After The European Bank Bloodbath, Is Canada Next?

Tyler Durden's picture

Back in the summer of 2011, when we reported that Canadian banks appear dangerously undercapitalized on a tangible common equity basis...

... the highest Canadian media instance, the Globe and Mail decided to take us to task. To wit:

Were the folks at looking at the best numbers when they argued that Canadian banks were just as levered as troubled European banks?


In a simple analysis that generated a great deal of commentary, a blogger at, an oddball but widely followed financial site, suggested that Canadian banks were as leveraged as European banks because they have low ratios of tangible common equity to total assets.


But there's an argument that looking at that ratio is the wrong way to judge a bank's strength because it ignores the composition of the assets.

Sadly, the folks at were looking at the best numbers, and even more sadly, in the interim nearly 5 years, Canada's banks took absolutely no action to bolster their capital ratios; in fact, these have only deteriorated.

The Globe and Mail, however, was right about one thing: the TC ratio did not capture the full risk embedded in Canadian bank balance sheets: it was merely a shorthand as to how much capital said banks have in case of a rainy day.

Sadly for Canada, it's not only raining, it's pouring for the country's energy industry, a downpour which is about to migrate into its banking sector. Which is why it is indeed time to take a somewhat deeper dive into the Canadian banks' balance sheets, where we find something very troubling, and something which prompts us to wonder if the time of freaking out about European banks is about to be replaced with comparable panic about Canadian banks.

The following chart from an analysis by RBC shows that when compared to US banks' (artificially low) reserves for oil and gas exposure, Canadian banks are...not.

Here is the one chart showing why the time to panic about Canadian banks may have finally arrived:


To be sure, last week we presented a full breakdown of the public U.S. bank energy and commodity exposure courtesy of Janney: which woefully lacking in many aspects, most notably in the credibility of the presentation as a result of the recently noted discussions between the Dallas Fed and US banks, at least it provides a relative benchmark of who is exposed to what per management disclosures.


We would do the same for Canada's banks only... we can't. So where does that leave us? Here are some though from RBC, ironically a Canadian bank itself, on bank balance sheets:

Early small cracks – timing is uncertain – preparing for volatility

The small negative moves in credit would normally not even “register” were it not for plenty of evidence of issues surround the oil and gas sector and the impact it could have on the oil producing provinces in Canada. The timing of loan impairments and PCLs has been volatile on a quarterly basis during previous credit cycles for the Canadian banks (see Exhibit 7 and Exhibit 8). We forecast rising provisions over the next four quarters, but have low confidence of when these losses will materialize for the banks (see Exhibit 9). In other words, while we increased EPS estimates for three banks on account of lower loan losses in Q1/16, this change was due to the perceived timing of losses (e.g., we may still be “early” in the cycle) rather than a shift in our outlook for overall credit quality of the Canadian banks. As we touch upon in the next session – Canadian banks like to wait for impairment events to book PCLs rather than build reserves (called sectoral reserves in the past) for problematic industries.

The problem with that last bolded sentence, is that as it says, "Canadian banks like to wait for impairment events to book PCLs rather than build reserves", in effect throwing the entire process of reserving for future losses out of the window.

However, with oil prices now suffering from a worse crash than the one seen in 2008, waiting is no longer an option, which means approximating the magnitude of potential losses on Canadian oil and gas loans is of utmost importance, especially since as Exhibit 10 shown above demonstrates, no loss reserves have been built whatsoever.

RBC has done this exercise, and here is what it finds (for other banks, if not for itself):

Some large U.S. banks currently have or guided to loss reserves in the 5-9% range against oil and gas loan exposures (see Exhibit 10).


Small diversion…We note there are some differences between the recognition and reserving for loan losses between U.S. and Canadian banks that do not make for a perfect comparison between countries, nor can we control for underwriting discipline. Nevertheless, we believe loan loss accounting is similar in both countries with oversight from the regulator and from auditing firms.


In practice, however, it appears as though U.S. banks build collective (or “general”) loan loss reserves early and later release these reserves into earnings. In Canada, when we speak with management teams, they seem to stress that the event of impairment is what will trigger PCLs rather than a build of reserves before impairments. We show a summary of Canadian and U.S. bank allowances relative to total loans over time and note that U.S. bank allowances are still higher than Canadian banks, but have been trending down (see Exhibit 11). In fact, US banks have more than double the level of allowances against loans versus the Canadian banks. However, we should also point out that the US banks also have approximately double the level of impaired loans that the Canadian banks have and loan mixes are quite different.


