The Only Western Country Where the Banks are Profitable
Stock-Markets / Canadian Stock Market Apr 18, 2009 - 07:46 PM GMTBy: Justice_Litle
If you can believe it, there is a land where the bankers are still honest and polite… and even profitable.
First, a quick corrective note. On Wednesday I said that FAZ, at more than 125 million shares traded in recent days, “had bigger trading volume than Microsoft, Intel, Exxon and IBM combined.”
I should have qualified that by saying intraday volume (at the time of my writing). Microsoft, Intel, Exxon and the like have all had their occasional 100 million share days. But the general point still stands... FAZ is super liquid, and routinely out-trades some of the biggest names in existence.
Now, on to today’s topic... Would you believe it if I told you that not all big banks are dishonest?
How about if I told you that even in this time of sweeping global financial crisis - a time when banks on both sides of the Atlantic gorged themselves on leverage to the point of bursting like the fat guy in the Monty Python skit - there is a nearby land where the bankers are not only polite and honest, but actually profitable... without relying on gross accounting fictions or endless reams of bailout cash.
That’d be pretty hard to believe, eh?
Take Off, Hoser!
Hard to believe, but true. In case the “eh” didn’t give it away, the magical land of polite and honest bankers I’m talking about is Canada. (And I hope our readers from the Great White North can forgive the McKenzie brothers reference.)
As it turns out, while American and European bankers were busy making damn fools of themselves, Canada’s bankers went about the business of earning C$12 billion worth of profits in 2008... and they did it without any help from Dudley Do-Right types or Royal Mountie rescue missions from the Canadian government. (Okay, no more tongue-in-cheek references, I promise.)
As this FDIC failed bank list shows, more U.S. banks have failed in 2009 alone than one can count - at least without running out of fingers and toes. In Canada, there hasn’t been a bank failure in nearly a quarter century. And prior to two regional bank failures in 1985, Canada hasn’t seen a bank go under since 1923.
So how did they do it?
Bankers, Not Banksters
“Canada’s banks are still making money,” Bloomberg reports, “because they kept a bigger cushion of capital - the result of more stringent regulation and conservative management - while steering clear of riskier loans and securities.”
Ah, so that’s the trick. They acted like bankers are supposed to act, instead of coked-up profit junkies willing to do anything for another earnings fix.
As of January 2009, according to Bloomberg, Canada’s eight publicly traded banks held capital equivalent to 9.9% of assets. That’s more capital than the 7% minimum Canadian law requires, and a whopping sixty percent more than the standard set for U.S. commercial banks.
Canada also managed to sidestep some of the nuttiness of the global housing bubble by taking a pass on sketchy mortgage loans. If you can believe it, Canadian bankers actually decided to pay attention to the creditworthiness of potential borrowers, instead of handing out neg-am interest-only NINJA loans (No Income, No Job, No Assets) to anyone who could fog a mirror.
Canada hasn’t gone completely untouched by the financial crisis. In a move of forbearance and caution, the Canadian government set up a special loan program in October 2008, in order to backstop Canadian lenders and help them compete with newly government-backed lenders in the U.S. and Europe. But the funds were never tapped.
A True Partnership
From America’s perspective, Canada can have a reputation as being a little stodgy, a little too reserved... in need of “loosening up” a bit. (Not that I personally agree with this perception. I’ve met a fair number of Canadians in my world travels, and they can be pretty wild let me tell you.)
But if anything, “stodgy” and “reserved” are exactly the kind of adjectives one would want applied to banks. (That’s why bank buildings are so heavy on the brick and stone and marble - to convey a sense of prudence and permanence.)
There is also a tendency for America’s freewheeling business culture to look askance at Canada’s more buttoned-up approach. Would it be worth it, U.S. businessmen seem to ask, to squelch American spirit with lots more rules and regulations like they have up north?
The answer there is, you don’t need extra red tape. You just need accountability.
Take the old investment banks, for example. Back when investment banks were actual, honest-to-god partnerships, the partners had both their reputation and their money on the line at all times. Every single deal was scrutinized, because the partners knew it was their money they were risking.
Similar lines applied to the old family-owned and private-investor-owned banks. There are still a few of these around today, but not many.
Point being, in the days of true accountability and true partnership, nobody would have dreamed of racking up thirty and forty times leverage, making massive bets with other people’s money that threatened to bring down the house upon failure. Prudence was built in because accountability was built in.
America could get that model back, and take a page from Canada, by properly aligning ownership interests and financial consequences in U.S.-based financial institutions. Break up the monsters... let the players get smaller... let the system get privatized, with risk allocated as it should be - to the private investors - and start again.
It seems too bad we are striving so hard now to run in the opposite direction... looking for ways to absolve public bank investors of their bad decisions at any cost, thus encouraging the caretaker CEOs of these outfits to go out and leverage up on the taxpayer’s dime once again.
A Sounder Footing
Meanwhile, the favorable position of Canada’s banks offers yet more reason to take a hard look at the Canadian economy.
As the global economy finally begins to heal itself - which it will at some point - which North American economy will be in better shape do you think? The one that is still nursing the mother of all leverage hangovers, or the one that showed a little more prudence and sobriety during the crazy times and still has a working financial system to show for it? No matter how you slice it, the health of Canada’s banks (compared to the sickness and malaise everywhere else) will be a positive draw.
There are different ways to think about investing in Canada... one of them is through long-term exposure to the Canadian dollar.
The “Loonie,” as the Canadian dollar is affectionately nicknamed, looks to have worked out a bottoming process over the past six months, and could easily ride higher - maybe much higher - along with natural resource prices as the global economy gets on a sounder footing.
It should be pointed out that trading in a currency and investing in a currency are two different things... while timing is critical on the trading side, with a long-term investment it’s easier to take a bigger-picture perspective.
Buying currencies backed by natural resources and sound financial underpinnings now, then holding those currencies for a period of years, looks like a hard-to-go-wrong way to diversify out of the dollar (or the euro) and shore up one’s investment portfolio.
Warm Regards,
By Justice Litle
http://www.taipanpublishinggroup.com/
Copyright © 2009, Taipan Publishing Group
Justice Litle is editorial director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter, and editor of Taipan's Safe Haven Investor, which helps guide readers to new global investment frontiers and safe harbors.
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