Analysts: U.S. banking crisis ‘unlikely’ to affect Canadian banks


The U.S. banking crisis is "unlikely" to affect Canadian banks because of differences in their business models and lending practices, analysts said.

"The U.S. contagion is unlikely to spill over to Canadian banks as the issues in U.S. are unique and specific to certain business models or lending activities," James Shanahan, banking analyst at financial services firm Edward Jones, said.

Analysts explained that the top six banks in Canada — including the Royal Bank of Canada, Toronto Dominion Bank and Bank of Montreal — had enough liquidity and manageable credit risks that could help them get through the crisis of confidence in the global banking system over the past two weeks.

Carl De Souza, senior vice president of global credit rating firm DBRS Morningstar said Canadian banks typically had lower exposures to fixed-income securities compared to U.S. lenders, which "should enable these banks to navigate current market turbulence."

Analysts pointed out that Canadian banks emerged stronger from the financial crisis in 2008 because of stringent regulations. The country's six largest banks account for 80 percent of national banking assets and have avoided failures their peers in Europe and the U.S. encountered.

Multibank
4.9/5
Multibank Review
Visit Site
eToro
4.9/5
eToro Review
Visit Site
Capital.com
4.8/5
Capital.com Review
Visit Site

Nevertheless, six big Canadian banks have collectively lost nine percent or $41.7 billion (C$57 billion) in market capitalization over the past two weeks. Meanwhile, the U.S. bank index has dropped by 21.5 percent within the same period.

The banking crisis began in the U.S. after San Francisco-based regional lender Silicon Valley Bank (SVB) announced a shutdown on March 10. SVB had a problem meeting liquidity needs as customers withdrew large amounts of deposits within a short period.

Two days later, U.S. regulators closed New York-based regional lender Signature Bank due to "systemic risks."

As a result of the sudden implosions, the banking sector in the U.S. crashed last week. Investors were concerned that other U.S. banks, particularly regional lenders, would meet the same fate as SVB and Signature.

In Canada, financial authorities took permanent control of the Canadian branch of the defunct SVB. Venture capitalists also projected that Canadian startups would face more difficulty in financing themselves following the SVB implosion.

Later that week, Switzerland's Credit Suisse also reported a liquidity crisis. The Swiss National Bank attempted to save Credit Suisse by offering a $54 billion loan before eventually engineering a buyout for the troubled bank. Rival bank UBS agreed to acquire Credit Suisse for $3.23 billion, a significantly lower price than the original market value.

Six top central banks, including the U.S. Federal Reserve and Bank of Canada, agreed to expand the existing dollar swap mechanism starting Monday to contain the global banking crisis. The expansion is expected to boost the dollar supply in the global market, allowing participating banks to provide dollar loans to domestic lenders.

Canadian banks under scrutiny

Despite the assurance of stability in the Canadian banking system, some Canadian banks remain under public scrutiny.

In the past, Canadian banks mostly focused on serving local customers by providing domestic loans. However, in recent years, lenders like TD Bank, Royal Bank and CIBC have expanded their businesses to the U.S. They purchased regional lenders in the U.S. to benefit from the rapid growth of second-tier cities there.

The public voiced concerns about this strategy as the U.S. banking crisis began with issues at regional banks.

"The market is thinking that TD is in a good position to re-negotiate the deal considering First Horizon is in a tough spot now."

James Shanahan, Banking Analyst at Edward Jones

Toronto-based TD Bank's $13.4 billion bid for Memphis-based First Horizon is still pending approval from regulators. However, shares of First Horizon plummeted last week after the SVB implosion.

On Monday, First Horizon shares were up three percent but remained 38 percent lower than TD Bank's bid. Analysts said TD Bank could renegotiate the contract since the U.S. regional lender was in a "tough spot."