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.

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