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shorting Canadian Banks

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Deal Addict
Sep 2, 2009
2978 posts
3020 upvotes
Ottawa
retireat50 wrote: The Canadian Government is intent on one thing - totally crippling industry no matter what it is and they do a fabulous job of it. No wonder the TSX has been complete garbage the last fifteen years compared to the alternatives.
Is this not a good argument for diversifying not only by sector but my region? Especially considering different time-frames have the other alternatives lagging?
Deal Guru
Aug 17, 2008
10989 posts
13539 upvotes
Bloomberg a little behind on the news. Small LB LRCN deal done, that was in demand. Shoring up the capital.

New CEO making an either catching the tailwind or making her own.
https://w*w.theglobeandmail.com/business/rob-magazine/article-laurentian-banks-rania-llewellyn-has-a-message-for-all-the-doubters/

Update 11July23

Taking off RFD affiliation link that's making the link useless.
Last edited by MrMom on Jul 11th, 2023 10:28 pm, edited 3 times in total.
Answer not a fool according to his folly, lest thou also be like unto him = Never argue with an idiot, they'll only bring you down to their level & beat you with experience
Sr. Member
Sep 28, 2011
818 posts
1481 upvotes
Winnipeg
retireat50 wrote: The Canadian Government is intent on one thing - totally crippling industry no matter what it is and they do a fabulous job of it.
In reading that speech it certainly seems like the government is more interested in handcuffing the banks with regulations that helping them thrive and grow. And as for the COVID restrictions placed on the banks, I suspect political interference is at play in keeping them on. Because, the economic rationale for those restrictions is gone and actually never really materialized, as COVID was not the GFC for banks. Instead, the market is booming and has been now for a good 9 months, other companies are starting to do buy backs, and the banks are sitting on a bunch of cash. They had $70 Billion combined at the start of January and that total has surely grown.
Deal Expert
Dec 5, 2006
16787 posts
12570 upvotes
Markham
bigblue1ca wrote: In reading that speech it certainly seems like the government is more interested in handcuffing the banks with regulations that helping them thrive and grow. And as for the COVID restrictions placed on the banks, I suspect political interference is at play in keeping them on. Because, the economic rationale for those restrictions is gone and actually never really materialized, as COVID was not the GFC for banks. Instead, the market is booming and has been now for a good 9 months, other companies are starting to do buy backs, and the banks are sitting on a bunch of cash. They had $70 Billion combined at the start of January and that total has surely grown.
The only reason banks are so profitable now is due to CERB type money, otherwise the banks loss would be way higher than it's. Most of their profit is from provision reduction. So I wouldn't say economic rationale is gone.

If government rescued banks by CERB, then it's fair game that government "interferes" banks operation
Deal Addict
Feb 26, 2017
2901 posts
4579 upvotes
If I don't get a dividend increase this year from the banks it will kind of suck but not have a big impact on me. I don't blame the government for being conservative this year as they also gave a lot of help to the banks last year.

I still see the banks as a good long term investment that will offer a current yield of around 4% and probably 4-7% dividend growth once dividend increases start again. Overall I think the long term returns will be in line with the yield + dividend growth and will be somewhere between 8-12%. Overall that's in line with my returns which are around 9% for BNS then 12% for TD% which I bought in 2010 and 2014. My returns are around 15% for RY which is mostly due to some good timing on buys/sells and 18% for CM but I've owned CM for less than 2 years which I think is too short of a time frame.
Deal Addict
Oct 21, 2014
1939 posts
2937 upvotes
Burlington, ON
smartie wrote: The only reason banks are so profitable now is due to CERB type money, otherwise the banks loss would be way higher than it's. Most of their profit is from provision reduction. So I wouldn't say economic rationale is gone.

If government rescued banks by CERB, then it's fair game that government "interferes" banks operation
CERB was a bailout for those who were affected by layoffs/sickness during covid. It allowed them to continue to provide for their families and in some cases pay on their loans. Not providing CERB to our citizens would have been catastrophic, there would be large scale looting by those who couldn't make their bills and pay for essentials. CERB should have been called property insurance, because that is what it really was. Something like 40% of Canadians used it.... to say it benefited the banks and therefore gives license for the government to make the banks use their capital in suboptimal ways is ridiculous rhetoric.

As to your statements about PCL... Royal had broad based strength across insurance (up 11% yoy), wealth management (up 4% yoy) and especially capital markets (up 21% yoy). Reduced PCL was part of the story but not most of the profit by any stretch.

Using CERB as rationale to restrict the banks from using their capital as they seem fit as a way of "evening the score" for a slight which does not exist in any objective reality will harm our economy in the long run.

