Commercial Real Estate Finance

It turns out not every Canadian is a dim-witted Dudley Do-Right riding backwards on his horse.  In fact, the Canadian’s have proved they know what they’re doing when it comes to running large, private banks.  In a time when the largest U.S. banks are suffering from rapid deterioration of market value, Canadian banks are actually improving their market cap without having to engage in dilutive capital raises.  There’s no doubt that RBC, TD, Bank of Nova Scotia, Bank of Montreal, and CIBC (the 5 largest Canadian banks) have weathered the economic downturn far better than their U.S. counterparts.  In many instances Canadian markets move in step with U.S. markets, so what could be the reason for the relatively strong health of our banking neighbors to the north?

Well, the reasons are fairly obvious and are both coincidental and strategic in nature.  It’s the strategic differences in Canadian and U.S. banking that is more interesting since those differences are factors the banks can actually control.

On the whole, Canadian banks have willfully been a lot more conservative than their U.S. counterparts.  They were about 50% less leveraged than banks in the U.S. leading up to the housing collapse of 2007.  Also, they relied less on the commercial paper market to fund long-term obligations.  These two strategic factors alone coupled with stricter underwriting and securitization requirements on the part of the regulatory authority are probably responsible for the bulk of Canadian banks’ good health.  Immediately, I can see parallels to this conservatism when it comes to real estate ownership and development.

It’s the owners and developers who were the most aggressive in making acquisitions and developing projects in the last decade that are suffering the worst now–similar to U.S. banks who acquired bogusly valued assets and overextended themselves.  On the other hand, owners and developers who were conservative leading up to the recession (more like Canadian banks) are well-poised to take advantage of opportunities as they become available.

Interestingly, the conservative mindset of Canadian banks has persisted through the correction in valuation of financial institutions.  While Goldman Sachs, JP Morgan, and Bank of America decided to opportunistically snatch up their suffering rivals, Canadian banks continued to sit back and pursue their conservative, organic expansion strategies.  Will this prove to be good or bad for Canadian banks?  Only time will tell.  B of A already regrets having jumped on the Countrywide and Merrill Lynch opportunities in an effort to exploit synergies and expand market share.  Goldman and JPM, however, look like they could turn out to be pretty happy with their risky acquisitions.

What will owners and developers of commercial real estate do?  Will they adopt the strategy of U.S. banks and opportunistically scoop up assets in spite of risk?  Or having been burned once already will they pursue the “slow and steady” model of the Canadians?  Ordinarily, the words “Canadian” and “strategy” would only be side-by-side when discussing a game of ice hockey.  But it seems that our brethren to the north are bringing a powerful punch to the discussion about banking strategy as well.

If you enjoyed this post, make sure you subscribe to my RSS feed!