With their staid and conservative cultures, Canadian banks have weathered the global financial crisis relatively well. They didnt get as reckless in their lending and other business practices to the extent U.S. banks did, so they have come through with relatively clean balance sheets and twice the return on assets. As well, their capital (Tier 1) ratios, currently ranging from 9% to 10.5%, remain well above the global regulatory minimum of 7%.
All of which is leading to speculation that the Canadian banks could be getting ready to swoop in and buy up some ailing U.S. financial institutions at bargain prices. “I think they’re in a position to really pick over the carcasses,” a portfolio manager with Toronto-based mutual-fund firm CI Investments, Eric Bushell, is reported to have saidat a Morningstar Canada investment conference held in Toronto on June 11, 2008.
In other words, as agued in this Canadian Business Online article, the global financial crisis may actually end up benefiting the Canadian banks. They could emerge as bigger and more global players. Canadian banks are going to be in the driver’s seat for the next decade,” said Dennis Gartman, editor of The Gartman Letter, at the same conference.
Nevertheless,the financial crisis has weighted on the share prices of the Big Five chartered banks in Canada during the past year most of all CIBC(-48%), followed by Bank of Montreal(-42%), Royal Bank(-28%), TD Bank(-23%) and Bank of Nova Scotia(-13%). CIBC was worse hit because of its exposure to credit derivatives and monoline insurers.
The Bank of Montreal, Royal, and TD are down in large part because their U.S. subsidiaries expose them to U.S. loan defaults. The Bank of Nova Scotia is getting off lightly because it has pursued expansion into overseas markets instead of the U.S. Of the five, I suspect (without having done a great deal of digging) that Royal Bank shares could be the most likely to benefit from the growth opportunities in the U.S market. It has long been the biggest of the Canadian banks and its existing U.S. operations are not as exposed to U.S. loan defaults as the other Canadian banks with a U.S. presence.