Obama in Canada Finds World’s Best Financial System (Update1)
By David Scanlan, Theophilos Argitis and Sean B. Pasternak
Feb. 25 (Bloomberg) -- David Denison, who oversees investments for Canada’s pensions, says his country’s banks are the best in the world right now and Barack Obama, like so many money managers from Beijing to Paris, can’t disagree.
Before President Obama made Ottawa his first visit to a foreign capital earlier this month, he couldn’t resist telling the Canadian Broadcasting Corp.: “In the midst of the enormous economic crisis, I think Canada has shown itself to be a pretty good manager of the financial system and the economy in ways that we haven’t always been.”
The comment was something of an understatement, as no country among the so-called industrialized nations is showing as much confidence in its bankers as Canada. Not one government penny has been given to any of the 21 banks from British Columbia to Quebec since credit worldwide seized up in August 2007. Since then, American taxpayers have provided $300 billion to bail out more than 450 companies, led by Citigroup Inc. and Bank of America Corp., two of the three largest banks measured by assets.
Obama isn’t the only important person “looking at Canada” in a belated attempt to figure out how to fix a broken financial model, Denison said.
“Solid funding and conservative consumer lending criteria are key features” of Canadian banks, said John Haynes, senior U.S. equity strategist at Rensburg Sheppards Plc in London, which oversees the equivalent of $17 billion. “This has meant that they have had their hands caught in the cookie jar to a much more limited extent than their American and European counterparts.”
Brazil, China
Money managers from Brazil, China, France, Ireland and Australia scheduled visits to Denison’s Toronto office in the past two weeks to learn how Canada and its banks and pension funds are weathering the financial crisis. The visitors include the AustralianSuper Fund and the French National Reserve Fund, which together have assets of $53 billion, he said.
“They have assembled a high-quality team,” said Ian Silk, chief executive officer of AustralianSuper, who visited Denison in May along with three other executives from the Melbourne-based fund and remains in contact with the Canadian money manager.
Canada’s higher capital requirements and loan limits that European banks exceeded by 50 percent helped Canadian lenders avoid most of the writedowns and losses crippling competitors worldwide, even as the nation’s economy slipped into a recession and the jobless rate jumped to a four-year high.
Few Failures
Just two Canadian regional banks have failed since 1923. The only government support has been a pledge to buy as much as C$125 billion in mortgages, allowing the banks to increase lending to companies and consumers.
“The Canadian banking system is a very good story,” said Denison, chief executive officer of the Canada Pension Plan Investment Board, which manages C$108.9 billion ($86 billion) for retired Canadians. “People are looking at Canada” to determine how to fix their broken financial models, he said.
Canadian banks are more constrained than their international peers in the amount of loans they can extend. The nation’s lenders are required to set aside a minimum 7 percent for Tier 1 capital, compared with 6 percent for U.S. commercial banks. At the end of October, Canada’s eight publicly traded banks were above the minimum, at 9.6 percent, according to data compiled by Bloomberg.
Canada’s banking regulator says institutions can lend as much as 20 times their capital base. According to Bank of Canada data released in December, European bank non-risk weighted assets were more than 30 times capital, while that ratio for U.K. banks and U.S. investment banks was above 25.
European Writedowns
Europe’s largest financial companies have reported $321 billion in writedowns and credit-related losses since the collapse of the U.S. subprime mortgage market in 2007 spread to other continents. The market turmoil has forced European lenders to raise $370 billion in fresh capital and sparked government-led bailouts in countries including the U.K., Germany and Switzerland, according to Bloomberg data.
European deficits have ballooned as governments committed more than 1.2 trillion euros ($1.5 trillion) to save their banking systems from collapse.
“When the crisis started emerging on those fronts, Canada was less affected,” said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets, a unit of the country’s biggest bank. “Canada has always had a fairly conservative banking sector.”
Dividend Cuts
While Bank of America and Citigroup cut their dividends to 1 cent a share from as high as 64 cents, the payouts at Canada’s five biggest banks haven’t been reduced since the Great Depression. Toronto-based Royal Bank of Canada is now the third- biggest bank in North America by market value, almost three times the size of Citigroup, while Toronto-Dominion Bank ranks fifth. Royal Bank is almost three times bigger than European lenders Royal Bank of Scotland Group Plc and Deutsche Bank AG.
