Could it be that the Banks and Flaherty are both right? part 3

I have a solution to solving the “Are Banks Lending?” confusion (see prior post “Could it be that the Banks and Flaherty are both right? part 2” January 9-09). It all starts with getting the requisite information. If the public had the data, they’d be better placed to adjudicate the stark difference in the positions between Finance Minister Jim Flaherty and the Canadian Bankers Association, et al.

The key is far better quarterly disclosure of segmented loan growth. As much as we can dig into the weekly lending data that’s released by the Bank of Canada, it really should be the banks who tell their investors the lay of the land. Why is it left to bloggers and the media to figure it out on their own? And even then, that isn’t alwasy possible.

Let’s look south of the border at how Bank of America (BAC:NYSE) discloses their quarterly lending figures. This from last week’s quarterly financial press release:

“Customer Highlights

— Of the more than $115 billion in new credit extended during the quarter, about $49 billion was in commercial non-real estate; $45 billion was in mortgages; nearly $8 billion was in domestic card and unsecured consumer loans; nearly $7 billion was in commercial real estate; more than $5 billion was in home equity products; and approximately $2 billion was in consumer Dealer Financial Services.

— During the fourth quarter, Small Business Banking extended nearly $1 billion in new credit to over 47,000 new customers.

— Mortgages made to low- and moderate-income borrowers and areas totaled $11.3 billion in the fourth quarter, serving more than 77,000 borrowers.

— To help homeowners avoid foreclosure, Bank of America and Countrywide modified approximately 230,000 home loans during 2008. This year the company embarked on a loan modification program projected to modify over $100 billion in loans to help keep up to 630,000 borrowers in their homes. The centerpiece of the program is a proactive loan modification process to provide relief to eligible borrowers who are seriously delinquent or are likely to become seriously delinquent as a result of loan features, such as rate resets or payment recasts. In some instances, innovative new approaches will be employed to include automatic streamlined loan modifications across certain classes of borrowers. The program utilizes an affordability equation to qualify borrowers for loan modifications at a targeted first year mortgage debt to income ratio of 34 percent.

— The company established a lending initiative group: senior officers meeting with the chief executive every week to evaluate how much Bank of America is lending, to whom, and what more can be done while remaining prudent and responsible. The company will report findings monthly.

In clear script, we now know i) how much “new” credit was advanced during the quarter, ii) the sectors that saw the capital, iii) that of the US$115 billion of new capital, US$49 billion went to “commercial” (larger corporates) but less than US$1 billion went to 47,000 small business customers (US$21k per client), and iv) the public will now be able to assess BAC’s business on a monthly basis. Talk about a “best practice”. BofA deserves a medal for the detail, pretty or otherwise.

Although the U.S. Congress may be driving the banks “to tell more of the story”, I’m not entirely sure why we haven’t seen a similar effort on our side of the border. I randomly pulled up the quarterly press releases of three banks (CIBC, National and Scotia) and you might be amazed by what you will and won’t find:

CIBC

– the supplementary financial disclsoure covers 49 pages, but the best you’ll do is uncover which sectors of the economy saw increases/decreases in loan volume. Nothing about “small business” as a category, for example, let alone a discussion about how many new customers were added or how many customers got new credit.
– loans to business and gov’t did jump $5 billion in the quarter, from $34B to $39B, with $1.3B of new capital going to the mining industry alone!
– there were $21.3 billion of undrawn loan commitments to businesses and govt’s, as compared to $83.7 billion of loans outstanding; just think what might happen if they are all drawn as the recession deepens? (CIBC had about $9 billion of cash on deposit with other banks)
– you will see that loans to students dropped to $859 million from $1.28 billion two years ago, even as credit card loans, personal loans and mortgages all grew over the same period. Wonder why.

National Bank

– their supplementary financial statements share a bit more information
– Personal and Comercial loan volumes increased 7% yr/yr
– avg. monthly volumes in SME loans increased to $15.3B from $14B yr/yr
– avg. monthly volumes in corporate loans increased to $7.1B from $6B yr/yr
– there is a facinating chart on pg. 19 showing National’s daily trading revenue and losses as compared to “Value at Risk”; daily trading generated a profit on 65% of the trading days in the quarter — better results than the “House” gets in Las Vegas; net trading losses in excess of $1 million were recorded on 22 days during the 4th quarter, but there was a huge $20 million single day trading win that came what appears to be three days before the end of the fiscal quarter/year.

Scotiabank

– avg. Canadian banking assets grew by 14% for the entire year;
– average Canadian business loan balances for the 4th quarter rose to $28B from $26B in Q3; interestingly, International business loan avg. balances rose even faster, from $36B for Q3 to $40B for Q4; it isn’t clear to me why Scotia Capital also reports business loan balances, but they do: $58B vs. $57B in Q3;
– undrawn credit risk (appears to be both personal and corporate credit) of $72.4B, of which $44B is in Canada. This figure was flat to the prior quarter, but drawn Canadian credit risk increased by $10B during the quarter.
– and that’s all the information you’ll garner from a press release and a 35 page supplementarty financial package

This snapshot of three random Canadian banks makes it clear that Bank of America, for all of its problems, is far more transparent about their specific experiences in SME lending. Although monthly updates might be overkill, BofA’s investor relations’ team seems highly sensitive to the pressure emanating from elected officials in Washington, D.C., and by putting the numbers out there, the likelihood of being called to a Congressional hearing to discuss loan portfolio growth is diminished.

If the banks want to end the PR battle with Jim Flaherty, this would do it:

– how much new credit was approved and advanced (separate concepts) during the quarter, by marketplace and geography, for commercial (SME and non-SME) and corporate clients?
– how many new borrowing clients were added during the quarter (same categories as above)?

These figures will remove any doubt about which side of the argument has the moral highground. The other way to go would be for the House of Commons Finance Committee to pick up the ball once the House comes back. And they can ask about the Fording tax avoidance trade while they’re at it (see prior post “Fording tax avoidance deal poses questions” November 6-08).

The banks are doing a good job protecting their shareholders and depositors. But, fair or not, that’s not good enough right now. Although it might not be fair to be the constant whipping boy of Confederation, there are a few simple improvements that could be made to quarterly disclosure. Having achieved best practices and the highest rankins in the Corporate Governance universe, now is the time to win the award for financial statement clarity and transparency.

MRM
(disclosure – we own BNS in our household)