TARA PERKINS AND BOYD ERMAN - Sat. Globe and Mail March 6, 2009
Derided for years as meek and mild while banks around the world expanded wildly, suddenly the reputation of Canada's big lenders as prudent and sometimes downright boring has become an asset instead of a liability.
U.S. President Barack Obama has heaped praise on the management of this country's financial system. Ireland is considering overhauling its system to look more like Canada's. Financial papers around the world are running headlines such as “Canada banks prove envy of the world.”
Whether measured by market value, balance sheet strength or profitability, Canada's banks are rising to the top. Since the credit crunch began in the summer of 2007, the Big Five banks have booked a total of $18.9-billion in profits.
In roughly the same period, the five biggest U.S. banks have lost more than $37-billion (U.S.). One, Wachovia Corp., was forced to sell out to avoid failing. Another, Citigroup Inc., long the world's largest bank, may have to be nationalized and this week became a penny stock. The picture is similar in Britain.
The U.S. has spent most of the $700-billion the government earmarked for bank bailouts, and there are estimates that the final tally could be more in the trillions of dollars. The head of the Bank of England said last month that it's “impossible” to know how much money it will take to fix his country's banks.
Canada, by contrast, has not had to inject capital directly into banks, other than starting a program to buy from banks $125-billion (Canadian) of insured mortgages – any losses from which the government was already on the hook for anyway.
The reason comes down to a fundamental conservatism. From lending practices to bets on trading to financial reserves and takeovers, the Big Five banks have long tended to be more careful than their global peers. And when they did want to get aggressive, government and regulators held them in check.
“The Canadian banks were under a significant amount of pressure from both the analysts and the marketplace in general to be more aggressive in expanding into international markets, particularly the United States, and I think to some degree resisted partially because of a more conservative approach,” says RBC chief executive officer Gordon Nixon.
Still, the industry has had stumbles, most notably Canadian Imperial Bank of Commerce's misadventure in derivatives, which led to a $2.1-billion loss for 2008.
And shareholders in Canadian banks have been battered. As a group, the banks' shares are down almost 50 per cent since Aug. 1, 2007, with most of the decline in the past six months as the economy worsened.
The concern weighing on these bank shares, for starters, is that profit growth in general is a thing of the past until the economy picks up. Most analysts say the banks' profits will shrink in coming quarters as more loans go sour and margins on lending tighten up. There's also nagging doubts that dividend payments are unsustainable and that something bad is still lurking on balance sheets.
More writedowns are likely in store for banks such as Toronto-Dominion Bank and Royal Bank of Canada, both of which made big acquisitions in recent years that now look overpriced.
My question, have the Canadian banks been closely regulated during the last five or ten years or have the Canadians bought into "deregulation" as a religion? Does anyone have that answer?
Globe and Mail writers seem to suggest it may have been industry and regulatory prudence, together with earlier hard times, that kept level-headed thinking atop the management totem poles.
“You've got a more balanced cultural approach towards consumption and savings than we do in this country,” says Charles Dallara, head of the Washington-based Institute of International Finance, and a former managing director at JPMorgan Chase & Co.
Much of that stems from the pain of the last recession. While the downturn of the early 1990s was short and sharp in the U.S., it was drawn out in Canada, leading to more of a social evolution, says CIBC chief executive officer Gerry McCaughey.
Former central bank governor David Dodge agrees. Canadian bank executives keenly remember that period, “and there was therefore perhaps a degree of prudence, a lack of aggressiveness, in comparison with major banks around the world,” he said.
And he gives top marks to the Office of the Superintendent of Financial Institutions, Canada's banking regulator, for being more conservative than those in the U.S. or Britain. “I think that, from a regulatory point of view, you can say that the Canadian banks were more appropriately regulated.”
The final key is the structure of the mortgage market.
While U.S. banks sold a large proportion of their mortgages, Canadian banks held the bulk of theirs on their balance sheets, giving them an incentive to make sure they were good loans. Riskier ones are backed by government insurance. And the law here makes it tough for consumers to walk away from a mortgage because banks can go after other assets.
Still, the banks are wary of getting cocky when a careful approach has worked well.
“It's a good thing for us to recognize the things we do very well, but maybe do it in what is appropriately a Canadian way – with modesty,” said Bank of Montreal CEO Bill Downe.
And they have also, those Canadians, avoided the haphazard Humpty-Dumpty healthcare situation our nation, in the wisdom of its decision makers, has evolved over time while the remainder of the civilized world has been more prudent and humane in the universality and centralization of health services provision than in the US of A.
If we as a nation were more humble, we might be capable of learning from good judgment elsewhere. Some corporations have been criticized for a "not invented here" attitude. Our national government seems to have too much of a "not screwed up here" attitude. Judgment and humility have traditionally been viewed as virtues, at least in the do-as-I-say-not-as-I-do sense, even if not more broadly. Also the Canadians seem to have somehow insulated themselves from wretchedness, such as having no Newt Gringrichs of note on their national political scene. They may have some pretty wretched people. Just not that wretched. Or at least they've not gained the notority of Newt.