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Canadian version of Wells Fargo?


CanadianMunger
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What Canadian bank, large or small would be the closest to Wells Fargo in terms of being rational, opportunistic and shareholder friendly?

 

I have looked very superficially at the big 6 and I'm uncertain.  I don't see their share counts decreasing (say over the last decade) and I see some questionable forays into foreign markets. 

 

Is there a Canadian bank that's quite content to stick to their knitting and work in the best interest in shareholders ie. if Buffett were to buy a Canadian bank, which one?

 

 

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I think all and none would best answer the question.  None has nearly as bad an underwriting record as Wells did leading up to the subprime debacle.  Then securitization is not as big an industry here.

 

Canadian Banks are protected from competition by strong federal legislation.  In return they are under tacit agreement with the feds to provide job security etc.  They are not as cheap as Wells relative to book value.  They dont have to take as much risk to make money as US banks because of the lack of competition.  Many larger forays into other markets have proven disastrous, as you know. 

 

My feeling right now is that if there is some adjustment downwards on property values then you may see the banks get a lot cheaper relative to book without actually booking alot of losses. 

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Any thoughts on the safest Canadian bank to invest in, in terms of the business risks and leverage taken on? I know pretty much all of the Big 5 are guaranteed to survive due to their impact on Canada.

 

Royal Bank seems to be very conservatively run, for example. Was trading at a very appealing price late last summer, as well, with a nice dividend to boot.

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I don't think he would touch the Canadian banks.

 

A quick look at TD (a proxy for Canada):

 

CEO: Clark (considered the best in Canada and a sensible sounding man)

ROA = 0.9% (10-year average = 0.8% with no financial crisis to bring down the average)

Non-interest income (NNI) to non-interest expense (NNE), a measure of efficiency = 67%

Provision for credit losses (PCL) to average assets (AA) = 0.2%

 

Now, compare that to USB:

 

CEO: Davis (very sensible fellow)

ROA = 1.5% (10-year average = 1.6% with 2009 well below 1%)

NNI/NNE = 88%

PCL/AA = 0.7%

 

Or WFC:

 

CEO: Stumpf (another sensible fellow)

ROA = 1.3% (10-year average = 1.4% with 2008-2009 well below 1%)

NNI/NNE = 77%

PCL/AA = 0.6%

 

Canada (TD) looks to be a low return environment (ROA), not as efficient (NNI/NNE) and priced for perfection (PCL/AA). Also, USB and WFC require much less leverage to achieve a decent ROE. They are currently running at 10:1 assets to common equity. Whereas Canada (TD) requires a lot more leverage, about 17:1 assets to equity to get to the same ROE.

 

I would hesitate. TD trades at 1.6X 2012 estimated BV, with USB at 1.6X 2012 estimated BV and WFC at a little more than 1.1X 2012 estimated BV.

 

Canada's household debt to disposable income is now over 150% and the US' is now below 120%.

 

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I think Buffett would like Canadian banks. As has been stated, they are essentially an oligopoly and they all 'play ball fairly'. I would go so far as to say this results in a sizeable moat. Bottom line is the group should continue to grow earnings at a 6 to 8% clip pretty easily. I view Canadian banks as a reasonable trade to holding a bond; much higher rate of return and moderately more risk.

 

Their growth in their Canadian business will be low moving forward. As a result each bank has picked a different growth vehicle:

RY = global wealth management

TD = US

BNS = Latin America & Asia

BMO = US midwest

CIBC = ?

National = small and ?

Laurentian = small and ?

Canadian Western Bank = very small and growing in West

 

Because the Canadian banks are expanding internationally (and this is where much of the growth will come from in future years) it is difficult to compare to Wells Fargo. Rather than try and pick 'the winner' my decision recently has been to buy a basket of Canadian banks: BNS, CWB & BMO (cheapest when I bought a month ago). Late last year I did purchase RY and sold as it ran up. I also view these holdings as a trade (i.e. buy when cheap and hold for dividend and sell when they run up 10 or 15%).

 

BMO looks to be the cheapest (of the big 4) right now; their US aquisition is looking to be a steal (purchased at the bottom of the market). However, their Canadian business looks to be slowing...? They release results tomorrow AM and I will be following closely. If the results are good (no weakness in Canada and the US business is getting better faster than anticipated) then I will consider adding to my position. 

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i have looked at this also. It is hard to get to one winner/loser out of the bunch. In spite of the poorer ROA figures, some of these banks have done well for long term holders with dividends versus comparable blue chips generally I think.

 

I've gone with RY and BNS, and sold BMO and TD because of the us strategy and the extreme competitive situation there, and the history of bad us expansions. CM i hold a small position not sure what to do with it.

 

With banks held in non reg accounts, to me it is hard to trade and pay cap gains tax and make the returns. I'm looking to hold and get the dividend and gain long term.

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Thanks for the great comments.

 

I should have clarified that I have no interest in the Canadian banks at the moment - I'm just looking to expand my circle of competence so I can be opportunistic in the future.  Wells is 10% of my portfolio, and BAC and USB combined another 5%.  Due to Berkshire being my number one position I would estimate that I'm in for 20% of the aforementioned names.

