I'm around 12% for the investments I control.


    Cheers

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    There's an interesting graph somewhere of that debt-to-income ratio, between US & Canada, and how the US's crashed after the financial crisis but Canada's kept going higher. That's one graph that has always worried me. The US actually de-leveraged, which is healthy. Canada did not.

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    Quote Originally Posted by Eclectic12 View Post
    Good thing on the ETF front, I'm using XIC ... though I'm pretty sure I'm more conservative at I think I'm around 12% for the investments I control.
    I'm a fan of index ETFs but I don't like this huge weight in banks. A couple interesting broad exposure ETFs are CDZ with 22% financials and ZLB with 24% financials. However it remains to be seen if those actually outperform XIU long term ( with its amazing 7.12% return since inception in 1999 )

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    My stock component is 24% financials, but that's worldwide. Right now less than 30% in Canada. Total exposure to Canadian finance is circa 8%; large but not crazy.

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    Umm, since banks make money off of lending it out, doesn't it kind of make sense that, with Canadian personal debt at an all time high, banks are doing extremely well?

    The problem, if it comes, won't be with the banks, it'll be with the deadbeats who refuse to pay back what they borrowed. Because of that, the Canadian government will have to step in and repay on behalf of its citizens who it represents. </sarcasm...though, now that I wrote it, it does kind of make sense>

    Maybe the government should implement a stupidity tax, the revenues of which will go to pay off their bad debts in the future.
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    "Maybe the government should implement a stupidity tax, the revenues of which will go to pay off their bad debts in the future."

    Potentially.

    A man goes to a buffet at a restaurant.
    There is enough food for 40 people.
    Man eats so much food he gets a stomach ache that lasts a few days.
    When man asked why he ate so much food - his response: "Well, the food was there! It's the restaurants' fault!"

    This is sadly the common behaviour amongst many adults.

    An aside note....if you're an indexer, you shouldn't really care about financials or energy or other weights in the index. You simply accept market returns and cap market weighting. Otherwise you are speculating (like an active investor would). Thoughts?

    If you're really concerned about Canadian banks then you limit your CDN content and invest abroad.

    Last edited by My Own Advisor; 2017-03-24 at 12:06 PM. Reason: update, invest abroad.
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