For Canada's Banks This Is "The Next Shoe To Drop", And Why It Will Drop This Spring

Tyler Durden's picture

Roughly around the time the market troughed in early February, we asked "After The European Bank Bloodbath, Is Canada Next?" The reason for this question was simple: we said that "when compared to US banks' (artificially low) reserves for oil and gas exposure, Canadian banks are...not."

 

Stated otherwise, we warned that the biggest threat facing Canada's banking sector is how woefully underreserved it is to future oil and gas loan losses.

We added that unlike their US peers, "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."

We then cited an RBC analysis according to which a 7% loss reserve would be sufficient to offset loan losses in what is shaping up as the biggest commodity crash in history. We disagreed:

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.

We were, of course, referring to the Globe and Mail's reaction to our post from 2011 that despite the sterling facade, Canadian banks are really woefully undercapitalized.

And while we still await for the G&M to note this ping, here is Canada's Financial Post, confirming everything we said almost a month ago, and explaining what the "next shoe to drop" for Canadian banks will be. The Post's answer: "Relatively low oil loan provisions."

Sounds familiar?

Here are the FP's details which are already well known to our readers.

Canadian banks are taking lower provisions for oil and gas related credit losses than their U.S. counterparts, prompting observers to dig into the reasons behind the trend.

 

Reserves related to oil and gas loans held by U.S. banks are four to five times higher than those held by the Canadian banks, according to analysts at TD Securities, who believe accounting treatments and interpretations are, at least in part, behind the striking difference.

 

In a note Tuesday, the TD analysts led by Mario Mendonca said loan quality within the portfolios could also be another reason, with historical loss trends suggesting Canadian banks are more conservative lenders. Still, they said there is more to than that, including how aggressive each country’s regulators are, and interpretations under two different accounting regimes: U.S. Generally Accepted Accounting Principles (GAAP), and IFRS.

 

A close reading “reveals what we view as a material difference in loss recognition,” the analysts wrote.

 

FP0330_BMO_Loan_Loss_Provisions

FP0330__Banks_Loan_Loss_Provisions-C-GS

It appears Canadian banks are... different.

Under U.S. GAAP, they said, a loan is impaired when it is probable a credit will be unable to collect on all amounts due, based on current information and events. IFRS accounting considers a loan impaired based on “objective evidence” surrounding a financial asset or group of financial assets.

 

“We believe that either there is a very significant difference in the two accounting regimes or the standards are being interpreted in very different ways,” the TD analysts wrote.

 

In addition, they said U.S. banks are more likely than their Canadian counterparts to use a special form of provisioning known as a collective allowance because there is a greater acceptance in the United States of releasing these reserves in the future if conditions improve.

Like, in the case of a global financial system bailout. Of course, nothing prevents Canadian banks to release these reserves too. The problem is that one has to take them first, and doing so would soak up so much capital it may expose the bank's balance sheet as a hollow sham.

That said, now that everyone is finally pointing the finger at their gaping reserve holes, Canadian banks have begun to increase provisions for credit losses, reflecting the early impact of low oil prices.

It is too late.

The TD analysts said they expect "the next shoe to drop" in Canada when second-quarter results are posted this spring. “Despite the recent move in oil, futures are flat year-to-date and prices are still down materially since the fall 2015 determinations,” they wrote. “This should result in further pressures on borrowing bases and the potential for covenant breaches.”

 

Combined with expected “prodding” from the Office of the Superintendent of Financial Institutions (OSFI), Canada’s key bank regulator, “we expect impairments and credit losses to climb,” the analysts said.

All of this could have been avoided if Canada's banks did not try to be just a little "too clever." Instead, now they have a bleak future to look forward to, one where, in just a few months, the European bank bloodbath will shift over, as we first warned nearly two months ago, to Canada, something which both the mainstream media and "respected" analysts now admit.

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SILVERGEDDON's picture

Even the fucking hosers got an infestation of banksters, eh ?

Got a cure for that - cover them in maple syrup, then roll them in sawdust, so's they look like corn dogs. Then, sic a herd of starving beavers on them.

Or, tie them up in hockey goal nets, and let pro hockey players practice their slap shots on 'em.

Or, fuck it, just go for the gold - get an airport snow blower running at top speed, and frog march the fuckers into the business end for reincarnation as pet food for bad pets.

DownWithYogaPants's picture

They don't call it world domination for nothing.

TAALR Swift's picture

When down & out, Trudeau will bail out.

Oh Canada!

johnnycanuck's picture

Don't cha know as my old Bro used to say. 

But you have to acknowledge he's just the shiny face leading the latest clean up crew.  Harper and the Black Cats created the mess, and now their cousins the White Cats will pitch woo to the public while they prescribe the medicine. 

As Tommy Douglas (Keifer Sutherland's granddad) once said, the most common complaint the Cats have is the Mouse holes aren't big enough for their paws.

Dave's not here's picture

No worries. Now that Harper is gone we get to pay carbon taxes. That'll fix everything.

Yukon Cornholius's picture

We did just post a 0.6% GDP. So that's something.

Jacksons Ghost's picture

Not to worry, they can just fall back on their Gold Reserves. Oh, Wait.......Nevermind.

Yukon Cornholius's picture

My gold reserves now! Fuckers. Hahaha.

Canadian Dirtlump's picture

We have a loveably satanic infestation here, instead of a satanic one.

