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Analysis: Canada banks steal quiet march as Wall Street retreats from energy | Business | Reuters

Analysis: Canada banks steal quiet march as Wall Street retreats from energy | Business | Reuters.

The logo for the Bank of Montreal is seen at its branch Toronto, March 5, 2013. REUTERS/Mark Blinch
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By Nia Williams

CALGARY, Alberta (Reuters) – As Wall Street’s giants pull back from the energy business, Canadian banks are stepping forward, aided by booming domestic oil production and a reputation for prudence.

Bank of Montreal (BMO.TO: Quote), Canadian Imperial Bank of Commerce (CM.TO: Quote) and Bank of Nova Scotia (BNS.TO: Quote), long-time niche players in energy trading, hedging and dealmaking, are expanding their operations both north and south of the U.S. border, executives told Reuters.

In total, commodity trading revenues at the three banks rose by 30 percent last year, according to a Reuters review of their annual reports. Executives say it has been a struggle to match that performance this year, but that they are still gaining ground.

“We have been able to pick up market share not only in our home market but able to rapidly grow our business in the U.S. and overseas in places like the North Sea,” said Adam Waterous, a veteran oil banker who heads Scotiabank’s global investment banking team, which is based in Calgary, Canada’s oil capital.

With their reputation for caution, Canadian banks say they are unlikely to copy their U.S. counterparts and start amassing physical assets such as metal warehouses or oil storage terminals. Big Wall Street banks including JPMorgan Chase & Co. (JPM.N: Quote) and Morgan Stanley (MS.N: Quote) are looking to sell their physical trading desks as regulatory scrutiny increases and returns diminish.

“This is the fourth time in my career I have seen Americans come and go,” Waterous said.

Scotiabank is by far the biggest commodity trader in Canada, due in large part to its long-held ScotiaMocatta precious metals venture. Scotia reported a 26 percent rise in commodity trading revenues to C$425 million ($397 million) last year.

Of the other “Big Five” Canadian banks, Toronto-Dominion Bank (TD.TO:Quote) does not break out commodity trading revenue figures, but Royal Bank of Canada’s (RY.TO: Quote) trading revenues for foreign exchange and commodities climbed by 11 percent last year.

OIL VETERANS

Canadian banks have a long history in the energy sector as a result of their involvement in the expansion of Alberta’s oil sands and the country’s status as the world’s sixth-largest producer of crude.

That opportunity is now expanding as more producers look to hedge output in Canada, which is expected to more than double to 6.7 million barrels per day by 2030. New products, such as CME Group’s Edmonton Sweet oil futures, which was launched this week, open new avenues for trading.

Thanks to a culture of conservative and cautious lending, Canadian banks emerged from the global financial crisis with reputations intact and some of the strongest credit ratings in the world.

“There’s a coming of age. In Canada there is the oil sands and in North America there’s the shale revolution that provides a great opportunity for our skill set and our history,” said Shane Fildes, head of global energy at Bank of Montreal, whose commodity trading-related revenues surged 65 percent to C$66 million in 2012.

Fildes said BMO’s energy trading desk expanded recently to five people from three, and its energy business as a whole employed 65 people in Calgary and 45 in Houston. The bank recently hired Paul Dunsmore from Barclays (BARC.L: Quote) to beef up its commodities derivatives team.

“The counterparty credit of being a Canadian bank is a very smart calling card in this environment,” he said.

At CIBC, commodity trading income rose 20 percent to C$52 last year and headcount has also increased across sales, trading, research and analytics, said Arden Majewski, who joined the bank two years ago to run its global commodities business after working for Swiss-based merchant Mercuria and for Merrill Lynch.

Scotiabank, whose commodity business is the largest and most established, has a history of stepping in when foreign banks pull back. Three years ago it bought much of UBS’s (UBSN.VX: Quote) Canadian commodities trading platform technology, when the Swiss bank exited Canadian energy trading. It bought U.S. energy investment boutique Howard Weale last year.

In September, RBC hired Kathy Kriskey from CIBC as head of commodity investor sales in New York to develop the bank’s commodity index products.

But in the scramble to pick up Wall Street business Canadian banks face competition from foreign banks such as Australia’s Macquarie MQG.AX and Brazil’s Grupo BTG Pactual SA (BBTG11.SA: Quote) as well as from private equity-backed merchants such as TrailStone and national giants such as Russia’s Rosneft (ROSN.MM: Quote).

TRADING OPPORTUNITIES

While many Wall Street banks embraced physical energy trading, Canadian banks have so far shied away.

CIBC, Scotiabank, TD, and RBC do trade physical natural gas, a homogenous product that is easy to value. As well, BMO is in the middle of an approval process to trade physical natural gas, and the bank expects the process to be completed early in 2014.

None of the banks are involved in physical crude trading, however, which would entail greater investment in logistics and storage, Calgary market players said.

That makes them unlikely bidders for businesses such as JPMorgan’s physical commodities desk, which is in the second stage of a sale, or the asset-rich oil and power operations at Morgan Stanley, which has tried in vain for more than a year to find a buyer for that desk.

Instead, the Canadians concentrate on trading financials – crude derivatives contracts, usually based on the U.S. West Texas Intermediate benchmark – that enable clients to hedge their exposure to price swings in oil markets.

Client hedging activity tends to increase sharply in relation to oil market volatility. Bank traders in Calgary said they expect hedging demand to stay strong because of booming North American production and supply bottlenecks that exacerbate the discount on Canadian crude.

