# Do other banks compare with Canadian banks, as investments?



## Buckwheat (Dec 11, 2021)

Canadian banks have very good reputations with investors, for good reasons, and there are some good ones available now. I am wondering there are any other countries which have banks which have the kinds of growth, and/or return, and/or stability that Canadian banks have. If you know of any banks to compare, please mention them.
Thank you.


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## james4beach (Nov 15, 2012)

Well, the American and European banks suffered tremendously when those housing markets crashed in the 2007-2010 time frame. The Canadian real estate market didn't tank, possibly due to our stronger economy at the time supported by a commodity bull market. As a result the Canadian banks were in better shape both going into, and coming out of, that crisis.

So I think we have to be careful about thinking that the Canadian banks are *inherently* better businesses than global peers. I don't think they are inherently better, but rather, were just lucky to not have a RE crash.

I think as soon as our RE market tanks, the Canadian banks will get hit very hard and would underperform other global banks.


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## Money172375 (Jun 29, 2018)

Canadian lending rules are very robust….at least from the big 5. What goes on outside the big 5, I don’t have direct knowledge of. the qualifying rate used to obtain an approval was over 5.3% when I was last lending back in 2018/2019. There is a sizeable cushion built in. I never experienced a prolonged market value depression during my career, so I can’t comment properly. We were more worried about job loss scenarios. A big chunk of the current book of business is based on rentals and investment properties….not sure what those landlords would do if prices dropped suddenly and sharply. I for one, will become a buyer.


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## MrMatt (Dec 21, 2011)

james4beach said:


> I think as soon as our RE market tanks, the Canadian banks will get hit very hard and would underperform other global banks.


I don't think so.
It would have to REALLY tank, like enough to wipe out CMHC, and I just don't see that happening.

The political/economic cost of a real estate market crash & burn is too high. 


I think the Canadian banks, with their domestic oligopy & good government relationship makes them exceptionally strong domestically, and they generally seem competent at foreign expansion.


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## AltaRed (Jun 8, 2009)

It is the business and industrial loan part of the business for which losses are most exposed. The residential RE market is pretty solid. Mortgage insurance (backed by Ottawa) is mandatory for <20% down payments (equity) and anyone with more than 20% equity in their house will try and move mountains to stay current on their mortgage payments. It is a beautiful market to be in......really.


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## Tostig (Nov 18, 2020)

I think it was in 2007 or it could be a bit earlier, but internationally Canada was being criticized for not being aggressive enough.

Then during the financial crisis, we found out that Canadian banks due to them being highly regulated, did not suffer as badly as those in the US or the EU.

Risk/reward.


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## Beaver101 (Nov 14, 2011)

AltaRed said:


> It is the business and industrial loan part of the business for which losses are most exposed. The residential RE market is pretty solid. Mortgage insurance (backed by Ottawa) is mandatory for <20% down payments (equity) and anyone with more than 20% equity in their house will try and move mountains to stay current on their mortgage payments. It is a beautiful market to be in......really.


 ... I totally agree with the above with those iron-clad loans. Hell, if there was ever a run on any (the) bank(s), depositors (and/or taxpayers) will make up for that.


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## damian13ster (Apr 19, 2021)

MrMatt said:


> I don't think so.
> It would have to REALLY tank, like enough to wipe out CMHC, and I just don't see that happening.
> 
> The political/economic cost of a real estate market crash & burn is too high.
> ...


Precisely.
In Canada banks get to take the profit and Canadian taxpayers assume the risk.
CMHC is way undercapitalized for any semi-significant market crash

So yes, they are very good investment because the RE risk exposure is smaller. 
Worldwide though, I really like eurobank as investment. But that might be bias cause by returns it got me past year


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## MrMatt (Dec 21, 2011)

Tostig said:


> I think it was in 2007 or it could be a bit earlier, but internationally Canada was being criticized for not being aggressive enough.
> 
> Then during the financial crisis, we found out that Canadian banks due to them being highly regulated, did not suffer as badly as those in the US or the EU.
> 
> Risk/reward.


I think, in general, highly regulated industries provide good returns as the regulation results in far less risk.
They generally have a certain profit level built into the regulations, either explicity, or implied.

The banks have a long history of complying with "requests" from the government, and get repaid quite well for their compliance.


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## james4beach (Nov 15, 2012)

Money172375 said:


> Canadian lending rules are very robust….at least from the big 5


I'm not saying the banks will collapse, I mean that a slowdown in real estate will hit their earnings very hard. The issue I'm addressing is Canadian bank stock performance versus global peers.

If Canadian RE tanks, then all kinds of Canadian loans will underperform. There will be higher defaults (this is manageable and not a catastrophe) but loan portfolios will shrink. Earnings will take a hit. Non performing loans will increase and probably stay elevated.

What I'm saying is that Canadian banks have enjoyed an incredibly long boom from credit growth during a booming RE market. Homes underpin the entire lending market, both mortgages but also everything else. So if and when RE weakens, all of Canadian lending weakens = bank earnings weaken = bank stocks do worse.


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## Money172375 (Jun 29, 2018)

Beaver101 said:


> ... I totally agree with the above with those iron-clad loans. Hell, if there was ever a run on any (the) bank(s), depositors (and/or taxpayers) will make up for that.


