Thursday, July 2, 2009

Canadian banks’ aversion to raising real equity, only succeeds in fooling Jim Flaherty

Yesterday on Canada Day, we learned that the Canadian banks failed to make the top 30 of global banking. All the while, Jim Flaherty is claiming to Canadians at every opportunity, that our banks are pillars of strength and global leaders?

This disconnect between real world fact and Flaherty’s fiction, arises in large part because of the Canadian banks’ unwillingness to raise real equity capital to bolster their balance sheets, and instead have resorted almost exclusively to raising billions since the financial meltdown, in the form of securities that are nothing more than “gimmick equity”, and which is effectively debt. It appears that the only person who has been fooled by this bank scheme of issuing gimmick equity is Canada’s Finance Minister.....and any Canadian foolish enough to believe in his wares.

This gimmick equity issued by the Canadian banks goes by the generic name of “preference securities”, and is essentially debt, since the interest that is paid on this “equity” is deductible from the earnings of the bank, in the way that dividends on true equity is not.

As such, we have a tax/regulatory scam of sorts going on here. If nothing else it is a completer contradiction in terms and contradiction in treatment ( by the same government), as one branch of the Department of Finance (OSFI) treats these securities as equity (when it comes to the question of the capital adequacy of the banks) and on the other hand we have another branch of the Department of Finance (CRA) treating these securities as debt (when it come to treating the payment on these securities as tax deductible interest).

This is fooling no one, except Canada’s Minister of Finance. It also makes a complete hypocrisy of Jim Flaherty’s income trust tax, that will see income trust distributions which is equity paid by Canadian businesses taxed at the rate of 31.5% when these massive payments of interest paid on Canadians banks’ “equity” being taxed at ZERO?

Such are the consequences of lobbying Ottawa for favorable tax regimes and industry carve outs.

This type of smoke and mirrors approach by Jim Flaherty to the solvency of Canadian banks in completely analogous to his so called solution to the issue of under funded pensions, that would grant companies 10 years to make up their shortfalls, rather than the customary 5 years.

As with preference securities, “solutions” of this nature are only notional/token solutions, as the substance of the problem has gone completely unaddressed. Much like our Finance Minister himself. A person completely lacking in substance.

Canadian banks fail to make top 30 of global ranking

CIBC ranks 15th in world for worst losses

By Eric Lam,
Financial Post
July 1, 2009

Federal Finance Minister Jim Flaherty has touted Canada’s banking system as the best in the world in the past few months, but the latest rankings from a top financial publication show that not every member of the Big Six has been as lucky in escaping the global financial crisis.

Contrary to Mr. Flaherty’s rhetoric, no Canadian banks made it into the top 30 of The Banker magazine’s annual list of 1,000 banks, sorted by capital strength, released on Tuesday. Capital strength, as defined by the Financial Times magazine, includes only the core of a bank’s strength: common stock, disclosed reserves and retained earnings and excludes such things as cumulative preference shares, revaluation reserves, and long-term debt.

However, with losses of some US$4.3-billion, the CIBC can call itself the 15th worst bank in the world when it comes to the largest losses, capping off a disastrous 2008. By contrast, one Canadian bank clinched 10th spot out of 25 in terms of profit: Royal Bank of Canada.

“CIBC has been heavily involved in capital markets in the U.S., which are high risk,” said Colin Cieszynski, an analyst with CMC Markets. “It’s the cyclicality of the business, and they’ve had their issues in the past.”

The bank posted losses of C$1.46-billion and C$1.1-billion in the first two quarters of 2008 alone as CIBC took the brunt of the U.S. credit crunch.

The bank did come in 71st in the overall rankings, down two spots from last year.

Still, CIBC’s losses pale in comparison with the mammoth US$59.3-billion shortfall suffered by the Royal Bank of Scotland that landed it the dubious honour of top spot on the list.

Rounding out the top three is a pair of American banks, with Citigroup down US$53-billion and Wells Fargo & Co. close behind at US$47.8-billion.

Overall, banks on the top 1,000 list registered system profits of only US$115-billion, down 85.3% from US$780.8-billion registered last year, the magazine reported. As well, return on equity dropped to less than 3% from 20% in the same period.

The results are not altogether surprising, considering the carnage of the past year as banks around the world resorted to government bailouts to stay afloat.

The list also does not take into account major banks that failed outright, including Washington Mutual, the largest such failure in American history.

However, Royal Bank, which came in 34th in the overall rankings, did grab the 10th spot on the list of the top 25 banks by profit by earning about $6-billion in 2008.

