Are Banks choosing Provincial bonds over Commercial loans?

Has your broker ever tried to get you to look at a “relatively juicy” Provincial bond yield of late? Despite the historically tight spread you’re earning over Canadas, you might want to consider their advice; you’ll be in good company.

According to data from the Bank of Canada, Canada’s chartered banks have been flowing more money into Provincial and Muni bonds of late than the commercial and corporate bank loan market. It’s either i) an investment strategy at work, ii) Bank loan portfolio managers prefer the risk / reward profile of Provincal bonds and Munis over new corporate/commercial loans, iii) there’s not enough commercial loan demand, or iv) a combination of all of these points.

Over the past 18 months (as of November, which is the most recent data):

Corporate and Commercial loans outstanding from Chartered Banks:

November 2011: $176.7 billion
March 2010: $169.5 billion

Provincial and Municpal bond securities held by Chartered Banks:

November 2011: $48.6 billion
March 2010: $32.1 billion

Ignorning the relative percentage changes, which are stark, it’s pretty clear that provincial and municipal bonds got more new dough from the banks over the last 18 months than corporate and commercial borrowers. What gives? Bankers dumped almost $80 billion of dollars of Federal paper during the same period (into a strong rally I’d note), but bought sub-nationals instead.

As we try to do each month, here are the updated figures on corporate drawdowns. The category is “Business loans to Canadian residents for business purposes”:

December 2008: $191.563 billion
January 2009: $185.679 billion
February: $183.759 billion
March: $184.089 billion
April: $181.811 billion
May: $178.691 billion
June: $176.365 billion
July: $174.664 billion
August: $173.818 billion
September: $171.152 billion
October: $171.091 billion
November: $168.425 billion
December: $169.430 billion

January 2010: $167.892 billion
February: $168.104 billion
March: $169.495 billion
April: $169.163 billion
May: $166.378 billion
June: $165.369 billion
July: $166.988 billion
August: $164.774 billion
September: $163.976 billion
October: $168.401 billion
November: $168.892 billion
December: $169.170 billion

January 2011: $170.42 billion
February: $171.800 billion
March: $174.028 billion
April: $175.198 billion
May: $173.974 billion
June: $176.527 billion
July: $177.574 billion
August: $177.654 billion
September: $176.856 billion
October: $178.214 billion
November: $176.705 billion

A nice bump in the first four months of 2011, but lending has been flat since June. Right on the heels of May’s 500 point drop in the Dow Jones. And by August, stocks in the Dow 30 were off 16% over the prior 12 weeks or so. Perhaps those bank RAROC models are good predicters of volatility.

MRM