Oddly, we often hear that US banks are applauded for “recognizing” the problem “early” and this too may play a role in their volatile reserve behavior and may be why US reserves for the oil and gas loan books are as high as they are. Conversely, we have had many past conversations with Chief Risk Officers in Canada about recovery methods and proactive management of loans that may be criticized or struggling and we found that a “through the cycle” best result is not necessarily tied to recording losses “early” through the income statement. In fact, one might argue that “arming” your recovery teams with large “reserves” ahead of the restructuring/loan workout phase may lead to sub-optimal recoveries…

So... it is preferential to not arm your recovery team to handle the truth, because it leads to sub-optimal recoveries. This is also known as the... well, in this case a picture is certainly worth a $1000 in loss reserves:


RBC continues with its attempt to show how much more pleasant having one's head stuck in the sand is:

We would note that Exhibit 10 only shows specific allowances for Canadian banks while the U.S. bank reserve levels in Exhibit 10 includes both specific and general allowances. In other words, the Canadian banks may have general allowances against oil and gas loans which are not captured in the below analysis. In Canada, general allowances are not explicitly disclosed by industry and hence we cannot quantify how much general allowance the Canadian banks may already set aside for oil and gas loans (so we exclude them from our analysis).

In other words, even more balance sheet obfuscation which means that nobody actually knows the full exposure of Canadian banks, something which has led Europe's largest bank to crash 10% today, seen its CDS more than double in the past month, and trade at levels not seen since the Lehman failure. But for Canadian banks, this is somehow... different.

Which brings us to the punchline:

Back to our loan loss calculation methodology in Exhibit 13… This method essentially holds all loan losses from 2015 as constant and then adds direct loan losses from the drawn oil and gas loan books. Effectively, we are assuming the US banks reserve levels are a “correct” estimation of loan losses from the direct oil and gas loans and the Canadian banks need to “catch up” to have similar levels of reserves. We like this method as it helps us determine a sort of “consensus” loss on oil and gas loans – but we admit this is very general and does not control for the investment grade ratings, geography, future drawdowns and/or specific industry exposures (like E&P lending versus mid-stream lending, etc.).

And here is what "panic" means in purely monetary terms:

To summarize:

  • Canadian banks' (ex RBC) current loss allowance: $170MM
  • Canadian banks' (ex RBC) pro-forma loss allowance assuming U.S. banks reserve levels are accurate: $2,529MM

The difference: $2,359MM, or an increase of 1,288%.

Clearly, the above RBC analysis assumes that 7% loss reserves are sufficient to offset loan losses in what is shaping up as the biggest commodity crash in history.

We wish we could be as confident as RBC that this is sufficient, however we are clearly concerned that if and when Canada's banks finally begin to write down their assets and flow the impariments though the income statement, that things could go from bad to worse very quickly, and not necessarily because Canada's banks are under or over provisioned, but for a far simpler reason - once the market focuses on Canadian energy exposure, it will realize just how little information is freely available, and if European banks are any indication, it will sell first and ask questions much later if at all.

However, indeed assuming a worst case scenario, one in which the banks will have to "eat" the losses and suffer impairments, then the question emerges just how much capital do these banks truly have, which in turn goes back full circle to our post from the summer of 2011 which led to much gnashing of teeth at the Globe and Mail.

We wonder what its reaction will be this time, and even more so, what its reaction will be if the market decides that when it comes to "the next domino to fall", it was indeed Canada which courtesy of a generous global central bank regime which flooded the world with excess liquidity, and which China is now actively soaking up, allowed Canada's banks to quietly skirt under the radar for many years; a radar that has finally registered a ping.

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Yes We Can. But Lets Not.'s picture

>>> Panic over bank failures

>>> Welcome bank failures

Durrmockracy's picture

It's funny that even when it's fantasy digit, virtual fiat dollars you can still be "undercapitalized".  You'd think there would be lots of that stuff to go around?

Soul Glow's picture

Canada is fine.  They can print more and devalue the loony to zero.  Then they're saved.

The Black Bishop's picture

I'm glad I decided to jump in and bought 500 ounces of silver last week. Starting to spike on all this shit going down.

new game's picture

has the monster arrived at your door?

Soul Glow's picture


Look at stocks fall!  I wonder if my March collapse call is going to come early.  Either way.

Jump you fuckers!

Mr.Sono's picture

Why March? I been reading your prediction for a while, what gives? Can it be June on my birthday?

BaBaBouy's picture

Looks Like It Will Take WORLDWIDE Fiats Paper Money Hellicopter Printation To TRY and solve This MF'er of a Major Keynesian Fuckup......

