Great Ponzi.com

Canadian Credit Health Update

2010-09-10


Introduction

I plan on releasing these Canadian Credit Health Updates approximately every quarter. In these reports, I apply the same analysis techniques that I used when watching the American financial system through 2005-2009. If American and European-style problems develop in Canada, I expect that these metrics will show early warning signs just as they did in the USA. All data comes from public financial reports.

Why watch these numbers?

In the modern economy, credit is the key factor. Credit (loan) quality ties directly to bank health and can indicate problems long before a bank is pushed to the brink of insolvency. But this isn't just about bank health and safety of deposits. Loans backed by real estate collateral underpin balance sheets throughout the economy. This means that loan quality problems translate into problems in banks, business, households, and even the government (for example the US Government pays Fannie Mae's ongoing mortgage losses). On top of this, impacts of credit are amplified through leverage, both personal and bank. Canada is very highly leveraged, and this is why we need to watch the situation.

Big Five Bank Data

A. Gross impaired loans / Gross loans (higher = more bad loans): A quick measure of how bad the loan book is. Pre-crisis, these values were under 1%.

Bank

2010.Q3

CIBC

1.10%

TD

1.24%

Royal Bank

1.72%

BMO

1.78%

Scotiabank

1.91%

B. Gross impaired loans / Total assets (higher = worse balance sheet): A quick measure of deterioration on the asset side of the balance sheet. In the USA, banks started having major problems at 1.5%, and critical problems including insolvency above 2.0%.

Bank

2010.Q3

TD

0.55%

CIBC

0.58%

Royal Bank

0.71%

BMO

0.79%

Scotiabank

1.03%

C. Gross impaired loans / Tier 1 capital (higher = worse balance sheet): This measure is very similar to the Texas Ratio, and compares the bad loans to Tier 1 (Basel II) capital, the core measure of bank capital which is primarily equity. If bad loans are a large % of the bank's capital, it means the bank can not easily absorb the losses.

Bank

2010.Q3

CIBC

13.5%

TD

14.1%

BMO

14.7%

Royal Bank

15.0%

Scotiabank

21.6%

D. Tier 1 Leverage ratio (lower = higher leverage): This doesn't measure loan quality, but rather the bank's leverage and aggressiveness. Tier 1 leverage = tier 1 capital / total assets. This measure is included because higher leverage translates to greater overall risk. The banks with the worse loan books (above tables) should exhibit lower leverage, otherwise it means they are being far too aggressive for their condition.

Bank

2010.Q3

BMO

5.3%

Scotiabank

4.8%

Royal Bank

4.8%

CIBC

4.3%

TD

3.9%

Big Five Bank Analysis

Royal Bank, BMO, and Scotiabank have the worst loan books. Scotiabank in particular is an outlier with particularly bad loans. On leverage the situation is sensible, with TD and CIBC (best loan books) showing the highest leverage.

Bankruptcy Statistics

These numbers lag by quite a bit, but they are still valuable: this shows total Canadian bankruptcies over time. Bankruptcy rates closely relate to bank loan quality. Bankruptcy rates have come down sharply from the peak of the crisis.




- Perpetual Bull