That list was dominated by Chinese banks, holding the top two spots and three of the top five. The Industrial and Commercial Bank of China earned US$21.3-billion at the head of the list, while China Construction Bank Corp. came in second with US$17.5-billion in profit.

Santander Central Hispano is next at US$15.8-billion.

“These banks stuck to the basics of banking and did not get involved in some of the more complicated and highly leveraged financial instruments that caused so much damage at banks like Citigroup, Royal Bank of Scotland and UBS,” Brian Caplen, the magazine’s editor, said in a release. “In the case of Spain they were helped to do so by the strictures of a tough national regulator.”

The Banker also released a top 10 list of Canadian banks based on capital, and of note is Toronto-Dominion Bank taking over third place by swapping with the Bank of Montreal. TD Bank also jumped seven spots in the top 1,000 rankings to 46 as its capital strength rose 27% to US$20.9-billion from US$16.5-billion.

© Copyright (c) National Post


Anonymous said...


Are dividends paid on preferred shares treated as a tax deductible expense by banks?

If so, the granting of dividend tax credit to owners of preferred shares is nothing but a fiscal fraud.


CAITI said...


No, not tax deductible in the case of “preferred shares proper.”....however yes in the case with “preference securities”, which is the form of capital that the banks have been issuing of late.

These instruments are therefore, nothing more than tax deductible equity. The payments rececived on these instruments are treated as interest so their is no abuse of the dividend gross up going on here.

However the payments are also treated like interest by the banks themselves. as issuers. As such, the banks are servicing this “equity” with pre tax earnings, which is why they prefer to issue it, as opposed to servicing it with after tax earnings in the case of dividends on common shares or preferred shares. Plus this form of “equity” does not dilute their earnings per share, which the issuance of true equity (i.e common equity) would.

This is a classic case of having your cake and eating it too, as these securities have all the regulatory benefits of common equity, but none of the costs. The government is at the nexus of this inherent contradiction in its treatment for capital adequacy purposes and its treatment for tax purposes. One minutes it’s equity and the next it is debt, depending on what’s most favorable to the banks, but not their depositors or Canadian taxpayers, if truth be told.


Dr Mike said...

I guess the bigger question becomes "who is really running the show in Ottawa"??

Is this relationship between big business & our gov`t symbiotic or does big business run this place only for their own pleasure??

Where does the little guy on the street fit into this whole scheme??

It appears that you & I are the source of capital , we supply that capital to gov`ts & big business who run the show.

The gov`t supplies business with policy which will make them money who then slice & dice until they may , & I do mean may , throw us back a few crumbs.

It appears that the big cheese CEOs install gov`ts that are favorable to themselves.

Maybe we should just eliminate the middle man & have the Council of Chief Executives run the operation on their own.

They might as well install John Manley as PM while they are at it.

Dr Mike Popovich

corporatebully said...

RBC Bank President Gordon Nixon - Salary $11.73 Million


I'm a commercial fisherman fighting the Royal Bank of Canada (RBC Bank) over a $100,000 loan mistake. I lost my home, fishing vessel and equipment. Help me fight this corporate bully by closing your RBC Bank account.

There was no monthly interest payment date or amount of interest payable per month on my loan agreement. Date of first installment payment (Principal + interest) is approximately 1 year from the signing of my contract.
Demand loan agreements signed by other fishermen around the same time disclosed monthly interest payment dates and interest amounts payable per month.The lending policy for fishermen did change at RBC from one payment (principal + interest) per year for fishing loans to principal paid yearly with interest paid monthly. This lending practice was in place when I approached RBC.
Only problem is the loans officer was a replacement who wasn't familiar with these type of loans. She never informed me verbally or in writing about this new criteria.

Phone or e-mail:
RBC President, Gordon Nixon, Toronto (416)974-6415
RBC Vice President, Sales, Anne Lockie, Toronto (416)974-6821
RBC President, Atlantic Provinces, Greg Grice (902)421-8112 mail
RBC Manager, Cape Breton/Eastern Nova Scotia, Jerry Rankin (902)567-8600
RBC Vice President, Atlantic Provinces, Brian Conway (902)491-4302 mail
RBC Vice President, Halifax Region, Tammy Holland (902)421-8112 mail
RBC Senior Manager, Media & Public Relations, Beja Rodeck (416)974-5506 mail
RBC Ombudsman, Wendy Knight, Toronto, Ontario 1-800-769-2542 mail
Ombudsman for Banking Services & Investments, JoAnne Olafson, Toronto, 1-888-451-4519 mail

"Fighting the Royal Bank of Canada (RBC Bank) one customer at a time"