BaBaBouy's picture

<<< Run For Your Life From The Likes OF AAPL Stocks ???

<<<  APPLE Is A Great Buy At these low sale prices ???

CheapBastard's picture

They elected the Boy Soclialist so they should be fine, just fine ... until he runs out of OPM.

Soul Glow's picture

Why March?

Just a hunch.  I'm looking at how much BS the central banks can spew versus what they actually can do.  Also growth estamates versus actual growth.  I'm charting eqtuity versus bond rates.  Taking into account the oil collapse and margain calls on bank loans for the sector.  The gold price is important.  All of this looks like it comes to a head in March.  Draghi falls flat, Yellen is out of ammo, the shitshow explodes, stocks implode, they close the banks, ban cash, go NIRP, devalue the dollar, gold explodes and bonds collapse.....and when it starts there is no stopping it.  

The central banks are out of ammo.

aVileRat's picture

What happens in March?

I'll give you a hint: Loan origination. Redeterminations. Rollovers. Sov (Provincial) budgets.

Now check out the spreads on your Bloomberg terminal. There is no way the system in Canada is going to get out of this thing in 1 piece.


mickeyman's picture

The Ides of March is typically a good day for politicians.

california chrome's picture

@Soul Glow

March does seem about right.  Feels the same way it did before the subprime debacle when things happened quickly.

But it's so much f'g bigger now.

DB is not too far away from zero.  When it gets into the single digits, look out below...yep, there will be no stopping it.

BaBaBouy's picture

JUST A Reminder, It now costs over 1700. CAD for 1 GOLD ozs.
How long before that number is surpassed.......In USD's ?????

zuuma's picture

No worries!

It's just Canada.  There's only, what?  35 million peeps up there?

It's like California with a few bad loans.

They'll make it up in viagra perscriptions back to the states.

asteroids's picture

When not if the FED raises rates again, the Bank of Canada will be in a world of hurt. If they raise rates real-estate will finally crash taking the banks with it. If they don't then the Loonie crashes taking the banks with it.

Iam_Silverman's picture

"If they raise rates real-estate will finally crash taking the banks with it."

So, I should save some dry powder to buy me a summer vacation spot in Alberta then?

Abbie Normal's picture

Yes, there are some lovely houses along Cougar Creek in Canmore with beautiful mountain views.  They back onto the dry creekbed, which is a 50-yr flood zone that has only flooded 3X in the past 20 years.  The most recent flood took out a few houses but not-to-worry, those have been flattened and now the empty 28x80' lots are for sale again for only $500K.  The best news is the govt engineers guarantees that the next flood won't cause any damage because the scenic creek banks are now paved over with more concrete than the L.A. flood control channels.  Maybe building an entire community on top of an alluvial flood plain wasn't the brightest idea.

Iam_Silverman's picture


So, I like get a pool too without paying extra?

Man, why does everybody bag on the Canadians?  I like the way y'all package everything up in a nice, tidy deal like that.

pitz's picture

Real estate has been falling for almost 3 years now across Canada.  So the BoC needs to cut to deal with the aftermath.  Rates have almost nothing to do with the CAD$ which has remained very stable in its value.

digiblader1's picture

It is already devalued and already bottomed weeks ago--I'd be more worried about the coming significant devaluation of the US dollar coming when the Fed is forced to do QE4/NIRP because the US economy is in or close to recession, causing gold prices to soar.. most investors seem to be expecting a huge devaluation, as the US dollar is plunging vs. the euro and yen, and the Canadian dollar, and gold is soaring.

Mr.Sono's picture

To soon junior, Canada dollar is just a small dead cat bounce. U.S. Dollar is going higher, the higher it goes the lower it falls.

Soul Glow's picture

Race to the bottom.  The dollar has a long way to fall too.

Soul Glow's picture

I was sort of joking.  I know it has been massively devalued.

matinee55's picture

ah, we don't make sheit, what you going to eat, snow?

Beatscape's picture

The Bank of Nova Scotia declared their loans to Emerald Oil in default today and shut down their credit facility.



ExploitedCitizen's picture

Well Canada is all about diversity now, these maroons welcome anything, even a bank holiday.

Kirk2NCC1701's picture

Looking at the Exhibit 10 graph, and all sarcasm aside, who the hell is the US ZION bank?  Never heard of them.

Mintcoin's picture

I believe it is a Mormon bank. 

FrankDrakman's picture

That 2.4 billion listed in bold as the Royal Bank's 'deficiency' is almost exactly equal the bank's profits.

For the 3rd quarter of 2015. 

