Could it be that the Banks and Flaherty are both right? part 2

I enjoy decoding riddles.

Canadians are telling Finance Minister Jim Flaherty that they can’t get credit. The Banking Oligarchy is saying they are doing all they can to make loans available to “credit worthy” clients, and that their business loan portfolios are actually growing during the recession (see prior post “Could it be that the Banks and Flaherty are both right?” January 7-09). Hmmmm.

I saw that bank loans to Businesses are up $6.8 billion (3.7%) YTD as of November 2008, something that the banks are touting to wire service journalists in what can only be called an excellent PR counterattack.

The Bank of Canada puts out good weekly numbers, so you can follow along if you like. But I think that the numbers might be lying. At least, they may not be telling the story that my banking friends would like you to believe.

We just need to apply the same “mega deal outlier” analysis to the stats that is done every day with Investment Banking lead tables. If there’s one big deal that skews the underwriting lead table figures in favour of a competitor, you use a nice footnote to explain why XYZ firm really isn’t the powerhouse they claim to be.

In October, business loans to domestic borrowers stood at $190.9 billion. In November, that figure had apparently shrunk just a titch to $189.8 billion.

As I recall, November was the month that four Canadian banks did some mega business lending (see prior post “Fording tax avoidance deal poses questions” November 6-08). BNS did the $2.3 billion “Fording Tax Trade”, while BMO, CIBC and Royal Bank each put up 13.3% of the US$9.8 billion in new bridge and term debt that Teck (TCK.B:TSX) required for its company-risking acquisition of Fording Canadian Coal Trust. Those two deals together amount to C$7 billion of new corporate debt on the books (using 1.2 for the US$). Even if the BNS deal was of a short term nature and paid off in November, didn’t three Canadian banks strap on C$4.7 billion of new business debt that month, just from this one deal?

A deal that actually cost jobs and led to a $500 million dividend reduction? This from today’s Globe and Mail:

The country’s largest base metals miner is trimming 1,400 jobs including 550 in Canada. Teck said the move will lead to annual savings of $85-million a year, less than 1 per cent of the $9.8-billion (U.S.) in debt it took on to buy Fording Canadian Coal Trust last year at the height of the commodities boom.

Assuming that the three domestic banks held their entire piece, isn’t $4.7 billion of that $189.8 billion November business loan figure really just new debt for Teck? Back it out, and business loans dropped $5.8 billion during November, a full 3%.

Banks can use the Bank of Canada stats if they like, but don’t count the Teck figures as proof that business loans are actually growing. Not to mention the fact that the high leverage at Teck just cost 550 Canadians their jobs, forced a dividend cut, and will require a spate of asset sales as the clock ticks on the US$5.8 billion bridge that comes due this October.

MRM
(disclosure – we own BMO and BNS in our household)