{"id":66481,"date":"2015-01-14T04:04:08","date_gmt":"2015-01-14T09:04:08","guid":{"rendered":"http:\/\/countingpips.com\/?p=66481"},"modified":"2015-01-14T07:34:52","modified_gmt":"2015-01-14T12:34:52","slug":"dangerous-yield-canadian-banks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/01\/dangerous-yield-canadian-banks\/","title":{"rendered":"Dangerous Yield: Canadian Banks"},"content":{"rendered":"
January 14, 2015<\/div>
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By WallStreetDaily.com<\/span><\/a> \"Canadian<\/p>\n

By Alan Gula<\/a>, Chief Income Analyst <\/em><\/p>\n

On Monday, the Bloomberg Commodity Index fell to a 12-year low.<\/p>\n

This is bad news for economies dependent on commodity exports, particularly Canada and Australia.<\/p>\n

In fact, the Australian banking system is as unsafe as ever due to the global commodities rout and an overpriced housing market.<\/p>\n

In March 2014, I listed six dangerous stocks with tempting yields<\/a>, including Westpac Banking<\/strong> (WBK<\/a>), one of Australia\u2019s largest banks.<\/p>

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However, this edition of \u201cdangerous yield\u201d focuses on our neighbors to the north, who are in serious<\/em> trouble.<\/p>\n

According to an analysis of global housing markets conducted by Deutsche Bank<\/a>, Canada\u2019s housing market may be the most overpriced in the entire world relative to historical averages of home price\/rent and home price\/income.<\/p>\n

DB\u2019s Chief International Economist, Torsten Slok, and his team warn that Canada\u2019s household debt as a percentage of household income is higher than it\u2019s ever been \u2013 higher even than U.S. household debt to income at the apex of the U.S. housing bubble.<\/p>\n

Thus, the collapse in the price of oil \u2013 which is by far Canada\u2019s top export \u2013 couldn\u2019t come at a worse time for the country\u2019s economy and financial institutions.<\/p>\n

And as we know, a housing bust-induced recession can be particularly hard on a banking system.<\/p>\n

That\u2019s why it\u2019s very troubling that the Canadian banks have relatively low tangible common equity (TCE) ratios, which measure leverage and capital adequacy.<\/p>\n

\"Dangerous<\/p>\n

As you can see in the above table, Royal Bank of Canada<\/strong> (RY<\/a>), Toronto-Dominion Bank<\/strong> (TD<\/a>), Bank of Nova Scotia<\/strong> (BNS<\/a>), and Bank of Montreal<\/strong> (BMO<\/a>) all have TCE ratios below 5%.<\/p>\n

To put that into context, KeyCorp.<\/strong> (KEY<\/a>), Regions Financial<\/strong> (RF<\/a>), and Wells Fargo<\/strong> (WFC<\/a>) have TCE ratios of 10.2%, 9.8%, and 7.6%, respectively. In other words, these U.S. banks are less leveraged and better capitalized than their Canadian counterparts.<\/p>\n

If a Canadian recession ushers in a default cycle, the aforementioned Canadian banks may not be able to absorb steep losses in their loan portfolios.<\/p>\n

Bottom line: When your housing market is egregiously overpriced, household debt levels are in the stratosphere, the prices for your primary exports are plunging to multi-year lows, and your banks aren\u2019t prepared for the fallout, then you could have a massive problem on your hands.<\/p>\n

Indeed, the Canadian banks seem uninvestable to me at this point.<\/p>\n

Furthermore, speculators who believe the situation in Canada is going to get ugly may even consider buying put spreads on the iShares MSCI Canada Index Fund<\/strong> (EWC<\/a>).<\/p>\n

For example, buying the June 2015 $25 strike put option contract and selling the June 2015 $20 contract would cost $0.70 (net debit), and have a maximum profit of $4.30.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n

The post Dangerous Yield: Canadian Banks<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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By WallStreetDaily.com By Alan Gula, Chief Income Analyst On Monday, the Bloomberg Commodity Index fell to a 12-year low. This is bad news for economies dependent on commodity exports, particularly Canada and Australia. In fact, the Australian banking system is as unsafe as ever due to the global commodities rout and an overpriced housing market. […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-66481","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/66481","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=66481"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/66481\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=66481"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=66481"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=66481"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}