Yep, they're teetering on the brink. A whole quarter's profits might be at risk!


Chuckster's picture

So...this time around we have to bail out the German and Canadian banks as well as the USA banks.  Shouldn't be a problem.  Janet will strap it on and if it ain't enough she will borrow Hank Paulson's.

jaxville's picture

 Canadian banks recived massive loans from the Fed back in 2008-2009.  They were also bailed out by CMHC (a gov't agency that insures mortgage debt) and outright loans from the Canadian gov't.

  The CMHC bailout prevented distressed mortgages from hitting the market and driving down housing prices.

Dr. Engali's picture

Panic? Fuck no, burn them all down!

KnuckleDragger-X's picture

Canada is shiny forever, and since they've got a socialist running things now, the awesome will get deep quickly......

FrankDrakman's picture

Yep, no problem can't be solved by the Dauphin taking a few selfies with teenage girls, and lisping "the budget will balance itself". 

Infield_Fly's picture
Infield_Fly (not verified) Feb 8, 2016 1:00 PM

Everything is fine.  LMFAO!!!


 Maple syprup break.  Gotta go.

PyreneesPygmy's picture

bring it mofos!

i have been saying this for years. canadian banks are in worse shape than ttheir usa counterparts. fact.

when th inevitable recession officially hits(we ar in one now, but thy wont admit it. just likethe usa) our entir economy will crash. and th ensuing depression will se bank carnage everywhere. not one of our big 5 banks is financially prpared for a crisis. but! thanks to our good old ex PM Harper...the citizens are on the hook for bailing out the big 5 criminals.

we need a depresssion to cleanse and clean out our criminals at the banks.

Canadian Renegade's picture

Bail ins. Laid out in Canada action plan 2013.

Gonzogal's picture

And written and accepted by all govts present at the 2014 G20!

pitz's picture

Severe price increases on adjustable rate borrowers.  Not bail-ins or bail-outs.  Profit-ins, I guess you could call them.  There is very little, if almost no long-term assets on the books of Canadian banks, so they're not trapped in assets that do not reprice in accordance to market conditions.  They don't play the 'borrow short/lend-long' game that destroyed the US banking sector when the yield curve blew out in 2008.

RockySpears's picture

Last time round a Depression seemed only to bolster the grip of the FED, Banks etc etc

22winmag's picture

On topic:


Gold 7 day spot price +6.0% and climbing.

Seasmoke's picture

TD Bank scares the crap out of me. Everything looks so perfect from the outside of their big beautiful always open branches. That the contrarian in me says that it's a cover for big problems

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Seasmoke Feb 8, 2016 2:32 PM

I think of TD Bank as one of the only safe havens of the bank world since they aren't involved in all the crazy derivative products the average Wall St bank deals with.  God I hope I'm not wrong, what shit do they have on their balance sheets? Anyone know?

fasTTcar's picture

My company had a business relationship with TD for many years before I bought it.  We grew and went from small business to commercial.  My fees went from $175 to over $6000 per month with no changes in services required.  That is not interest on loans, just fees.

Loved the front line workers at TD, but got bent over when I got to the big leagues.  Left them 3 years ago.

digiblader1's picture

Ugh Zero Hedge--can't you give Canada a break? I'd be more worried about the huge issues with US and European banks regarding China.. why do you think Deutsche Bank is plunging? And of course, the US banks have concerns with their exposure to the tech sectors, of which their valuations are plunging..

And those loan losses are just a drop in the bucket for the Canadian banks.. China on the other hand for European and US banks...

CPL's picture

There isn't any such thing as Canadian bank. There are still Canadian people though.

The 'Canadian' banks were all slowly eaten since the Mulroney era in one sideways deal after another and when the shit hit the fan in 2008.  They got eaten yet again.  Remember it's not TD...It's TD Canada Trust Water House Coopers.  The only 'Canadian banks' are the Credit unions now.  The rest of them are under the squid in someway (JPM Morgan goldman sacks blah blah blah).  So saying there is a 'Canadian bank' is like saying there's a Canadian 'Pepsi' or a Canadian 'Starbucks' or an American 'hero'.  These things only exist in corporate marketing now, only an idiot would believe there is any nation state on earth that isn't part of the corporate umbrella.

Hasn't been national sovereignity since at least 1956 for most places.  All happened in a single meeting. 

Now if you are looking for a Canadian in owned by and for Canadians.  Try a credit union.  Completely different paradigm, charter and application of how union resources are applied to loans and accounts.  Same goes for other nations as well.  Credit unions are practically everywhere.