Canada's Banks

Some Hedge Funds are shorting Canadian banks.  Their main argument is that the Canadian real-estate market is pooched, and many consumers are facing massive defaults due to excessive personal debt.  There is no doubt there are some risky loans on the bank’s books, but the hedge funds are fear mongering.  We feel the risk to our banks are minimal. 

First off, it will take a 1930 style depression or a world war for this to occur.  If this happens, it would make little difference where your money is parked.  Everything, except actual cash, will experience a substantial price drop.  It should be pointed out our banks only lowered their dividends, as opposed to cutting them all together, during the Great Depression and both World Wars. 

Secondly, Canadian banks are amongst the most financially sound in the world today. Sure, some more than others, but overall our banks are very safe.  Banks must maintain a capital ratio of 8 or higher.  BNS is just over 11 as most other banks are as well.  TD is at 12.  These numbers are amongst the highest in the world. 

Last, but not least, the Canadian banks have been transferring high risk loans and mortgages, plus a few high-quality loans, to their mutual funds.  By doing so, they are reallocating the risk from their balance sheet to the unitholders of the mutual funds.   The banks in turn take a fee every year to manage these types of loans in their funds. During the 2007-09 meltdown, Canada’s loan losses ended up being just over 1% of assets. Not a big deal. Banks do not want to foreclose so in many cases the loans are re-negotiated.

While the Hedge Funds did not say how many shares they shorted, the banks are showing significant short sales according to the most recent IIROC Consolidated Short Positions Report.   Hedge funds begin shorting prior to making their predictions public.  The public hears this and sell their holdings, forcing the price down.  Guess who buys back their shorts at a profit?  While illegal, it is a common practice and very hard to prove market manipulation in the courts.  

We expect all Canadian banks to raise their dividends at least once over the next 12 months. We will not be selling our holdings and recommend purchasing more in any sell-off.