The excess capital generated by these enterprises should be returned to it's owners as soon as possible.
Deal Fanatic
Jul 23, 2007
5129 posts
4924 upvotes
I dunno. Down in the U.S. in 2020 Buffett felt the need to sell off a lot of his bank holdings. Being entirely honest I only sold one and that was NA. Not because I didn't like the bank, but it was a very small holding in the portfolio and I could match it along with another stock I sold (both at a profit) to match the loss in IPL in the taxable account. No thoughts of selling the big five Canadian banks we owned in 2020 nor this year. In fact I've been adding to them when our money isn't going into some other Canadian sectors.

I just checked the e-fund indexes at TD and the Canadian market is still outperforming since 1999 over the U.S, market whether you look at it in $CDN or $US. Of course everyone and their dog points to the U.S. market over the last decade, but having been in the markets myself near forty years, I only consider that recency bias. Moving forward, I never know what's going to happen. Meanwhile, I just collect the bank dividends and re-invest them into other Canadian equities. As far as the Canadian bank dividend increases, if I could wait it out after the financial crisis around twelve years ago, I can do it again.
Deal Expert
User avatar
Dec 12, 2009
29536 posts
20456 upvotes
Stryker wrote: I dunno. Down in the U.S. in 2020 Buffett felt the need to sell off a lot of his bank holdings. Being entirely honest I only sold one and that was NA. Not because I didn't like the bank, but it was a very small holding in the portfolio and I could match it along with another stock I sold (both at a profit) to match the loss in IPL in the taxable account. No thoughts of selling the big five Canadian banks we owned in 2020 nor this year. In fact I've been adding to them when our money isn't going into some other Canadian sectors.

I just checked the e-fund indexes at TD and the Canadian market is still outperforming since 1999 over the U.S, market whether you look at it in $CDN or $US. Of course everyone and their dog points to the U.S. market over the last decade, but having been in the markets myself near forty years, I only consider that recency bias. Moving forward, I never know what's going to happen. Meanwhile, I just collect the bank dividends and re-invest them into other Canadian equities. As far as the Canadian bank dividend increases, if I could wait it out after the financial crisis around twelve years ago, I can do it again.
How can anyone hate cash generating machines. We are all mindful of how Canadian telecoms are expensive. The banks are equally expensives with account fees. My CIBC smart plus account has a fee of $30 a month if certain conditions are not met. I am sure many customers are paying the $30 monthly fee. I am not going to get mad, just get even by owning a tiny part of the company.
Public Mobile customer, $34/50GB CAN-US, $29/30GB, $24/4GB
Tangerine, EQ, Simplii, HSBC customer
Deal Expert
Dec 5, 2006
16787 posts
12570 upvotes
Markham
Gungnir wrote: CERB was a bailout for those who were affected by layoffs/sickness during covid. It allowed them to continue to provide for their families and in some cases pay on their loans. Not providing CERB to our citizens would have been catastrophic, there would be large scale looting by those who couldn't make their bills and pay for essentials. CERB should have been called property insurance, because that is what it really was. Something like 40% of Canadians used it.... to say it benefited the banks and therefore gives license for the government to make the banks use their capital in suboptimal ways is ridiculous rhetoric.

As to your statements about PCL... Royal had broad based strength across insurance (up 11% yoy), wealth management (up 4% yoy) and especially capital markets (up 21% yoy). Reduced PCL was part of the story but not most of the profit by any stretch.

Using CERB as rationale to restrict the banks from using their capital as they seem fit as a way of "evening the score" for a slight which does not exist in any objective reality will harm our economy in the long run.

The excess capital generated by these enterprises should be returned to it's owners as soon as possible.
I have no issue with CERB.

In terms of profit, I agree it's not all due to pcl, but it's probably the biggest driver or one of biggest drivers. I might read it wrong, but i saw PCL in Q2,2020 is 2.8 billion and 110 millions in Q1,2021, that's a big drop although spread by quarters

