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Canadian Banks: An Oasis of Financial Calm
by Dr. Mark Skousen, Advisory Panelist
Wednesday, February 25, 2009: Issue #943
The U.S. financial system is a mess – according to the World Economic Forum, the United States ranks 40th among banking systems around the world. Without federal bailouts, the two largest banks in the country, Citibank (NYSE: C) and Bank of America (NYSE: BAC), would be in bankruptcy, and the good ol’ USA would be headed for the Greater Depression, as my friend Doug Casey likes to call it.
But you’ll never guess where the world’s No. 1 banking system is. No, it’s not fabled Switzerland nor booming Hong Kong.
While the central banks around the world are desperately trying to stem the flow of red ink, this country’s red is emblazoned on its iconic mounted police force.
It’s right next door: Canada. The land of hockey and moose has the world’s soundest banking system. While European and Asian banks are collapsing, Canada stands out as an oasis of financial calm.
Canadian Banks Receive Highest Rankings
According to the Global Competitiveness Report, Canadian banks received the highest ranking, 6.8, out of a possible 7.0 (healthy, with sound balance sheets). The lowest ranking of 1 means insolvent and possible government bailout.
Canada’s stock has been rising quietly – the Canadians are known for their modesty and self-restraint – as American financiers and media are astonished to find that their northern neighbors have somehow avoided the subprime lending scandal and the housing market mess.
What’s Canada’s secret? With the exception of oil-rich Alberta, Canada did not have a strong construction surge as the United States did during the boom years. And mortgage interest is not tax deductible in Canada.
Canadian banks are national in scope; the top five banks have branches in all 10 Canadian provinces, making them less susceptible to downturns. They have large numbers of loyal depositors and a more solid base of capital. They are more tightly regulated than their U.S. counterparts, more liquid and less leveraged.
Canadian Banks – 4 of The Top 10 Largest North American Banks
Among the top 10 largest banks in North America, 4 are Canadian banks:
- Royal Bank of Canada (NYSE: RY),
- Bank of Nova Scotia (NYSE: BNS),
- Bank of Montreal (NYSE: BMO),
- and Toronto Dominion (NYSE: TD), which bought Commerce Bank last year.
Canadian bank executives don’t have to be excoriated by Parliament before taking a pay cut. The CEOs of Canada’s three-largest banks have all voluntarily cut their own pay in response to the global economic crisis.
Canada has its share of problems – being linked to commodity prices – but financially it’s done a better job than its southern neighbor. While the Bush administration ran up massive deficits year after year, Canadian officials finally pushed through a stimulus package that resulted in the government’s first deficit in a decade!
Right now, the Canadian banks are selling at incredible bargains. With operating margins exceeding 30%, and dividend yields between 6% and 8%, Canadian banks are selling at only around eight times earnings. Bank of Montreal is my favorite – it’s selling for only six times this year’s expected earnings and is yielding 10%.
During a crisis, the good investments get hit like the bad ones. But when the markets recover, the good bank stocks will skyrocket, especially those across the border.
Good investing,
Mark Skousen
Today’s Investment U Crib Sheet
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As part of that strategy, we recommend holding 30% of your portfolio in foreign stocks. It helps diversify your risk and it lowers your overall volatility. Many people who don’t look beyond the borders of the United States for their investment choices severely limit the amount of top stocks they can purchase.
It makes as much sense as investing in stocks based in California. It limits your options, and ultimately, your profits. And with the amount of foreign companies trading on U.S. exchanges, it couldn’t be easier to invest in quality foreign assets.
See how our asset allocation portfolio stacks up…
- Canadian Banking: Sober, Boring, and Successful
- The Best Banks In North America Probably Aren’t Where You Think
- The Best Two Ways to Play Canada’s Economy, Currency And Natural Resources
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22 Responses to “Canadian Banks: An Oasis of Financial Calm”
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February 25th, 2009 at 12:39 pm
I hear similar things about Australian banks- do you concur?
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Yvonne Wackernagel Reply:
February 26th, 2009 at 11:13 am
How much did you get paid to write this article, pushing BMO which is not considered the most favourite in the country of Canada, your nextdoor neighbour.
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February 25th, 2009 at 1:06 pm
Yes, Canada have the bests banks in the world,
the only tings is they will have to cut their dividends soon. The price will drop for a few more months. Look for bottom before buying.
