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The recent headlines that smack of patriotic pride concerning Canadian banks buying up distressed financial assets in the USA over the past few months have

The recent headlines that smack of patriotic pride concerning Canadian banks buying up distressed financial assets in the USA over the past few months have been interesting to say the least.  I don’t know a heck of a lot about corporate finances at the highest levels, or even what metrics these guys are using in order to gauge if these acquisitions make sense or not.  Anecdotally though, as a Canadian citizen, I think I should be interested, and possibly even concerned about these goings on, even though I really can’t do much about it.

God Bless the Beaver and the Maple Leaf!

Perhaps my concern comes from the recent chest beating we appear to be doing as a nation when it comes to our banks.  Hey, I’m all for being proud of how great our little oligopoly is.  I’m glad that all those fees we pay give us something to brag about when everyone else’s banks are throwing assets overboard like crazy just so they quit taking on water.  At some point though I just wonder if we might be getting a little “high and mighty” (which isn’t very Canadian after all).  So, we’ve done pretty well in weathering this financial storm over the past few years.  We only handed out mortgages to almost everyone, instead of absolutely everyone plus their dog.  The hardest days might still be ahead for our “Big Six” or “Big Five Plus One” or whatever clever title the talking head give our banks now.  Again, little data to back up this assertion up, but it doesn’t look like unemployment is going down anytime soon.  Our energy sector is dealing with shrinking demand due to the Americans’ good fortune of finding deposits that are now accessible, as well as all of the insane pipeline issues.  Finally, we might be starting our very own run of depressed housing statistics, but hey, for the time being we’re number one baby.

I’ll Give You Two Dimes For That Credit Card Portfolio…

Thanks to how smart we all are (lucky?) our banks have solid liquidity at a time when everyone else is having a garage sale on all of their money stuff (a.k.a. deleveraging depressed financial assets).  This has led to our banks buying up whole banks in the USA, expanding foreign holdings all over the globe, and generally playing the role of high rollers.  This might be a great thing.  If you go to a garage sale and buy valuable stuff at low prices, you feel pretty good about yourself right?  That’s basically Warren Buffett’s whole approach to investing, and one could argue that if the Canadian Banks play their cards right they could parlay their current advantages into a great long-term position.  Of course they could also be buying everyone’s retro band shirt equivalents that are worth even less than their current depressed values.

What Goes Up, Must Go ???

I just know this much.  A few short years ago Ireland and Iceland were touting how great their banking sectors were.  If you check out Boomerang by my boy Michael Lewis, he details how Icelanders actually started to believe that there was something in their blood and/or culture that made them superior financial strategists.  As crazy as that sentence seems, it was considered perfectly legitimate thinking at one point.  Canadians seem to be edging into that territory right now (although from a much more Canadian angle).  Our line seems to be, “Look how safe and conservative we are in our lending practices, the world could learn something for us.”  I have no real evidence that we might have to take a couple steps back, other than the wheel of life generally doesn’t allow anyone to stay on top for THAT long.  As our energy economy starts to recede a little, and a few of our urban housing markets come back to normal, it will be interesting to see if we stay high and mighty.

Did You Know You’re Probably Part-Owner of Canadian Bank?

On a pure money level, I wonder how many Canadians are aware of the fact that they have a lot more than just patriotic pride invested in their banks – like their pension for instance.  The Canadian Pension Plan (CPP) has substantial exposure to Canadian equities, and the banks are a large portion of that.  While the overall percentage of the CPP might be fairly small, it’s still a relatively large exposure relative to any other single asset group.  Not only that, but if you have a third-party controlled defined benefits pension plan like the one I have as a teacher, you likely have a large exposure to the banks through there as well.  Finally, if you are an indexer that likes to use ETFs, TSX 60 ETFs like XIU are very heavy on the financials side of things.  For iShares’ XIU specifically (just a large-volume example), Royal Bank is the largest holding at 7.67% of the entire fund, TD Bank is second with 6.82%, Bank of Nova Scotia is third with 5.89%, and Bank of Montreal is fifth with 3.49% of the ETF. (with Suncor Energy breaking up the party in fourth place).  If you include Canada’s large insurance companies, they make up a huge part of our overall economy; therefore, even if you have not invested in the bank stock directly, chances are you will indirectly feel the sting anyway.

It might simply boil down to whether you think the Canadian banks are making good strategic acquisitions right now, or if they are simply buying stuff because they are the only ones in the crowd with a wad of cash in their pocket.   I hope for the sake of our pensions that the guys that are smarter than me know what they are doing!  For what it’s worth, I do believe the US economy will get back on track (eventually), so if I had to place a bet, I’d guess that as long as the big boys like TD and RBC manage these new assets well (and there’s really no reason to think they won’t) I’d say that these new assets should be a nice little money-maker for all Canadians going forward.

Article comments

Liquid says:

If the CPPIB has faith in Canadian banks then so do I :0) Yeah! Go banks! I think it’s a great opportunity for TD and other banks to take advantage of purchasing assets in the US and other countries where valuations are relatively cheaper than similar assets within Canada. Plus our Loonie at par with the USD offers excellent purchasing power 😀 I think it should be something any Canadian company, not just banks, should be looking at doing. Canadian manufacturers for example, can buy cheap machinery from the US to increase their output and become more competitive.

Teacher Man says:

Great point on the CAD-USD parity Liquid. You also raise a good point about the strong past performance of the CPPIB. I still just get nervous when I see the similarities to countries in the past that thought their financial sector was the key to their growth.