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 (bank web sites and OSFI web site).
Off-balance sheet derivative exposures will be included in some reports.
TD and Scotiabank currently have the worst loan books (by impaired loans), but they did improve versus last quarter.
All (big five) banks have fewer bad loans this quarter. Balance sheets look better.
TD is increasing leverage (and in fact has the most leverage) while they have one of the worst loan books. This is potentially dangerous and brings the risk of very sharp losses. Average bank leverage is unchanged.
Royal Bank is in the process of selling substantially all U.S. regional banking operations to PNC Financial. They're taking a loss of $1.6 billion and the U.S. bad loans are eliminated from their impaired loans (unless the sale fails approval and finalization). As a result, Royal now shows virtually nil bad loans in the USA and their loan book metrics have improved. This is good.
BMO added significant U.S. loans ($29 billion) this quarter from the acquisition of M&I. At the same time, BMO's gross impaired loans have been restated to omit bad loans from purchased U.S. loans. BMO says that the current figures have been adjusted to reflect future expected losses. The flip side is that if U.S. loans go sour, BMO's loan book will rapidly deteriorate: their U.S. loan risk has increased.
Total Canadian bankruptcies are stable at 2007 levels. There is no sign of escalating bankruptcies.
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 losses at banks, business, households, and the national Treasury (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.
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 |
2011.Q3 |
2011.Q2 |
2011.Q1 |
2010.Q4 |
2010.Q3 |
|---|---|---|---|---|---|
|
Royal Bank |
0.79% |
1.31% |
1.54% |
1.65% |
1.68% |
|
CIBC |
0.91% |
0.92% |
0.98% |
0.99% |
1.09% |
|
BMO |
1.11% |
1.58% |
1.71% |
1.80% |
1.78% |
|
TD |
1.32% |
1.34% |
1.43% |
1.23% |
1.24% |
|
Scotiabank |
1.38% |
1.43% |
1.47% |
1.50% |
1.86% |
|
Average |
1.10% |
1.32% |
1.43% |
1.43% |
1.53% |
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 |
2011.Q3 |
2011.Q2 |
2011.Q1 |
2010.Q4 |
2010.Q3 |
|---|---|---|---|---|---|
|
Royal Bank |
0.32% |
0.55% |
0.65% |
0.69% |
0.71% |
|
BMO |
0.48% |
0.68% |
0.74% |
0.78% |
0.79% |
|
CIBC |
0.49% |
0.45% |
0.50% |
0.52% |
0.58% |
|
TD |
0.60% |
0.62% |
0.66% |
0.56% |
0.55% |
|
Scotiabank |
0.74% |
0.74% |
0.80% |
0.84% |
1.03% |
|
Average |
0.53% |
0.61% |
0.67% |
0.68% |
0.73% |
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 |
2011.Q3 |
2011.Q2 |
2011.Q1 |
2010.Q4 |
2010.Q3 |
|---|---|---|---|---|---|
|
Royal Bank |
6.9% |
11.6% |
13.9% |
14.7% |
15.0% |
|
BMO |
9.4% |
12.7% |
14.3% |
14.9% |
14.7% |
|
CIBC |
11.1% |
11.1% |
12.0% |
12.4% |
13.5% |
|
TD |
15.0% |
15.2% |
16.1% |
14.2% |
14.1% |
|
Scotiabank |
15.3% |
16.0% |
17.1% |
17.5% |
21.6% |
|
Average |
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 lower leverage, otherwise it means they are being far too aggressive for their condition.
|
Bank |
2011.Q3 |
2011.Q2 |
2011.Q1 |
2010.Q4 |
2010.Q3 |
|---|---|---|---|---|---|
|
BMO |
5.1% |
5.3% |
5.2% |
5.3% |
5.3% |
|
Scotiabank |
4.9% |
4.7% |
4.7% |
4.8% |
4.8% |
|
Royal Bank |
4.7% |
4.7% |
4.7% |
4.7% |
4.8% |
|
CIBC |
4.4% |
4.1% |
4.2% |
4.2% |
4.3% |
|
TD |
4.0% |
4.1% |
4.1% |
3.9% |
3.9% |
|
Average |
4.6% |
4.6% |
4.6% |
4.6% |
4.6% |
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 are virtually unchanged in recent months. They are still at pre-crisis (2007) levels.
- Perpetual Bull, perpetualbull@gmail.com