Tuesday, September 4, 2012

Seeking Alpha: Short RBC

2 Canadian Banks To Buy, 1 To Short On Housing Bubble Burst
There is sufficient data to suggest that the red hot Canadian housing markets are now cooling down. In the wake of recent developments in the Canadian housing markets, we have buy ratings for Toronto-Dominion Bank (TD) and the Bank of Montreal (BMO). These buy ratings are justified on the basis of the banks' higher proportion of insured mortgages, lower proportion of mortgage lending to their overall lending portfolio, and attractive valuations. Since the Royal Bank of Canada (RY) has no insured mortgages, we believe it is poised to take the maximum hit if the Canadian housing market bubble bursts, which is why we are bearish on the bank.
There is a rundown of each major bank.
Royal Bank of Canada (RY)

The bank, with a Tier 1 capital ratio of 13% and a Tier 1 common ratio of 10.3%, is adequately capitalized when compared to BNS. RY relies approximately 70% on Canada for its revenues, while the rest accrue from other international markets where it has its operations. Fitch considers the bank to have considerable exposure to the Canadian housing markets and faces the largest risk, as it uses less mortgage insurance as compared to most of its peers in the Canadian Banking Industry. In their conference call, after reporting the results of the third quarter of the current year, the management noted that the bank has the lowest insured mortgages of all the banks in Canada. The bank also has a large portion of its domestic mortgage loans to its overall lending. Going forward, we believe the bank will face a challenging operating environment, however, the bank's concentration on its credit card and commercial businesses will partially offset any adverse impacts.

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