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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Canadian banks. Wow! Make That A Double Wow. There it was. Staring At Us. It was a July 11 /2013 article in Canada's most prestigious daily business paper questioning the health of the Canadian banking system. We couldn't believe it either. Could our banks in Canada actually not be infallible? Let's dig in! including our stunning conclusion.
Long term stability, safety, and being generally risk-averse are what the Canadian business owner/manager associates our Canadian banks with. As the world trudged through the 2008 Global financial meltdown it seemed fairly clear to all that the Canadian banking system was the last man standing when it came to the bank pillars of capital, liquidity, etc.
So what in the heck was our aforementioned article really saying. Simply that global banking analysis has changed and the way banks are measured has also. The gist of all that analysis was pretty simple - under a newer method of looking at bank financials, all assets are treated equally, whether they're higher risk or government secured.
In reality, it's the same way we look at our clients' financials when we're contemplating completing financing for them - looking at leverage as a key example of financial health. And it turns out that that simpler method of looking at financials has us looking... well... not so good.
It's all up for debate of course, as our article suggested that since the largest asset for the banks is usually home mortgages that simply means more safety and government support.
In the U.S., unlike Canada, banks fail all the time... if not once a day certainly on occasion. The complexity of the U.S. banking system (there are different types of banks) makes it difficult to analyze and figure out what's really going on.
So how would one in fact analyze a bank if it came down to it? A lot of factors come into play. Some of the basic areas would include:
Financial accounting presentation
Types of assets they finance
Quality of the assets they hold and finance
Types of assets that are no longer ' performing ' - i.e. defaulted loans, mortgages, etc.
Weird stuff - derivatives /hedging etc. (Don’t even ask us, as even we don't get it!)
Overall country risk
Management
International holdings re assets/risk
Have you ever looked at the financials of a large corporation? They are exceptionally complex more often than not. Take that complexity and multiply it by ten in our opinion!
Also, think back to recent years debacles of such firms as ENRON, NORTEL. The smartest guys on Wall Street even if they could figure out the numbers were hoodwinked by accounting tomfoolery, etc.
So our stunning conclusion on Canadian banks 'falling behind' as our article stated? Is the sky falling? Let's say simply that we're optimistic and hoping for the best - because this is Canada eh!
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Stan Prokop
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