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February 25th, 2009 at 1:09 pm
Canada has its share of problems – being linked to commodity prices – but financially it’s done a better job than its southern neighbor. While the Bush administration ran up massive deficits year after year, Canadian officials finally pushed through a stimulus package that resulted in the government’s first deficit in a decade!
You should have added another sentence.
“Obamanation will far exceed what the world has seen to date”.
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February 25th, 2009 at 1:44 pm
Concerning Canadian Banks, since I am Canadian, they had to ask for help from the Federal GOVERNMENT FOR 54 BILLIONS DOLLARS for supporting their investment in U.S. Toxic Waste (CDO, ABCC etc.)Also the Federal government change temporaly the Bank Act so that Canadian Bank can keep that toxic waste on their books as purchase value so that they are not force to write off those bad assets since the Fed( Canadian government support by taxation ( 54 billions)) is supporting those assets. So actually they are in bad shape but definitely not as the US Banks. Their loan portfolio is good and their prudence is paying off. But there is still a risk , because they will have to pay it back or slowly do the proper write offs on their books. They are strong but not without the help of our Fed. Talk about pure capitalism. To me they should declare their lost and merge so that they will be stronger later. I wish I could keep my share on the stock market at my purchase cost and use that as collateral to borrow for investing.
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February 25th, 2009 at 2:49 pm
The odds of The Bank of Montreal retaining their 10% dividend are about the same as the Montreal Canadians winning the Stanley Cup this year
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February 25th, 2009 at 3:19 pm
While it’s true Canada doesn’t have the mortgage tax deduction that contributed to the US bubble, historically, Canadian real estate trends lag the US by a year or two. As the US’s largest trading partner, Canada is not immune to the US downturn. There’s still a good chance the Canadian real estate market will implode, and the Canadian banks’ market cap with it. Just like the rest of the world. It’s quite possible the Montreal Canadians winning the Stanley Cup may be a better bet than owning the Canadian banks. Personally, I wouldn’t take either bet.
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February 25th, 2009 at 5:54 pm
Are you familiar with Ted Butler’s concerns about the Bank of Nova Scotia in relation to the silver market and its activity in shorting the market in huge quantities? I wonder what that does to it’s viability in a run away silver market?
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February 25th, 2009 at 9:52 pm
what do you think about the bankruptcies that are increasing in both personnel and commercial areas. Canada is also slowing down precipiticly.. any idea on how bad this could effect the cdn banks. I think this is the last hurdle they have to work thru.
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February 26th, 2009 at 8:52 am
The beauty of Canadian banks is the oligopoly they have in Canada. The comment about Canadians
having self-restraint has paid off for the banks with the crisis. I’m hoping the share prices drop even further, it’s been a while since they’ve been this low and I missed the last oppurtunity.
I do NOT want to miss this time.
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February 26th, 2009 at 10:43 am
As a Canadian I would like to thank you for your article. Yes you are right our banks are SOLID we often grumble in Canada about the tight control of the big 5 banks in Canada and the lack of consumer options. However there is something to be said about regulation . The strident regulation of Canadian banks has proven to be an asset with the financial turmoil in world markets.
Having said this Canada is not impervious to the economic malaise of the United States – our biggest trading partner. A slow down is coming in real estate and business in general. This leads credence to the old phrase we have up North – when the United States ‘coughs’ .. Canada sneezes.
I would personally recommend a Canadain bank to anyone , anywhere in the world.
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February 26th, 2009 at 11:19 am
Moderation? What a biased article. I have accounts and savings with the first three, but that does not make me biased against the others in which I also have an interest. What happened to Canadian Imperial Bank of Commerce which has the biggest share price at this time? This is the type of article which makes the Americans untrustworthy, in my opinion. In any event, there are not only 5 banks in Canada; you should do better research.
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February 26th, 2009 at 5:20 pm
I read the report and simply do not see the data you are referring to. Canada is not ranked that high.
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March 1st, 2009 at 11:06 am
There appears to be an error in the article. Even without checking it out, I believe the Toronto Dominion Bank took over Canada Trust, not the “Commerce Bank” as stated. I presume the author was thinking of the Canadian Imperial Bank of Commerce (CIBC), which is not specifically mentioned in the article. CIBC is one of Canada’s largest banks, and I doubt if it has been bought by another bank.