 

I don't disagree that we have a minefield potentially, but we've been a quarter away for a year. I mean I've been waiting for silver to go up for 4 years, the alberta real estate bubble to blow for 3 years. Now today, we post 6% fukkin GDP.

 

So yeah, the skids have been greased since my first kid was born. I'm divorced now and he's got a reasonable set of grown up teeth.

styme's picture

   I fucking love everyone of those idea's, brother! We could also just man up, light some torches, grab our pitch forks

and drag those fuckers out of their beds and set them on fire. Maybe hang a few as a warning to othere like minded scum.

Maybe Anonymous could get those addresses. We could have our own Night of the Long Knives....but with sharpened hockey sticks.

Yukon Cornholius's picture

I'm big on microwaves these days. Originated in the Rio favelas. Not too good for Canadjun banksters.

Rainman's picture

Credit redeterminations coming up next month for the drillers ...  and the credit line ...it gone

Direct Democracy's picture

Things are getting real bad in Canada: none of the Canadian NHL hockey teams will be in the playoffs (short Rogers!)

Bopper09's picture

Like it doesn't suck bad enough up here, you had to go and make us Hosers cry.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Mar 31, 2016 4:34 PM

Things won't change until the shoes stop dropping and start being thrown

shovelhead's picture

Canadian flavored extend and pretend on the menu?

Bopper09's picture

What the fuck would they care?  Bail in laws came to this country in '13.  We should be shooting lots of slaphots at these pieces of banking shit.

Davidduke2000's picture

These so-called experts have been saying this since 2007, for some reason Canada's banks are quite solid and are not in the gambling business like the American banks.

oveer 50% of homes in Canada are paid or have very little mortgage which make Canadian banks unexposed to a real estate market crash, if Alberta gets hit, the banks loss reserves are enough to absord the shock.

venturen's picture

good luck with that and $30 oil

Whalley World's picture

Just shorted Royal Bank, Jan 2017 $40 puts baby

wow thats crazy's picture

You there is lots of shit in the comment on zerohedge or any as a matter of fact but once in awhile someone says something clever!!

Ill check the price on those!!!

 

Whalley World's picture

Symbol RY NYSE, bid was .85 bid at .80 filled

 

Theonewhoknows's picture
Theonewhoknows (not verified) Mar 31, 2016 4:56 PM

So actually it may be Canada who will fail before US banks having the same problem - shale/E&P debt exposure.
They want to buy and consolidate the whole Shale/Oil&gas sector just like they have done it with Banks after 2008? http://independenttrader.org/shale-producers-on-the-brink-of-going-bust....

But the one thing FED won't do is bail out the Canada's banks...

Goldbugger's picture

Looks like The Fan just hit the Shit .

Infield_Fly's picture
Infield_Fly (not verified) Mar 31, 2016 4:57 PM

Canadian bank depositers will have their cash converted to shares.

 

There's your bailout Canada.

 

Have fun with that.

GuyBaker76's picture

Trudeau won't bail them out, . . . he's passing a bill that will require CANADIAN DEPOSITORS to bail them out.  

The new BILL, will force the depositors and anyone who is owed cash, bond holders etc, to convert the debts to STOCK.

You'll get WORTHLESS shares in bankrupt banks.   What a genius plan.

Congratulations to all socialists who voted for this uneducated bundle of ignorance. 

squid's picture

"Congratulations to all socialists who voted for this uneducated bundle of ignorance. "

 

Oh come now, he's a literature teacher after all.

 

The wonder boy.

 

Squid

Yukon Cornholius's picture

He was a bouncer too. Gay bars need bouncers don't they?

Nage42's picture

It's much worse than that.

The deposits are seized but that won't be enough, so the insolvent bank will be kept alive by government bailout in order to "protect our citizen's deposit."   This is because the CDIC is insolvent. 

 

The bail-in law is the method to ensure the bank will never be allowed to fail and leverage up more government (read: taxes) to backstop them.

 

Instead of letting the bank fail and use government money to make whole the deposit (which would be orders of magnitude cheaper in the long run).

Game, set, and match Canuks.  If you have deposits in a Canadian institution you have been warned.

mickeyman's picture

The bail-in provisions were introduced by the Conservatives.

So it wouldn't matter who we Canadians voted for--the result is the same.

new guy's picture

Wynn will know what to do.

aztrader's picture

The central bank will simiply stop marking their debt to the market like our Fed and call it a day.  Everything in the market is a fraud and unless you are on the inside, you don't have a chance.

WezTheJuic's picture

Ok.

 

The "Bail-in" legislation was already completed.  YEARS AGO.

 

When considering the exposure, some might go, most will stay.  (Boils down to maps.  I did not make that rule.)

 

Tyler. 

 

Thank-you,

Dark Daze's picture
Dark Daze (not verified) Apr 1, 2016 11:39 AM

This story, AGAIN. So again I will draw your attention to the teeny tiny print under the first chart which 'appears' to show US banks having reserved substantially against losess. They haven't. The note underneath the chart says that the chart shows 'the reserves US banks are 'presumed' to need' to cover their NPL's.

It's very obvious that several things are being forced One, someone is trying desperately to keep US depsoitors in US banks; Two, someone is trying desperatley to create a run on Canadian banks stock (gee I wonder who that could be? and Three, someone is trying to hammer CAD. None of it will succeed; all of it wil fail.