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AmericasFebruary 4 2008

Canadians’ capital building gives immunity from US

With mayhem in the banking sector in the US, the Canadian banks that have reported at their financial year end, October 31, 2007, appear to be sailing serenely on.
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In recent years, they have concentrated on capital building allied to diversification to try to render them less prone to credit and other problems.

All the banks, with the exception of Toronto-Dominion Bank (TD), made write-downs on structured credit products related to the US subprime problems in the fourth quarter. However, their exposure to structured products, with the possible exception of Bank of Montreal and Canadian Imperial Bank of Commerce, remains at a lower level relative to their size than those of US and European global banks and the Australian banks.

Three Canadian banks have had a downturn in pre-tax profits this year but the reasons behind them are all different. Bank of Montreal recorded significant losses in its commodities trading business as a result of a revision of its mark-to-market methodology, particularly in relation to its natural gas portfolio. TD’s pre-tax profit in the previous year was inflated by a one-off dilution gain on the sale of TD Waterhouse USA to Ameritrade, so ignoring this one-off, pre-tax profit grew 17.5%, comparable to its peers. And National Bank showed downturns in both net interest income and non-interest income in a year in which a new management team took over.

The ratio of gross non-performing loans to gross loans is well below 0.8% for all the banks reporting, so loan book quality is not an issue. However, concern does exist for banks with US banking subsidiaries, all of which are very active in the real estate market.

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