Just a quick aside. I was a bank teller in the lead up to the year 2000 “catastrophe“. We stockpiled cash for weeks in advance in preparation for a possible run in the banks. “Bricks” the size of a camping cooler of newly minted cash were delivered regularly. We actually ran into storage problems within the vault compartments and they then provided us with standalone large safes that were temporarily installed in the vault.


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## Buckwheat (Dec 11, 2021)

Thanks for the replies.

I've looked at a number of US banks now. A few of the biggest are comparable (1 yr. total return) to top Canadian banks, but not many. Some regional US banks are pushing 30%. As fir the housing bubble, the US has its risks but it does not have a bubble of the dimensions of the one Canada has.


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## MrMatt (Dec 21, 2011)

Canadian banks are lower risk, so it's quite likely that other banks will outperform them.

However I think that risk adjusted Canadian banks are still very competitive.

Canadian assets are far to RE focused, if Ontario however does succeed at building housing (and hopefully the industrial/commercial as well), that's great for the economy, but could devalue residential housing.

Though even if they accelerate housing development, it will take decades to undo the damage of decades of underbuilding. But I hope we see a long plateau in RE values. This will be good for the country (and detrimental to those who are too heavily invested in RE.

I think the banks will be just fine, they'll easily survive a 10-20% drop in RE value if the total mortgage market remains steady or slightly increases. Remember a new build is way more mortgage businesses than an old paid off house anyway.


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## londoncalling (Sep 17, 2011)

Buckwheat said:


> Thanks for the replies.
> 
> I've looked at a number of US banks now. A few of the biggest are comparable (1 yr. total return) to top Canadian banks, but not many. Some regional US banks are pushing 30%. As fir the housing bubble, the US has its risks but it does not have a bubble of the dimensions of the one Canada has.


I think Canadian banks are better than US because of the higher regulation. I am not sure if that means they are more prudent with their US operations. Does anybody have any insight into Canadian bank activities in the US in comparison to US banks?

As an aside which regionals were you looking at? I have a couple US regionals (Provident Financial and Citizens Financial)

Does anybody hold non NA banks?


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## Ponderling (Mar 1, 2013)

Not directly at present . IXUS and VDU actually hold a fair bit of global financials, as do most global ETF's
VTI has a fair chunk of financials, as do other funds that follow a broad US equity market.. 

It has been a while, but I owned Wells Fargo in the past. 

Best screen to start with for me is look at reports for a cdn bank stock in my I trade account
Read the research and see what other institutions that are considered their peers.
Often big US banks fall to that list. Find there ticker, and start sniffing that more directly to see if they are work looking at.

Then it is likely worth a trip to the library to log into their ValueLine account. Very good data on US stocks is likely to be found in those reports. .


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## londoncalling (Sep 17, 2011)

Canadian banks down about 3% US banks are down around 4-5% today. UK and European banks down 8-12%. The resiliency today may be because of commodity pricing as Australia is down around 3% as well.


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## Faramir (11 mo ago)

I find banking a mystery and being a Von Mises fan I am no fan of banking, investment banking even less so. My understanding of the reserve ratio is this. Say a bank has $10,000 in deposits and has a 10% reserve ratio. That means they can lend out $100,000 on that $10,000 in deposits. Essentially get to print money legally. Am I wrong?


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## MrMatt (Dec 21, 2011)

Faramir said:


> I find banking a mystery and being a Von Mises fan I am no fan of banking, investment banking even less so. My understanding of the reserve ratio is this. Say a bank has $10,000 in deposits and has a 10% reserve ratio. That means they can lend out $100,000 on that $10,000 in deposits. Essentially get to print money legally. Am I wrong?


If they have $10k in deposits, they can lend out $9k, and have $1k in reserves.
They can't lend out money they don't have.

The whole "fractional reserve = printing money" argument is a misunderstanding, but it's easy to twist up the details if people push their agenda hard, and dazzle you with math. typically this is by ignoring half the transaction
It's easy to have a high net worth if you ignore the debt side of your finances. It's also easy to have a low net worth if you ignore the value of your assets.(or some of them)


Now back to my example, lets say that the $9k is deposited again, the bank now has $19k in deposits, They could lend out $17.1k, or an additional $8.1k, and keep $1.9k in reserve.
So assuming everyone keeps depositing, and they keep lending they'll end up with numbers not too far from (I'm too lazy to do the math right now)
$100k in deposits, $90k in loans, and $10k in reserves (aka real money).


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## Faramir (11 mo ago)

MrMatt said:


> If they have $10k in deposits, they can lend out $9k, and have $1k in reserves.
> They can't lend out money they don't have.
> 
> The whole "fractional reserve = printing money" argument is a misunderstanding, but it's easy to twist up the details if people push their agenda hard, and dazzle you with math. typically this is by ignoring half the transaction
> ...


Thanks for that. I guess I was under a total delusional thinking on this for most of my life.


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## MrMatt (Dec 21, 2011)

Faramir said:


> Thanks for that. I guess I was under a total delusional thinking on this for most of my life.


Not really totally delusional, it's framing and mixing of the terms deposits and reserves. It's quite common for people to switch definitions/uses of a word when they like to confuse/mislead people.
Definitions really matter.

Or as Reacher says "details matter"


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