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Email this9:41 pm
August 9, 2014
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It sounds like our banks are very involve in the housing market and the tax payer are on hook if things goes wrong, a situation increasingly more likely due to high household debt. This does not imply a bubble will burst, but will imply economy will be sluggish as investment and consumption goes down during the deleveraging process, unless export is very robust.
Owner of banks' share need to be aware the change in gov regulation may require much more capital for the bank as mortgage business with CMHC insurance is consider to nearly be risk free at the moment.
2:22 am
October 21, 2013
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I stopped reading when I got to the part where the writer alleges that the taxpayer is on the hook for CMHC. It was clearly established by Norman1 in a previous thread that this is not the case. There are, unfortunately, a lot of myths out there about how taxes are deemed to be bad and taxpayers are on the hook for everything under the sun. These ideas are typically endorsed by money managers such as this, among others.
That said, I appreciate having these ideas brought to our attention.
Whether banks will take a bit of a haircut, I don't know, but I wouldn't be surprised. My impression is that a significant percentage of people who hold their stocks do it for the dividends, which are a kind of freebie as many believe there is virtually no risk and they do provide significantly higher returns than GICs plus tax advantages. Such investors are willing to hold them long term and let the capital gains ride until they bear fruit and the cash is needed or until they die. The banks are not likely to cut dividends unless the roof is starting to fall in.
But the idea that there is actual risk in bank stocks is one whose time has come. It doesn't make much sense that people can ride along for years on high and rising dividends without believing they are really taking on risk in any meaningful way. So, yes, they might decline. This ought not to be news if it is truly an investment and not a form of guaranteed income.
The banks themselves are very much aware of this. Have you ever noticed how market-linked GICs which are invested in bank stocks never provide you with the dividends, only the market fluctuations? They know where the greater risk is, and they want you to take it while they scoop up the dividends and invest them elsewhere. Yet they sell these things to countless naive investors every week so that they can meet their quotas of selling junk and not get fired.
Although they don't like to admit it, it's almost impossible for a mutual fund manager to come out ahead over ETFs and so on. Their best hope is often to take an aggressive stance on something. In this case, it's a negative one, against bank stocks. It's unlikely to cost him much, and it might prove prudent. So, from his point of view, it may be a sensible move.
8:51 pm
April 6, 2013
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I had also established that most of Canadian bank's profits don't come from CMHC-insured mortgages.
The article is also dead wrong about CMHC changes affecting bank capital.
CMHC default insurance is not renewed yearly. The premium is one time and the default coverage is for the life of the mortgage. That's usually 25 years. If CMHC does change the terms of coverage for new insured mortgages, it will be many years before those less-insured mortgages dominate.
As well, the Canadian banks have no problem raising new capital. That was actually tested while US banks were imploding around 2008.
Late 2007, CIBC's capital ratios were approaching their regulatory minimums. In January 2008, CIBC did a common share offering to raise capital. Four Canadian institutional investors agreed to take up $1.5 billion of the shares at $62.75 each. The retail portion was $1.2 billion at $67.05 each and sold out in less than 48 hours!
9:10 pm
April 6, 2013
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Loonie said
…
But the idea that there is actual risk in bank stocks is one whose time has come. It doesn't make much sense that people can ride along for years on high and rising dividends without believing they are really taking on risk in any meaningful way. So, yes, they might decline. This ought not to be news if it is truly an investment and not a form of guaranteed income.
…
There has always been risk in Canadian bank stocks. Shareholders like myself have been, and I think will continue to be, more than adequately compensated for assuming those risks.
The dividends from those BMO shares I bought in the 1980's have gone from 7% of my original cost to now over 40% of my original cost. At the current dividend rate, I receive my original investment back every 2½ years! 
9:27 pm
April 6, 2013
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I think it is good hear the other side of the story about Canadian banks.
The March Investment Reporter article Bank on the big five banks as cornerstone stocks would be good for that.
10:30 pm
October 21, 2013
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Norman1 said
Loonie said
…
But the idea that there is actual risk in bank stocks is one whose time has come. It doesn't make much sense that people can ride along for years on high and rising dividends without believing they are really taking on risk in any meaningful way. So, yes, they might decline. This ought not to be news if it is truly an investment and not a form of guaranteed income.
…There has always been risk in Canadian bank stocks. Shareholders like myself have been, and I think will continue to be, more than adequately compensated for assuming those risks.
The dividends from those BMO shares I bought in the 1980's have gone from 7% of my original cost to now over 40% of my original cost. At the current dividend rate, I receive my original investment back every 2½ years!
If you're confident that you will be "more than adequately compensated for assuming those risks" [inherent in bank stocks], then your view of the risk involved is that it is negligible. And that was the premise of my comment. In theory, investors acknowledge there is risk, but in practice most don't think it has any legs.
8:28 am
April 6, 2013
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Loonie said
If you're confident that you will be "more than adequately compensated for assuming those risks" [inherent in bank stocks], then your view of the risk involved is that it is negligible. And that was the premise of my comment. In theory, investors acknowledge there is risk, but in practice most don't think it has any legs.
That depends on what one means by risk.
If one means not receiving my original investment back, then the risk is zero for me now. I've received my original investment back many times over from the BMO dividends alone.
If one means ending up with less than if I had sold now and placed the money in GIC's and savings accounts, then the risk now is just as substantial in the short term as it was when I purchased the shares in the 1980's. However, in the long term (10+ years), I think history will repeat itself and the shares will outperform GIC's and savings accounts, with a certainty of 75% to 80%. 
I'm comfortable with the likely reward for assuming the risk from that 20% to 25% of uncertainty.
9:25 am
October 21, 2013
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I understand, Norman. My original comments weren't really written with people like you in mind. I was thinking of people who essentially have been led to believe and do believe that there is effectively no risk. They have been sold as bedrock stocks. This may prove to be the case in future, or not.
7:10 pm
April 6, 2013
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I think those people will end up doing the right thing and be happy with the long term results from putting money into Canadian bank stocks. Just that their theory is a bit off!
The stocks of Canadian banks do look like bedrock in contrast to those of some other companies, especially speculative ones that look like they will run out of money in 12 months.
However, they are still stocks and not actually bedrock. There have been times when they are down over 20% from their historic highs.
Please write your comments in the forum.