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Canada’s Fourth Largest Bank Erases $1 Billion In Excess Capital In Unexpected Accounting Gimmick
Canada’s Fourth Largest Bank Erases $1 Billion In Excess Capital In Unexpected Accounting Gimmick
Early in 2016, when oil prices were plunging and when US banks were careful to push up their loan loss reserves to exposed E&P loans, we noted something surprising: Canadian banks had barely taken any loss reserves to their exposure in the oil and gas sector.
As and RBC report calculated at the time, if they used the same average reserve level as that applied by US banks, Canadian banks’ current loss allowance excluding RBC would surge from $170MM to over $2.5 billion, resulting in a substantial hit to earnings, and potentially impairing the banks’ ability to service dividends and future cash distributions.
For months this discrepancy persisted even as oil remained well below last year’s levels, leaving Canadian bank watchers stumped as to just how Canadian banks planned to pull this particular “Exxon” without suffering balance sheet impariment, until this morning when we may have gotten the answer how the local Canadian money centers “planned” to resolve this odd accounting gimmick.
Today Bank of Montreal, perhaps the biggest violator of the loan loss reserve recongition, fell the most in two months after restating it restated its regulatory capital ratios for the first three quarters of the year. As Bloomberg first noticed, the shares slid 1.3% to C$84.72 in morning trade, the most intraday since July 27 and the worst performance in the eight-company S&P/TSX Composite Commercial Banks Index. The stock has gained 8.5 percent since Dec. 31. What was most notable about the restatement is that as one analyst calculated, the move was comparable to erasing C$1.3 billion ($1 billion) of excess capital at Canada’s fourth-largest lender.
…click on the above link to read the rest of the article…
Bank of Montreal Asks If “Oil Prices Could Collapse To $20”; Answers: “Yes”
Bank of Montreal Asks If “Oil Prices Could Collapse To $20”; Answers: “Yes”
In our “2015 Year Ahead” report we laid out three plausible scenarios: (1) our base case, which forecast Brent crude oil prices of $50-60/bbl over the first half of 2015 and $60-80/bbl over the second half of the year; (2) a bull case, which forecast a Brent trading range of $85-95; and a bear case, which suggested a Brent trading range of $50-60/bbl. The actual trading range in 2015 proved to be even more ‘bearish’ than our bear case, with Brent generally trading between $36 and $60/bbl. So what did we get wrong?
The answer: pretty much everything but mostly the fact that in the race to the production bottom (“we’ll make up for plunging prices with soaring volumes”) only dramatic outcomes, which shock the status quo, have any impact, to wit:
“we assumed that Iraq production would average 2.9 million bpd; actual production was roughly 1 million bpd higher. We also assumed that Saudi Arabia would be content to hold production at 9.2 million bpd whereas actual production was roughly 800,000 bpd higher. In our view, this incremental 1.8 million bpd of production was the principal reason that global oil inventories swelled by more than 340 million barrels to a record high of approximately 3.1 billion barrels and why crude oil prices have collapsed.”
Well, that, and the fact that the financial BTFD community finally threw in the towel on the most financialized commodity, and following two failed attempts at dead cat bounces, may have thrown in the towel. That said, just looking at speculative positions, oil may have a long way to drop still.
Which may also explain why, as noted last week, someone has made material directional (and/or hedge) bets via puts that oil will slide to $25, $20, even as low as $15.
…click on the above link to read the rest of the article…
How Insane Is Canada’s Housing Bubble? 42% of “Second-Time” Buyers Need (a lot of) Money from Mom & Dad to Buy a Home
How Insane Is Canada’s Housing Bubble? 42% of “Second-Time” Buyers Need (a lot of) Money from Mom & Dad to Buy a Home
A housing bubble is a huge party. Everyone gets drunk and has a good time. The economy booms because housing, particularly construction, is a very local business. It creates local jobs. People spend this money. Businesses get this money. Governments exact their pound of flesh. But there is a drawback to a housing bubble, beyond the fact that it will eventually crash with terrible consequences: New entrants into the market are getting locked out by soaring prices.
Canada’s housing bubble has been a sight to behold. Home prices only dipped 8% when the US housing market crashed. Then it re-soared. Now, across the country, home prices are 26% higher than they were at the already crazy peak in 2008. In Toronto, they’re 42% higher! Prices in the major urban centers where young people like to live have become a challenge for first-time buyers.
First-time buyers are special. One, they’re the foundation of a healthy housing market; they represent growth. And two, they don’t benefit from any run-up in home prices. Current homeowners profit from the housing bubble by owning a home that has gotten pricier. When they move, they sell an overpriced home, which soothes the pain of buying another overpriced home. But first-time buyers feel the full brunt of the bubble price.
So the Bank of Montreal (BMO), in its Home Buying Report, determined just how difficult it’s getting in Canada. The survey found that 42% of the potential first-time buyers, those hardy folks that haven’t been discouraged by the soaring prices, expect to recruit the help of mom and dad, and in a big way.
To begin with, which is not a good sign, first-time buyers whittled down their budget by C$3,400 on average from last year to C$312,700 (US$259,000).
…click on the above link to read the rest of the article…
Canada’s RBC and BMO move to cut prime rates
Canada’s RBC and BMO move to cut prime rates
TORONTO (Reuters) – Royal Bank of Canada, the country’s biggest lender, said on Tuesday it would cut its prime lending rate by 15 basis points, becoming the first of Canada’s big banks to trim borrowing costs nearly a week after the central bank stunned markets with a rate cut.
Bank of Montreal BMO.TO, Canada’s fourth-largest bank, quickly followed suit.
The moves by RBC RY.TO and BMO take their prime rates to 2.85 percent from 3 percent, effective Wednesday, the banks said.
Canada’s biggest banks, which also include Toronto-Dominion Bank TD.TO, Bank of Nova Scotia BNS.TO, Canadian Imperial Bank of Commerce CM.TO and National Bank of Canada NA.TO, have come under fire for not immediately cutting their lending rates after the central bank’s rate cut.
By not passing on the full rate cut to borrowers, the banks can protect their net interest margin, which boosts profits.
Typically, once one bank cuts its prime rate, the others follow in order to remain competitive with borrowers.
The Bank of Canada surprised markets with its Jan. 21 decision to cut overnight borrowing costs by a quarter of a percentage point, to 0.75 percent, to counter the effects of cheaper oil on economic growth and inflation.
