Canadian Banks: A License to Print Money

The Canadian banking industry is special, in that this system has never failed – through World War or Great Depression. In 2008, Canadian banks took a mere $12 billion in subprime losses – a trifling sum when compared against the collapse of Wachovia, Washington Mutual, AIG, Merrill Lynch, Bear Stearns, and Countrywide.

In all, the International Monetary Fund estimated more than $1 trillion in combined American and European banking losses through the Great Recession. For this, Onyx Investments is building out a long-term position in Toronto-Dominion bank ADRs.

The Big Six

Canadian banks are often times lauded as the safest financial institutions in the world – a stark contrast to high-rolling Wall Street, which lurches from one crisis to another every other decade.

The imposing barriers to entry, capital requirements, and fiscal conservatism Up North have made for an industry that regularly churns out big profits. Each of the Big Six banks have paid out dividends for more than 150 consecutive years.

Taken together, the Big Six control more than 90% of all Canadian banking. The National Bank of Canada, Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce operate as an oligopoly, due to the massive capital and regulatory requirements necessary to first enter this industry.

Canadian Banking Regulations

The Canadian Constitution has granted the Canadian federal government sole jurisdiction over its banks, as opposed to the U.S., which allows for state-chartered banks. The Canadian system therefore favors banks with massive scale, as opposed to a hodge-podge network of smaller, regional banks.

The Canadian government further restricts banking debt, leverage, and foreign and concentrated ownership of shares. These strong regulations limit excessive mergers and acquisitions activity and risk-taking.

Canadian banks mostly stick to their bread and butter of taking in deposits and making safe loans, which allows for consistent profitability, as opposed to wild booms and busts.

Opportunities for Growth

Admittedly, Big Six banks often times look towards the United States for growth. In 1984, the Bank of Montreal bought Harris, a venerable Chicago banking institution.

In more recent years, Toronto-Dominion has been especially active, in buying up East Coast regional banks, opening retail branches, and closing deals with both Ameritrade and Charles Schwab to bundle up American dollars.

Now, TD Group US Holdings, LLC, is actually the eighth largest bank in the United States, with more than $400 billion in deposits. From here, we do expect Toronto Dominion to leverage the strength of the Canadian economy and its banking system as a springboard for more international acquisitions. It is somewhat imperative that the Big Six diversify away from a Canadian economy highly dependent upon commodities, real estate, and trade with the United States.

The Canadians are showing us all how it is done.