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Why are bank stocks not recovering as economy begins to reopen?

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  • May 28th, 2020 11:53 am
Sr. Member
Jun 19, 2017
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choclover wrote: Unless times have changed, my experience in corporate finance has shown me that banks never lend money to businesses that is at risk. They will only lend when the funds loaned can be secured against something. Even if the business appears to be successful and showing strong financial position. So while the banks may not make as much profit if people can't repay their loans, I think that most small business loans are secured against valuable assets and/or a personal guarantee of some sort. In terms of credit card risk which is typically unsecured, banks probably make lots of money on the interest BUT will suffer a loss if people default on their credit card payments.
There is no guarantee that loan to value ratios will be sufficient to cover losses during a crisis, they can't just liquidate secured assets, they could shoot themselves in the foot by tanking the markets, everybody will need to sell at the same time. They really need their borrowers to have the capacity to keep servicing their loans. That's a pretty tough scenario if we end up facing permanent job losses, and companies that can't earn cash flow.
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Oct 7, 2007
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Qrewpt wrote: There is no guarantee that loan to value ratios will be sufficient to cover losses during a crisis, they can't just liquidate secured assets, they could shoot themselves in the foot by tanking the markets, everybody will need to sell at the same time. They really need their borrowers to have the capacity to keep servicing their loans. That's a pretty tough scenario if we end up facing permanent job losses, and companies that can't earn cash flow.
I was more focusing on business loans in my original comment but agree that this could be a real problem when it comes to mortgages, especially in places where we have severely inflated real estate prices. How likely is something like this to happen? And, if so, how much can the government bail people and the banks out on these issues?
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Oct 21, 2014
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Burlington, ON
Qrewpt wrote: There is no guarantee that loan to value ratios will be sufficient to cover losses during a crisis, they can't just liquidate secured assets, they could shoot themselves in the foot by tanking the markets, everybody will need to sell at the same time. They really need their borrowers to have the capacity to keep servicing their loans. That's a pretty tough scenario if we end up facing permanent job losses, and companies that can't earn cash flow.
I would point out that mortgages that are high LTV, meaning less than 20% equity are insured by the CMHC. However I still think over the next few quarters most of the bank's free cash flow is going to go to loan losses after paying dividends.
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Sep 21, 2007
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what are the chances of the banks not paying their next dividends?
"An essential aspect of creativity is not being afraid to fail." -- Edward Land
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Nov 9, 2013
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faken wrote: what are the chances of the banks not paying their next dividends?
Of not paying? At all? I would say low. If a Canadian bank doesn't pay a dividend, then the economy as we know it is done. This is of course unless a government mandate forces them to not pay a dividend, but I can't see that happening right now.

The probably of a cut is climbing as time goes on, but I still think that's relatively low for this quarter. Maybe in a few more quarters if nothing changes though.
Keep calm and go long
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Jul 5, 2004
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infamousdealer wrote: I'd assume we haven't seen the worst yet either from the banks - what happens when the deferral period ends and people default or can't pay things back?
Agreed. Other than small businesses, most people aren't hurting financially yet. With deferrals in place, people aren't missing payments yet, but it's coming. The banks are going to take a big hit, but it just hasn't started yet.
Deal Fanatic
Apr 5, 2016
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Calgary/Vancouver
Speaking of deferrals, for those who are still on the fence, I heard the deadline now is June 30th to put in a deferral, so make sure you decide before then.

Mortgage and credit defaults are looming. A lot of overstretched people might not be able to make it past the end of the 6 months deferral. Plus, their home's value most likely have went down, causing a lot of those people who bought with 80-95% leveraged might be at 100% or even over so even if they sell their homes, they are still going to be under. A few deals I did back in February and March immediately had to apply for payment deferrals. At least my commission is still guaranteed as long as the mortgage has been active for 3+ months. :P

All this is being factored into the bank stock price. I can almost tell you dividend yields will be reevaluated and plummet. This is why banks are starting to push more home financing incentives to the brokers. They need new business to generate cash flow to cover old business.
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Sep 8, 2007
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Way Out of GTA
Banks are a reflection of the underlying economy that they operate in. While each of them have some exposure outside of a Canada, the majority is still in Canada. As Canada’s future grows darker by the day.....the banks are reflecting a banana republic discount. You have people not showing up for work because they get more from welfare/CERB. At a point now where we should be laser focused on tools to reopen safely and ways to incentivize that we get more “bucket of govt cash for this group to stay home”. This is in addition to killing the resources industry, blockades, Etc before the virus. If residential housing crashes in Canada there’s literally nothing left to hold these banks up.