“With the U.S. investment banks that have pulled out of Canada, there would be more opportunity for these guys to fill that void,” said Brian Klock, equity analyst at KBW Inc.

($1=$1.07 Canadian)

(Editing by Jonathan Leff; and Peter Galloway)

 

Manufacturing’s Decline A Bigger Problem Than Housing Bubble: BMO

Manufacturing’s Decline A Bigger Problem Than Housing Bubble: BMO.

Heinz shuts down its plant in Leamington, Ont., laying off more than 700 and ending a 104-year-long presence in the town. Three weeks later, Kellogg’s shuts down its plant in London, Ont., erasing 500 jobs. Days after that, drugmaker Novartis announces its pharmaceutical plant in Mississauga will shut down, taking 300 jobs with it.

Add it all up, and what you have is the largest medium-term threat to Canada’s economy, BMO chief economist Doug Porter said in a client note this week.

Porter noted that Ontario has lost 4 per cent of all its manufacturing jobs in the past year — something he understatedly describes as “not good.” Canada overall lost 2.5 per cent of all its manufacturing jobs this year, the Wall Street Journal notes — and that’s despite a recent rise in manufacturing output.

There are now more jobs in health care in Ontario than there are in manufacturing; as recently as 2000, there were twice as many factory jobs as health care jobs.

bmo jobs chart

The decline of factory jobs is taking place even as manufacturing around the world, particularly auto manufacturing, is experiencing a boom — one that appears to bepassing Canada over.

“It would seem to us that this is a much bigger issue for the medium-term Canadian outlook than the more hyped housing bubble/household debt concern,” Porter wrote.

The Bank of Canada appears to disagree, once again reiterating this week that it sees high house prices and record high consumer debt levels as the dominant domestic risk to the economy.

But maybe those two risks aren’t entirely unconnected. As manufacturing employment wanes (even with manufacturing output growing), the real estate boom has picked up much of the slack, and construction employment is at or near record highs in Canada today.

But few market observers, even those optimistic about the future of the housing market, expect this juggernaut to continue. That’s why economists are constantly looking to external demand (i.e. exports) to pick up the economic slack from a housing boom that’s expected to level off.

On that front, there is some hope for good news, BMO economist Robert Kavcic says.

“With the high-profile job cuts in Ontario’s manufacturing sector piling up, there might be some reprieve coming from the weaker loonie and stronger expected U.S. growth,” he writes.

“But keep in mind that a weaker currency won’t help overnight — the impact tends to filter through over the course of at least two years.”

So here’s hoping the housing construction boom keeps up for a few more years, or Canada could get a nasty surprise in future unemployment reports.

 

Personal debt ratio hits record high of 163.7% – Business – CBC News

Personal debt ratio hits record high of 163.7% – Business – CBC News.

Canadians’ debt ratio increased last quarter, but so did the value of their assets, so the national net worth increased. (The Associated Press)

The amount that Canadians owe compared to their disposable income rose to an all-time record last quarter, although their net worth also increased.

Statistics Canada reported Friday that the level of household credit market debt to disposable income increased to 163.7 per cent in the third quarter from 163.1 per cent in the second quarter.

That means Canadians owe nearly $1.64 for every $1 in disposable income they earn in a year.

‘The seasonal bounce in mortgage borrowing in the previous quarter picked up into the fall’– Royal Bank economist Laura Cooper

Policymakers are fixated on the debt ratio in part because it was at above 160 per cent that households in the United States and Britain ran into trouble about five years ago, contributing to defaults and the financial crisis that triggered the 2008-09 recession.

Debt loads can be influenced by seasonal factors, and although the headline figure is higher, the rate of growth in that ratio was the smallest in 12 years.

“Those figures should be encouraging for policymakers and suggest that the Bank of Canada’s belief that imbalances are evolving constructively is right on the mark,” said Benjamin Reitzes, a senior economist with BMO Capital Markets.

Indeed, while they are borrowing more, Canadians are also worth more as their assets increase by a similar amount. The national net worth increased to $7.5 trillion in the third quarter, up 2.1 per cent from the previous quarter.

On a per capita basis, that works out to $212,700 for every Canadian. The previous quarter, that figure was $208,300.

Canadians saw their financial assets go up in value, as well as their non-financial assets (such as houses) do the same. The value of shares and other equities gained 3.7 per cent in the quarter, while the value of household real estate gained 1.5 per cent.

“The pace of debt accumulation picked up slightly in the third quarter as the seasonal bounce in mortgage borrowing in the previous quarter picked up into the fall,” Royal Bank economist Laura Cooper said.

HOUSEHOLD DEBT RATIO

With files from The Canadian Press

BMO, RBC, TD Hike Mortgage Rates; Economists Wary Of Effect On Housing Market

BMO, RBC, TD Hike Mortgage Rates; Economists Wary Of Effect On Housing Market.

 

Canadian housing boom in ‘9th inning’ – Business – CBC News

Canadian housing boom in ‘9th inning’ – Business – CBC News.

 

Canadians In Debt: 14 Per Cent Expect Debt To Follow Them To The Grave

Canadians In Debt: 14 Per Cent Expect Debt To Follow Them To The Grave.

 

Number Of Canadians In Debt Leaps As Repayments Shrink: BMO

Number Of Canadians In Debt Leaps As Repayments Shrink: BMO.

 

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