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March 1st, 2009 at 12:31 pm
As an economist, I try to always look at the larger picture, global movement of monies, commodities affected by weather trends, market trends and political influences..by far the most disturbing trend over the last thirty years has been that of “corporatism” the new societal movement wherin corporations, concerned only with bottom-line-profit, manipulate government policies to access the public resource base. So much of North American has been destroyed by these greed mongers, it is doubtful that we have the natural resources left to support out industry and poeple. The corporations, with the help of government, have looted the North American continent to the point of exhaustion, and the original owners and CEOs now sit back onm their polished yachts and watch the public try to deal with their mess. The banks are corporately owned too…dig a bit deeper and you will find a concerted effort to remove liquidity from the public..the high fuel prices were an indication of this process being stepped up a notch.
We, must remember…a dollar is only a coupon, a representation of value. The real value has always been in the land, agriculture, clean water, clean air, timber and a healthy stewardship of these resources. The Corporations have won the bloody battle against our resources..time for the people to save the country once again.
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March 1st, 2009 at 7:22 pm
Well done to the Canadians. Whilst on the subject of stable banking systems have a look at Australia’s. Four major banks and they are all AA rated, I believe there are only about 15 AA banks worldwide. Dividends are 8-12% but may come back temporarily. Share price has been pounded unjustly by 50%. Give the potential for additional upside due to the ridiculous current over valuing of the USD I think you would struggle to find a better place to invest in financial stocks.
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March 1st, 2009 at 11:12 pm
How abount banks in India , how do you rate them
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March 2nd, 2009 at 2:43 pm
Quite frankly i find these salacious newsletter articles that you guys send out with your “large or coloured font” headlines to be disingeneous and symptomatic of what gets done wrong alot in insufficiently bridled capitalism and particularly by self-proclaimed experts in investing. I am sure you have much to add, but advancing your thoughts with neutral “objectivity”, absent of your apparent urge to sound like a guru, is a path that will win the regard of intelligent minds. Canada’s banks with the oligopolistic protection of the Bank Act, good regulations have escaped a good amount of the carnage and have been fortuitous enough to garner top rating, but this does not make them into some sort of financial darlings. They are worthy places to evaluate if you are insane enough to want to put your money in financials as a sector instead of wait for further declines. As one blogger also pointed out, you were insufficiently meticulous as you failed to report the Canadian Imperial Bank of Commerce in your top 4 list – CIBC is canada’s 2nd largest bank. Canadian banks did also engage in risky lending via subsidiaries, but fortunately the U.S. market crashed before too much got onto their books. Overall it is not unreasonable to give decent marks to Canadian banks, but such commentary should be balance with other contrary statement of facts. What bothers me most about these newsletter services, is you have some WRITER posing as investment guru, does rapid google on a topic, create a salacious headline and then purport to give advice, which some INNOCENT people may act on an have their little savings deteriorate, simply by having a minor fool stir them up with ‘expertise’ garnered after a few minutes of internet research, and not a lifetime of know-how in the specific subject matter in which they purport to be experts – not including CIBC in your list and not BALANCING your commentary is the sure shot evidence that you are a fool.
Anyone acting on the advise of these ignoramuses does so to their own detriment.
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March 3rd, 2009 at 7:38 am
Australian banks are very sound; Mortgage defaults are still quite rare (2 per 1,000 approx); Plus the Australian Government has guaranteed ALL deposits (higher than AUD$1,000,000 you have to pay ‘insurance’ (read: tax) – so just open 4 bank accounts! – $4Million).
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March 5th, 2009 at 4:19 pm
The Global Competitiveness Report that i just checked: http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm …for 2008/09 shows Canada #10 with a 5.37 rating and US banks #1 followed bt Swiss and Denmark banks. I am curious where Dr Skousen got his info so I can better research the facts behind his hypothesis.
Thanks…
Shantam Sheptow
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dale Reply:
March 9th, 2009 at 10:40 am
Regarding Canadian Bank ranking and World Economic Forum.
Sheptow and John are reading the headlines and not the substance. The head line is US No. 1 in competiveness. The World Economic Forum (WEF) uses over 100 factors, one of which is banking strength to rank overall competitiveness.
To see just banking go to page 455 and 456 in the appendix to find the listing of countries and their banking strength.
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March 8th, 2009 at 9:16 pm
re shantam sheptow’s comment of March 5th
The GCR rankings that you and Dr. Skousen quote are both correct. Yours is from the overall rating/ranking of the countries while Dr. Skousen’s is that of one element (element 8.06 “Soundness of Banks” on page 456 of the report).
jB
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