I don't disagree with your views on government role on banks or in general private sector, but in Canada, banks is always strongly regulated or protected. Government or their policies on financial industry are also the reasons why we have such poor financial products from banks
Sr. Member
Jan 9, 2017
527 posts
742 upvotes
I believe it's strong government regulation in Canada protected Canadian banks not have failed as bad as USA banks during the Great recession 08/09, and coming back much quicker than USA banks. Take a look at citigroup, the price is still far away from before Great recession. So in this sense, we should appreciate that regulation. I prefer Canadian banks as a soon to be retiree. Canadian banks have a pretty high allocation in my portfolio but I don't own any US banks. If you don't like Canadian banks, you can always invest in USA banks, right? This is a free world.
Deal Addict
Dec 4, 2011
2565 posts
2828 upvotes
Montréal
dropby wrote: I believe it's strong government regulation in Canada protected Canadian banks not have failed as bad as USA banks during the Great recession 08/09, and coming back much quicker than USA banks. Take a look at citigroup, the price is still far away from before Great recession. So in this sense, we should appreciate that regulation. I prefer Canadian banks as a soon to be retiree. Canadian banks have a pretty high allocation in my portfolio but I don't own any US banks. If you don't like Canadian banks, you can always invest in USA banks, right? This is a free world.
Bingo, I will trade fewer financial products for better systemic stability (I am oversimplifying obviously, they are not mutually exclusive) any day of the week.
Jr. Member
Jan 13, 2021
115 posts
75 upvotes
The reason Canadian banks weren't as affected in 2008 was that entire risk for poor quality mortgages is assumed by Canadian taxpayer, not by banks themselves.
They are literally encouraged to give out poor quality loans and simply have them insured by CMHC - government corporation.
Easy to make money when risk is socialized - that's why I am invested in Canadian banks quite heavily despite housing market being irrational
Deal Fanatic
Nov 24, 2013
6479 posts
3344 upvotes
Kingston, ON
DamianK3021 wrote: The reason Canadian banks weren't as affected in 2008 was that entire risk for poor quality mortgages is assumed by Canadian taxpayer, not by banks themselves.
They are literally encouraged to give out poor quality loans and simply have them insured by CMHC - government corporation.
Easy to make money when risk is socialized - that's why I am invested in Canadian banks quite heavily despite housing market being irrational
While it’s true the banks have little to no risk on insured mortgages, I couldn’t let this go without replying because it’s not exactly accurate. CMHC’s underwriting requirements at 19% down are stricter with regards to ratios, income verification, etc., than the banks’ own underwriting at 20% down. CMHC doesn’t approve “poor quality mortgages” and pass the risk onto Canadian taxpayers. They make sure the banks don’t go Wild West when lending to buyers with low down payments, like NINJA mortgages in the US back in the day, because CMHC itself is underwriting them and vetting them.

Moreover, the buyers pay the insurance premium to CMHC. CMHC profits on the premiums (foreclosure is extremely low in Canada) and stress-tests show it to be solvent in the event of various major price crash scenarios. The risk isn’t “socialized” outside of a catastrophic event where government recapitalization would be needed.

https://www.cmhc-schl.gc.ca/en/about-us ... ual-report
Latest annual report is still pre-pandemic, but at a baseline they were collecting $2B annually in premiums and paying out $200M in claims in 2018&19. Profiting over $1B/yr on that segment in 2019, after paying $300M of income tax on it to boot. There may be a theoretical taxpayer risk, but in practice it’s CMHC-using homebuyers that pay for the banks’ lending security, which is as it should be.
Jr. Member
Jan 13, 2021
115 posts
75 upvotes
Mike15 wrote: While it’s true the banks have little to no risk on insured mortgages, I couldn’t let this go without replying because it’s not exactly accurate. CMHC’s underwriting requirements at 19% down are stricter with regards to ratios, income verification, etc., than the banks’ own underwriting at 20% down. CMHC doesn’t approve “poor quality mortgages” and pass the risk onto Canadian taxpayers. They make sure the banks don’t go Wild West when lending to buyers with low down payments, like NINJA mortgages in the US back in the day, because CMHC itself is underwriting them and vetting them.

Moreover, the buyers pay the insurance premium to CMHC. CMHC profits on the premiums (foreclosure is extremely low in Canada) and stress-tests show it to be solvent in the event of various major price crash scenarios. The risk isn’t “socialized” outside of a catastrophic event where government recapitalization would be needed.

https://www.cmhc-schl.gc.ca/en/about-us ... ual-report
Latest annual report is still pre-pandemic, but at a baseline they were collecting $2B annually in premiums and paying out $200M in claims in 2018&19. Profiting over $1B/yr on that segment in 2019, after paying $300M of income tax on it to boot. There may be a theoretical taxpayer risk, but in practice it’s CMHC-using homebuyers that pay for the banks’ lending security, which is as it should be.

You are right on vast majority of the points. And I have read the financial report from CMHC. My opinion is that the reserves are vastly inadequate when looking at exposure, and the fact that the exposure is to Canadian taxpayer.
And of course I am well aware of the premiums being paid, etc. Where we seem to disagree is the requirements. I find them to be vastly inadequate since they are focused on income vs equity. Income can be lost, and very quickly. I see equity as safety buffer, and CMHC encourages giving out loans with minimal down payment.
Imho, because of that the government got itself cornered and is stating that even 10% drop in prices could be catastrophic, and that is after a year in which prices went up ~18%!