 

I don't think he would touch the Canadian banks.

 

A quick look at TD (a proxy for Canada):

 

CEO: Clark (considered the best in Canada and a sensible sounding man)

ROA = 0.9% (10-year average = 0.8% with no financial crisis to bring down the average)

Non-interest income (NNI) to non-interest expense (NNE), a measure of efficiency = 67%

Provision for credit losses (PCL) to average assets (AA) = 0.2%

 

Now, compare that to USB:

 

CEO: Davis (very sensible fellow)

ROA = 1.5% (10-year average = 1.6% with 2009 well below 1%)

NNI/NNE = 88%

PCL/AA = 0.7%

 

Or WFC:

 

CEO: Stumpf (another sensible fellow)

ROA = 1.3% (10-year average = 1.4% with 2008-2009 well below 1%)

NNI/NNE = 77%

PCL/AA = 0.6%

 

Canada (TD) looks to be a low return environment (ROA), not as efficient (NNI/NNE) and priced for perfection (PCL/AA). Also, USB and WFC require much less leverage to achieve a decent ROE. They are currently running at 10:1 assets to common equity. Whereas Canada (TD) requires a lot more leverage, about 17:1 assets to equity to get to the same ROE.

 

I would hesitate. TD trades at 1.6X 2012 estimated BV, with USB at 1.6X 2012 estimated BV and WFC at a little more than 1.1X 2012 estimated BV.

 

Canada's household debt to disposable income is now over 150% and the US' is now below 120%.

 

 

I would guess the best way to invest would be the basket approach if they ever sold at distressed prices?

 

 

 

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I don't think he would touch the Canadian banks.

 

A quick look at TD (a proxy for Canada):

 

CEO: Clark (considered the best in Canada and a sensible sounding man)

ROA = 0.9% (10-year average = 0.8% with no financial crisis to bring down the average)

Non-interest income (NNI) to non-interest expense (NNE), a measure of efficiency = 67%

Provision for credit losses (PCL) to average assets (AA) = 0.2%

 

Now, compare that to USB:

 

CEO: Davis (very sensible fellow)

ROA = 1.5% (10-year average = 1.6% with 2009 well below 1%)

NNI/NNE = 88%

PCL/AA = 0.7%

 

Or WFC:

 

CEO: Stumpf (another sensible fellow)

ROA = 1.3% (10-year average = 1.4% with 2008-2009 well below 1%)

NNI/NNE = 77%

PCL/AA = 0.6%

 

Canada (TD) looks to be a low return environment (ROA), not as efficient (NNI/NNE) and priced for perfection (PCL/AA). Also, USB and WFC require much less leverage to achieve a decent ROE. They are currently running at 10:1 assets to common equity. Whereas Canada (TD) requires a lot more leverage, about 17:1 assets to equity to get to the same ROE.

 

I would hesitate. TD trades at 1.6X 2012 estimated BV, with USB at 1.6X 2012 estimated BV and WFC at a little more than 1.1X 2012 estimated BV.

 

Canada's household debt to disposable income is now over 150% and the US' is now below 120%.

 

+1

 

Excellent points.

 

In response to some of the other comments:

 

(1)  U.S. Banking has, effectively, become an oligopoly -- is anyone paying attention.  This was, in my opinion, by design in reponse to the insane results produced by an the hyper-competitive U.S. banking system in the 20 years leading up to the implosion.

 

(2)  Wells Fargo's mortgage underwriting leading up to and during the mortgage bubble was, for the most part, exemplary.  Take a look at their latest presentations wherein they actually have a slide pointing this out.  Their "problems" are from Wachovia (whose problems came from Golden West).  Those problems were more than reserved for (so far...they've been over-reserved) on the date they closed the deal for Wachovia.

 

(3)  Consider what Buffett is doing.  He has waded into BAC and today mentiond that he owns JPM.  So, Buffett owns US Bank (#5 in size) and WFC and BAC for Berkshire and says he owns JPM for his personal account.  The only bank we don't know he likes in the top 5 U.S. banks is Citigroup -- the only one with large foreign exposure. 

 

Please keep in mind that before the meltdown Buffett repeatedly commented that neither he nor Charlie could make heads or tails of the exposures of the big U.S. Banks (aside from Wells) even after going through all the footnotes.  Buffett warned of a derivatives implosion crushing these banks -- at least he warned of that if you read the tea leaves.

 

The implosion came and most of these banks still have derivatives and now he likes them. 

 

He sees the new oligopoly in US Banking and he's bought in.

 

The big U.S. based banks are going to do very well from these prices.  And, though I own it, US Bancorp is probably the least cheap of the group -- though it does have a current excellent return on tangible capital and likely no SIFI.

 

If you believe Buffett understands financials, he could hardly make a more clarion call.  BAC deal.  Bought more Wells since the start of the year.  Owns JPM for his personal account.  He's got huge and growing exposure to the U.S. banking sector oligopoly.

 

My 2 cents

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