Can you hear the drum’s. Canadian Banks are going to have a terrible time of it. Canadian housing market is about to fall apart. Declining housing prices will hurt banks. One article after another of Doom and Gloom.
Yes the Canadian housing market is and will continue to correct. CMHC is the federal entity that guarantees high ratio home mortgages may feel the pinch. But quite frankly it is an arm of the federal government who can and will print money as required.
Most comments are through the eyes of American Experience. Housing market cratered and banks went down right after. A few macro issues that investors need to understand about Canadian Banks. Yes they trade on stock exchanges. Most are listed on NYSE. But they are so highly concentrated within the Canadian economy they are too big to fail. Imagine the US economy where five banks control 90% of the action. Well that’s the way the Canadians play it.
Will banks suffer. Sure. But CMHC has guaranteed to said mortgages. It’s the same as a Federal Govt guaranteed with about a 3/8 of 1% yield premium. CMHC will pay when called upon in an orderly fashion.
Canadian banks do not have a sub-prime mortgage lending market, with dubious underwriting, funny credit ratings and no documentation approvals. So when the proverbial sh*t hits the fan as it has in the past it becomes a controlled crash landing. American style wild west confusion generally does not occur. The bog five will not become insolvent as was the case with many blue chip Wall Street names.
US players who do not understand the nuances may think they have found the next Citigroup and put on the big short expecting a big payday. They will find the stock prices soften and attractive buying opportunities present themselves. Most bank investors are other blue chip financial institutions along with dividend oriented investors. They are buy and hold. Many have held for over a decade and do not churn their position.
So watch the price soften. Butter softens when it becomes warm. But the calories never go away. This one may have more hysteria than substance.
George Gutowski writes from a caveat emptor perspective.