You don't really have to look very hard for proof that banks see those loans as less risk (and rightfully so). Go to mortgage calculator and check what your interest rate would be with 19% down payment (CMHC protected) vs 30% down payment (non-protected). The interest rate actually goes up with rising down payment!

Imho there is an easy way to 'fix' the housing market - get rid of CMHC. Then the underwriting will be more responsible, and Canadian taxpayers won't be subsidizing risky loans
Deal Guru
Dec 20, 2018
10120 posts
10230 upvotes
DamianK3021 wrote:
Imho there is an easy way to 'fix' the housing market - get rid of CMHC. Then the underwriting will be more responsible, and Canadian taxpayers won't be subsidizing risky loans
that's opposite based on experience elsewhere. Banks and alternative lenders will just take on more risks to make money and lend it out without worry of CMHC and if/when they do get in trouble, it's canadian taxpayers who will bail out the banks just like anywhere else in the world. your theory is only sort of maybe true if banks weren't too big to fail and gov't is ok with financial system collapsing
Jr. Member
Jan 13, 2021
115 posts
75 upvotes
StatsGuy wrote: that's opposite based on experience elsewhere. Banks and alternative lenders will just take on more risks to make money and lend it out without worry of CMHC and if/when they do get in trouble, it's canadian taxpayers who will bail out the banks just like anywhere else in the world. your theory is only sort of maybe true if banks weren't too big to fail and gov't is ok with financial system collapsing
I don't really follow your logic:
a) you are assuming institutions don't learn from the past
b) you are assuming that they will take on unmitigated risk and put taxpayers at risk anyway, that is if the government decides to spend taxpayer money
c) based on those assumptions you believe it is good idea to tell those institutions before they write loans that the risk is on taxpayer and not them?

There can still be regulations on minimal income, minimum downpayment etc. in place without encouraging risky loans and putting that risk on taxpayer.
If there was some common sense the Canadian housing market wouldn't be the mess it is now. There is no common sense though - there is only politics
Deal Addict
Oct 21, 2014
1939 posts
2937 upvotes
Burlington, ON
StatsGuy wrote: that's opposite based on experience elsewhere. Banks and alternative lenders will just take on more risks to make money and lend it out without worry of CMHC and if/when they do get in trouble, it's canadian taxpayers who will bail out the banks just like anywhere else in the world. your theory is only sort of maybe true if banks weren't too big to fail and gov't is ok with financial system collapsing
It would be very much the opposite. Banks would simply refuse to loan to people without 20% down, and the government does not want that to happen, that is the purpose of the CMHC. Our banks are solid because they don't make these types of loans.
Deal Guru
Aug 17, 2008
10989 posts
13539 upvotes
The incentive to game this just went up.

Amendments to the minimum qualifying rate for uninsured mortgages
http://www.osfi-bsif.gc.ca/Eng/osfi-bsi ... -0521.aspx

OTTAWA ─ May 20, 2021 ─ Office of the Superintendent of Financial Institutions

Today, the Office of the Superintendent of Financial Institutions (OSFI) announced that, effective June 1, the minimum qualifying rate for uninsured mortgages (i.e., residential mortgages with a down payment of 20 percent or more) will be the greater of the mortgage contract rate plus 2 percent or 5.25 percent.

Quick Facts
  • As of June 1, 2021, the revised calculation of the minimum qualifying rate for uninsured mortgages will be:
    The greater of the contract rate plus 2% or 5.25%.
  • OSFI will review and communicate the qualifying rate at a minimum annually, every December, well in advance of the high-volume housing spring season.
Images
  • Canada curve 20May21.JPG
Answer not a fool according to his folly, lest thou also be like unto him = Never argue with an idiot, they'll only bring you down to their level & beat you with experience
Deal Fanatic
User avatar
Dec 21, 2005
5865 posts
1672 upvotes
London, ON
MrMom wrote: The incentive to game this just went up.

Amendments to the minimum qualifying rate for uninsured mortgages
http://www.osfi-bsif.gc.ca/Eng/osfi-bsi ... -0521.aspx

OTTAWA ─ May 20, 2021 ─ Office of the Superintendent of Financial Institutions

Today, the Office of the Superintendent of Financial Institutions (OSFI) announced that, effective June 1, the minimum qualifying rate for uninsured mortgages (i.e., residential mortgages with a down payment of 20 percent or more) will be the greater of the mortgage contract rate plus 2 percent or 5.25 percent.

Quick Facts
  • As of June 1, 2021, the revised calculation of the minimum qualifying rate for uninsured mortgages will be:
    The greater of the contract rate plus 2% or 5.25%.
  • OSFI will review and communicate the qualifying rate at a minimum annually, every December, well in advance of the high-volume housing spring season.
When will Osfi allow the banks to hike dividends???
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