Great Ponzi.com

Canadian Credit Health Update

2012 Q1


Go to the most recent report: 2016 Q4

Health of Canadian banks: stable (green)

Introduction

These Canadian Credit Health Updates are released 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.

This report contains:

Summary for 2012.Q1

Big Five Banks: Balance Sheet Health

A. Gross impaired loans / Gross loans (higher = worse loan book): A rough measure of how bad the loan book is. Before 2008, these values were under 1%.

Bank

2012.Q1

2011.Q4

2011.Q3

2011.Q2

2011.Q1

2010.Q4

2010.Q3

Royal Bank

0.62%

0.78%

0.79%

1.31%

1.54%

1.65%

1.68%

TD

0.63%

0.70%

1.32%

1.34%

1.43%

1.23%

1.24%

CIBC

0.79%

0.94%

0.91%

0.92%

0.98%

0.99%

1.09%

Scotiabank

0.99%

1.32%

1.38%

1.43%

1.47%

1.50%

1.86%

BMO

1.09%

1.29%

1.11%

1.58%

1.71%

1.80%

1.78%

Average

0.82%*

1.01%

1.10%

1.32%

1.43%

1.43%

1.53%

* Note: banks switched accounting standards in 2012.Q1

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

2012.Q1

2011.Q4

2011.Q3

2011.Q2

2011.Q1

2010.Q4

2010.Q3

Royal Bank

0.29%

0.32%

0.32%

0.55%

0.65%

0.69%

0.71%

TD

0.33%

0.32%

0.60%

0.62%

0.66%

0.56%

0.55%

BMO

0.49%

0.56%

0.48%

0.68%

0.74%

0.78%

0.79%

CIBC

0.51%

0.52%

0.49%

0.45%

0.50%

0.52%

0.58%

Scotiabank

0.55%

0.71%

0.74%

0.74%

0.80%

0.84%

1.03%

Average

0.43%*

0.49%

0.53%

0.61%

0.67%

0.68%

0.73%

* Note: banks switched accounting standards in 2012.Q1

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 adjusted 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

2012.Q1

2011.Q4

2011.Q3

2011.Q2

2011.Q1

2010.Q4

2010.Q3

Royal Bank

6.7%

6.7%

6.9%

11.6%

13.9%

14.7%

15.0%

TD

8.9%

7.7%

15.0%

15.2%

16.1%

14.2%

14.1%

BMO

10.9%

10.7%

9.4%

12.7%

14.3%

14.9%

14.7%

Scotiabank

12.1%

14.3%

15.3%

16.0%

17.1%

17.5%

21.6%

CIBC

12.4%

11.4%

11.1%

11.1%

12.0%

12.4%

13.5%

Average

10.2%

10.2%

11.5%

13.3%

14.7%

14.7%

15.8%

D. Tier 1 Leverage ratio (lower = more 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 less leverage (higher % here), otherwise it means they are being far too aggressive for their condition.

Bank

2012.Q1

2011.Q4

2011.Q3

2011.Q2

2011.Q1

2010.Q4

2010.Q3

TD

3.7%

4.2%

4.0%

4.1%

4.1%

3.9%

3.9%

CIBC

4.1%

4.6%

4.4%

4.1%

4.2%

4.2%

4.3%

Royal Bank

4.3%

4.8%

4.7%

4.7%

4.7%

4.7%

4.8%

Scotiabank

4.5%

5.0%

4.9%

4.7%

4.7%

4.8%

4.8%

BMO

4.5%

5.3%

5.1%

5.3%

5.2%

5.3%

5.3%

Average

4.2%*

4.7%

4.6%

4.6%

4.6%

4.6%

4.6%

* Note: banks switched accounting standards in 2012.Q1

Off Balance Sheet Derivative Exposures

Amounts are in trillions of dollars. All amounts are notional, which is the face value of a contract (the amount of underlying money represented by a contract). These are not prices or market values of contracts. In other words, $1 trillion of notional exposure does not mean the bank could lose $1 trillion; however, it shows the magnitude of derivative contracts.

OTC exposures are included here because I believe OTC contracts are particularly dangerous since they are illiquid, difficult to value, and become worthless if the counterparty (another bank) collapses.

This derivative exposure is hidden off-balance sheet where it can't distress investors and depositors. The standard excuse given by banks is that they are long some derivatives, and short others – and the two (thanks to financial engineering) perfectly balance out risk, resulting in minimal net exposure. In reality however, all it takes is one bank failure to throw the entire derivative book into deep trouble. These things already caused significant problems in 2007-2009, and will cause problems again. Unfortunately the banks' derivative exposure continues to climb, which means that counterparty risk is increasing.

Source: OSFI, financial data – banks, quarterly derivative components.

Bank

2011.Q4


Total notional exposure

OTC notional exposure

Royal Bank

$7.62 T

$7.10 T

BMO

$3.82 T

$3.19 T

TD

$3.32 T

$2.97 T

Scotiabank

$2.54 T

$2.23 T

CIBC

$1.58 T

$1.45 T

Total exposure

$18.88 T

$16.94 T

Bankruptcy Statistics

These numbers lag by a full quarter, but they are still valuable: this shows total Canadian bankruptcies over time. Bankruptcy rates closely relate to bank loan quality. Note however that banks with significant US/international operations have further credit exposure beyond Canada.

Bankruptcy rates continued to decline through 2011, now below 2007 rates. There is no sign of a personal bankruptcies problem.




- Perpetual Bull, perpetualbull@gmail.com