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Nov 29, 2017

Royal Bank CFO remains 'bullish' despite short-sell call

RBC CFO on the latest short call: Canada's mortgage market very unlike the U.S. during crisis

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RBC’s Chief Financial Officer is unfazed by American calls to short his bank, saying he remains bullish on the Canadian banks.

Rod Bolger told BNN on Wednesday that Canada’s banks are well situated to withstand any potential housing downturn in light of the current low interest rate environment.

“We look at the quality of our book and if you look back over history and look back over 40 years in Canada, the low-point from a housing perspective was the early ‘90s and our loan-losses on the mortgage book topped out at 10 basis points, which is extremely low,” Bolger told BNN.

“Alberta, when the unemployment rate doubled, it went up to five basis points. So when we’re at one and two basis points, that is where the Canadian market is.”

 



 

Bolger was responding to a call made on Tuesday by Atlanta-based PAA Research to short the banks as lenders stare down potential cracks in the Canadian housing market. PAA laid out a short case against RBC and CIBC specifically and suggested in a worst case scenario the bank stocks could plunge by 50 per cent or more over the next three years.

"Time and time again in the two and half years that we have been following the Canadian housing market investors have suggested to us that the Big 5 Canadian Banks will be protected at any cost by the government. They are by all accounts ‘Too big to fail’. We get it," wrote PAA Research Founder and CEO Bradley Safalow in a report to clients Tuesday.

"There’s a huge difference between something that is deemed too big to fail and a good short."

McCreath: Short seller's call on Canadian banks 'dead wrong'

BNN Commentator Andrew McCreath weighs in on Atlanta-based PAA Research's short call against Royal Bank and CIBC. He says that PAA CEO Bradley Safalow doesn't understand the differences between how banks operate in Canada versus the U.S.

Bolger believes this approach overlooks the differences between the Canadian and American banks, hitting on some of the same issues raised earlier on Wednesday by BNN’s Andrew McCreath. He noted that Canadian banks keep the mortgages on their books instead of farming them out to government-sponsored entities, differences in the Canadian tax rules in regards to mortgages, the higher percentage down payments on average in Canada and the fact that borrowers are on the hook for their mortgages.

“I’m an American, I’ve been through some downturns in the housing market: Canada is a very different market,” Bolger said. “Short-sellers have always been looking for that opportunity.”

Bolger also pointed to comments former Bank of Canada governor David Dodge made to BNN on Tuesday. He said "those who short Canadian banks historically have lost money … And I think they will lose money going forward on that as well."

“He gave a compelling reason why the Canadian banks are strong performers over time and that’s in the short-term and the long-term,” Bolger said. “We’re still quite bullish on the banking environment here in Canada.”

RBC reported an earnings beat on Wednesday to the tune of a 12 per cent jump in its fourth-quarter net income, good for a $11.5 billion profit for its fiscal year.

The bank reported $10.52 billion in revenue for the fourth quarter, up 12.3 per cent from a year earlier and earnings per share of $1.92 (excluding one-off items).

- With files from The Canadian Press