Canadian Banks Strong Despite Slump

The recession that is chilling U.S. banks has crossed the border into Canada, where banks are posting big increases in loan-loss provisions to cope with nonperforming assets.

But that should not keep them from looking south.

Capital ratios at most big Canadian banks safely exceed international regulatory standards, and fresh issues of debt and preferred stock are strengthening capital bases.

On the Prowl

Fresh capital may revive expectations of further inroads into U.S. banking by Canadian neighbors, either through purchases of assets or outright acquisitions. Canadian banks are always on the prowl for opportunities that make sense, according to analyst Kevin Choquette of First Boston Corp.

"Longer term, the probability is very high" that there will be U.S. acquisitions by Canadian banks, Mr. Choquette said, but "the question is trying to find the right fit, and there is a problem with paying a lot of goodwill." He knew of no deals in the works, however.

Canadian banks tend to want to buy high-quality assets, but they resist paying high premiums, said another analyst. But right now, the premium demanded for high-quality U.S. bank assets is relatively high compared to late last year, before a sustained rally in the bank stock market.

Unwilling to Pay Premium

"The proximity [to the United States] is such that they're always looking, but they realize they'd have to pay a premium, and up to now, they've been unwilling to do so," the second analyst said.

Canadian banks prospered in the late 1980s, becoming aggressive corporate lenders. Even today, corporate loans often represent a greater proportion of their assets than is typical for U.S. banks. But as the North American economies slowed, these loan portfolios started to sour.

Despite these problems, Canada's capital markets have remained more accommodating than the U.S. markets, partly because Canadian investors have fewer options. Canadian banks represent 17% of the total market capitalization of the Toronto Stock Exchange. In contrast, banks represent just 3.6% of the market capitalization of stocks on the New York Stock Exchange.

Strong demand for securities issued by Canadian banks has not flagged, either from retail or institutional sides, said analyst Thomas McCandless of Goldman, Sachs & Co.

Rebound's Early Stages

"I do not think there is going to be a significant problem raising any capital at all," he said. "We're just in the early stages of a rebound" in banks' earnings.

Typically, Canadian banks rely heavily on preferred stock to meet the Tier 1 risk-based capital requirement. Preferred and common shares are the major components of Tier 1 capital under international guidelines.

And Canadian banks have been active issuers of preferred stock since May 1, the beginning of their third quarter. Canadian Imperial Bank of Commerce issued roughly $130 million in debt and about $220 million in preferred stock, and the Bank of Montreal unit of Bankmont Financial Corp. announced an issue of about $220 million in preferred stock. Royal Bank of Canada announced an issue of about $265 million in preferred stock last week.

Banks' Strong Capital

At the end of the first half of the banks' fiscal year, April 30, all the country's major banks logged capital ratios in excess of the levels required under the final risk-based capital guidelines.

National Bank of Canada led the pack with an 8.8% total risk-based capital ratio, but the lowest ratio reported by any major bank was the 8.2% reported by Canadian Imperial Bank of Commerce. An 8% risk-based capital ratio is the minimum level required.

Canadian Banks' Capital Prowess

Risk-based capital ratios as of April 30 Total Tier 1 capital/ capital/ assets assetsNational Bank 8.8% 5.2%

of Canada

Toronto 8.4 6.7

Dominion

Bank of 8.3 5.6

Montreal

Bank of 8.3 5.4

Nova Scotia

Royal Bank 8.3 5.2 of Canada

Canadian Imperial 8.2 5.5

Bank of Commerce

Source: Lehman Brothers Inc.

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