Rob Wessel

On Capital, Canadian Banks Continue to Lose Ground vs. Global Peers

In our Insight, “Canadian Banks – Are Falling Global Reserve/Capital Rankings Increasing Regulatory Risk?” (April 27th, 2016), we highlighted that on the most important capital ratio, CET1, the Canadian banks have an average ratio of ~10%, which is well below the average of ~13.5% for the banks in 35 “major” countries (ranking 34th out of 35). We also explained in that Insight that we believe the…

European Banks: Negative Rates – Four Charts Showing They are Not as Menacing as Advertised

In our Insight “European Banks: Sector Profitability Almost “Normal”, Reaching ~€90 bln in 2015”, we highlighted that the sector has seen  ‘core’ earnings recover to ~€90 bln, which represents a near complete recovery in earnings to pre-cycle (2007) levels. However, at the same time, European bank index levels are closer to levels last seen at the peak of the sovereign debt crisis (2011/2012).

European Banks: Sector Profitability Almost “Normal”, Reaching ~€90 bln in 2015

Macro issues continue to dominate European bank valuations as the sector remains in focus, particularly following the recent Brexit vote. Given all of the concerns over European banks, it is worth noting that profitability for the sector has almost completely recovered to pre-cycle levels. In 2007 (the last “normal” year), the European banks made just over €100 bln in “core” earnings. At the same time, the…

Five Reasons Why We Don’t Own C, JPM, BAC, GS, or MS

In this note, we provide five reasons why we do not have positions in Citigroup (C), JPMorgan (JPM), Bank of America (BAC), Goldman Sachs (GS), or Morgan Stanley (MS), despite the fact that these banks/brokers are very inexpensive, trading near or below TBV. In fact, their lower valuations are directly linked to the fact their ROEs remain below their cost of capital (although JPM is close).

Why CIBC Needs a Visible Capital Allocation Strategy

Since the end of the credit crisis (i.e., 2009), CIBC has generated core cash EPS growth above its Canadian banking peers as well as a (much) higher ROE. Despite exceeding its peers over the past four years on these important growth/profitability metrics, CIBC continues to trade at a notable P/E discount. So, in light of this post-crisis performance, and a (perceived) below-average risk profile, why does…

Why We’re Not Short (or Long) the Canadian Banks

There has been a lot of discussion in recent months about the potential for a material decline in Canadian home prices and the possible fallout for Canadian financials, and the banks, in particular. The speculated financial services sector impact – should such a decline occur – has ranged from: (i) slower economic growth causing slower revenue/earnings growth (most likely), to (ii) a credit downturn (a possibility),…

Are MICs the “Canary in the Coal Mine”?

Over the past several months, there has been a lot of discussion about the potential for Canadian home prices to fall and the possible impact on the Canadian financials (and banks, in particular). After a near-vertical rise in over the past decade (see chart), Canadian home prices appear vulnerable to a decline. The speculated impact of a decline on the domestic financial services sector has ranged…

Moody’s Bizarre View of Royal Bank

This past January, the once-powerful rating agency, Moody’s, downgraded the long-term credit ratings of four of the “Big five” Canadian banks. The downgrades, which were attributed to the economic risks posed by the high level of consumer debt and hot housing market in Canada, were largely ignored by the debt and equity markets. Click to Download»

For MICs, Time to Exercise Caution?

We were recently asked to look at and give our opinion on mortgage investment corporations, or MICs. Given the ultra-low interest rate environment, high yielding MICs have become a popular product among retail investors. What we found behind these high yield products was concerning to us, particularly given the potential for a generalist investor to significantly underestimate the actual credit risk of certain MICs.

Are the Canadian Banks Becoming Too Powerful? (Globe and Mail)

Over the past few years, the Canadian banks have been praised for avoiding the worst of the global financial crisis. This success is firmly rooted in public policy (and good management) since, for much of the past century, Canadian policy makers – i.e., governments and regulators – sought to create a very powerful and Canadian-controlled banking system. Click to Download»

That Was Then, This is Now: Comparing the European Debt Crisis to the Credit Crisis (Globe and Mail)

Europe’s current sovereign debt crisis bears many similarities to the recent U.S. Credit Crisis. Both crises involve(d) two roughly $14 trillion dollar economies weakened under the weight of too much leverage, particularly within the financial system. Both have seen central bankers provide unprecedented monetary accommodation as they struggle for ways to support economic growth. What’s more, bank stocks have acted in both cases as a daily…

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