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Investors In Canadian Bank Stocks Ought To Be Aware
By Bill Cara on August 19, 2009 | More Posts By Bill Cara | Author's Website
First comes economic recovery, as little as it may be; then higher taxes and interest rates, followed by more economic weakness. The International Monetary Fund is not painting a ‘blue sky’ picture this week. Traders beware!
http://www.thestar.com/business/article/682712
Investors in Canadian bank equities also ought to be aware. I noted the warning signs in the (Cara 100) Royal Bank of Canada recently after our simple little RSI-7 system gave a SELL Alert on August 6 for all six major Canadian banks on the same day.
In Working Paper 09/152, ‘Why are Canadian Banks More Resilient?’ which was published this week, the IMF analysts Lev Ratnovski and Rocco Huang, conclude as follows:
The paper analyzed pre-crisis balance sheet structural fundamentals of Canadian banks and compared them with banks in other OECD countries. We found that ample retail depository finding was the key factor behind the relative resilience of Canadian banks during the turmoil. Sufficient capital and liquidity were also important but played a less distinctive role. In addition, a number of regulatory and structural factors have reduced Canadian banks’ incentives to take risks. Results allow a conjecture that strong structural fundamentals of Canadian banks will remain a source of their resilience as the financial turmoil and economic recession persist.
https://www.imf.org/external/pubs/ft/wp/2009/wp09152.pdf
As SiO2 explains the reason, “It’s not because they are “conservative” or “well capitalized” (they are not at all, they are bad actually!), it’s because they have a very diversified customer/depository base (who would not cause a run on the bank).”
The data is illuminating, unlike the opaque material published by Humungous Bank & Broker (HB&B), which since the summer of 2007 has been faced with prospects of selling ‘blue sky’ or die.
I urge you to read this IMF paper and consider what will happen to bank shares when interest rates begin to rise. Unlike the game of musical chairs in which only one chair is removed at a time, the banks will be scrambling to avoid a massive purge. The last ones standing will pick up the pieces, and eventually thrive.
This morning in China, markets are in crisis. China has always been a liquidity driven market, so at the beginning of this month, when the People’s Bank of China started putting the pressure on commercial banks to tighten credit, the equity market started to collapse.
The Chinese are quick to take a profit, and unlike Canadians, quick to pull deposits out of banks that are not solid.
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