Why I continue to reduce CDN exposure. And will continue opportunistically.
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Nov 9, 2013
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cartfan123 wrote: If residential housing crashes in Canada there’s literally nothing left to hold these banks up.
It's very prudent to diversify away from a resource dependent economy, but I disagree with the "nothing left to hold these banks up" comments. There are a few things that will hold up the Canadian banks. Compared to other countries, the regulatory environment for the Big 5 is helpful and basically keeps them as a regulated oligopoly, limiting outside competition. The Canadian banks are also historically well capitalized with comparatively high CET1 ratios - especially compared to their US counterparts - and so they do have the built in capability to withstand financial shocks. Many of them have international exposure and activity outside of Canada, and so they too are diversified away from our economy.

Also in Canada I don't think we'll see the jingle mail that the US saw during the financial crisis - our lenders are generally more conservative. But yes, arrears and defaults will no doubt increase as a result of the economic shocks.

The other wild card is the Federal Government - they are throwing money at this problem and will likely continue to do so. If you've already tossed 80B at the issue but the issue hasn't gone away, why stop now? Why let the small business you saved a month ago fail today? The current playbook for all governments is spend spend spend and worry about the consequences later. Giving money to people will help the banks.

I'm not saying it's going to be all sunshine and roses for Canadian banks, but it's not all doom and gloom either.
Keep calm and go long
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Feb 7, 2003
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faken wrote: what are the chances of the banks not paying their next dividends?
Zero chance banks will not pay dividends. Remember who own majority of bank shares....the bankers. Not paying themselves? Yeah right. I've been collecting Canadian banks among other things. 2 of 3 signals telling me BNS is another buy soon.

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Member
Apr 2, 2016
482 posts
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Bank earnings are going to be down across the board until these mortgage/credit deferrals stop, and the majority of the defaults that follow are over. Could take another year to shake things out and get back on track.

The full effect of this lockdown hasn't materialized on the bank's earnings yet.
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May 5, 2008
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BNS usd went up 8% on Monday
Member
Mar 29, 2016
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BNS $49.50 Cad is a good entry or should wait for quarterly result end of May to get in?
Deal Guru
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Sep 21, 2007
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is there a source where I can see what each bank is exposed in %'s of what industry?
"An essential aspect of creativity is not being afraid to fail." -- Edward Land
Deal Addict
Aug 16, 2015
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yup the entire economy is collapsing, everyone is out of work. the banks could very well go bankrupt but don't worry technology is going to be just fine. :rolleyes:
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Oct 18, 2014
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Oakville, ON
Do bank stocks typically go up or down with all the foreclosures I see looming after all these mortgage deferrals default when it’s pay back time with added interest. On one hand banks holding more hard capital on the other hand losing mortgage holders , or little to no correlation at all ? Asking as my dividend index stocks are mostly holding banking sector.
Deal Addict
Oct 18, 2014
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Oakville, ON
Seeing Toronto is a sellers market, the banks can make a tidy profit on resale foreclosures with appreciated capital value no ?
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Dec 3, 2014
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Ontario
mrfrugal83 wrote: Seeing Toronto is a sellers market, the banks can make a tidy profit on resale foreclosures with appreciated capital value no ?
If there was a huge spike in foreclosures that would increase supply and therefore lower the value of real estate. There is also considerable expense involved with a foreclosure between lawyers, realtors, taxes and disbursements. Add to that very little equity in many homes due to overuse of HELOCs and I don’t see much silver lining to be had for the banks.
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Sep 21, 2007
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mrfrugal83 wrote: Do bank stocks typically go up or down with all the foreclosures I see looming after all these mortgage deferrals default when it’s pay back time with added interest. On one hand banks holding more hard capital on the other hand losing mortgage holders , or little to no correlation at all ? Asking as my dividend index stocks are mostly holding banking sector.
A lot of analysts are saying they haven't said anything about cutting dividends at all. They didn't during 2008 crisis.
"An essential aspect of creativity is not being afraid to fail." -- Edward Land
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Jul 23, 2007
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Last week I took a look at the YTD performance of the U.S. bank stocks that Berkshire Hathaway has in their portfolio. I think I'd rather have the common shares of the big five Canadian banks I've owned in my own portfolio for the last few years.

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