The Canadian banks, which begin reporting first-quarter results today, probably will say profit declined an average of 12 percent, the biggest drop in almost seven years, according to Scotia Capital analyst Kevin Choquette. By contrast, Bank of America reported its first quarterly loss since 1991 last month, and Citigroup posted a fifth straight loss.
The World Economic Forum in October ranked Canada’s financial system the soundest in the world.
The Canadian banks haven’t been in this position of global strength since between the two World Wars, said Charles Goodhart, a professor of finance at the London School of Economics, and a former Bank of England policy maker.
‘Very Diversified’
“They’re very diversified, didn’t get heavily involved in the international investment banking industry and they’ve benefited from good central banking,” Goodhart said.
Countries need more “boring” financial systems like Canada’s, Finance Minister Jim Flaherty said Feb. 14 in Rome, where he was attending a meeting of finance ministers and central bankers from the Group of Seven industrialized nations.
The federal government in October set up a C$218 billion program to guarantee bank debt to help Canadian lenders compete in international markets with government-backed U.S. banks. None of the country’s lenders has tapped the credit.
“The Canadian government has a lot of firepower these days, not just because this has been such a well-managed economy, but frankly, because the Canadian government has not been bailing out the Canadian banks,” Toronto-Dominion Chief Financial Officer Colleen Johnston told investors Jan. 28 in New York.
TD Profit Falls
Toronto-Dominion reported today that fiscal first-quarter profit fell 27 percent to C$712 million, or 82 cents a share, because of higher loan-loss provisions. Results topped analysts’ estimates.
Toronto-Dominion and Royal Bank are among just seven banks in the world with the top credit rating of Aaa from Moody’s Investors Service.
Canadian regulators resisted pushes from some bank executives to loosen lending restrictions when the economy was booming, says David Dodge, 65, who stepped down as Bank of Canada governor a year ago.
“The banks at the top of the cycle thought we were being too tight-assed,” Dodge said in a telephone interview.
Even the strength of Canada’s banks hasn’t kept the economy from being dragged down by the global crisis. The world’s eighth- biggest economy will shrink by 1.2 percent this year, in part due to falling exports of oil and other commodities, according to Bank of Canada projections. Employers cut a record 129,000 jobs in January.
‘Major Problems’
“We have major problems,” said Stephen Jarislowsky, the 83- year-old chairman and founder of Montreal-based money manager Jarislowsky Fraser Ltd., which manages about $31.8 billion. “Our commodity boom is over for a long time.”
Canada recorded its first monthly trade deficit in more than three decades in December, as exports plunged 9.7 percent. The country ships more than three-quarters of its goods to the U.S.
“We have some unique advantages, but we are being profoundly affected by the global crisis,” Bank of Canada Governor Mark Carney said in a Feb. 14 interview from Rome.
Canada’s housing market has also held up better than in the U.S., where prices declined a record 19 percent in December from a year earlier, according to the S&P/Case-Shiller index. Resale home prices dropped 9.9 percent in Canada during the same period, the Canadian Real Estate Association said. Last year, Finance Minister Flaherty scrapped 40-year mortgages when they started to gain popularity among homebuyers seeking to reduce their monthly mortgage payments.
Lending to Homebuyers
Canadian banks are less willing to lend to homebuyers with low credit scores: Subprime loans account for just 5 percent of the total. That compares with 20 percent in the U.S., where independent mortgage brokers and lenders competed with commercial banks to win business by attracting high-risk borrowers.
Another restraining factor is that Canadians, unlike their U.S. neighbors, can’t take mortgage interest as a tax deduction, removing an “inherent bias” to take on too much debt, Prime Minister Stephen Harper said in September.
Canada was the only Group of Seven nation to balance its budget for 11 consecutive years, before a stimulus package aimed at sparking growth pushed the country to a deficit for the fiscal year ending March 31, according to a government forecast.
The relative strength of the financial system may help Canada recover from the recession faster, Carney said. The Bank of Canada is forecasting growth of 3.8 percent for 2010, in anticipation of rising commodity and oil prices. Canada’s oil sands in Alberta contain more reserves than any region outside Saudi Arabia.
“Once this uncertainty is removed, and it will be removed ultimately,” Carney said in an interview, “these strengths will kick in and that will have a bigger impact in our opinion in terms of the recovery in Canada.”
To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net; Sean B. Pasternak in Toronto at spasternak@bloomberg.net.
Last Updated: February 25, 2009 12:05 EST |
