'That is a strange call' - Macleans.ca

‘That is a strange call’

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In international news coverage unrelated to the Prime Minister’s bathroom habits, the Wall Street Journal’s John Jannarone doesn’t think much of our economist’s suggestion that buying opportunities abound for our banks. Full dismissal after the jump.

Canada’s wilderness is renowned for big-game hunting. While the country’s banks may be tempted for a shot at foreign M&A, now isn’t the time to head abroad.

Canada’s banks have so far stayed profitable, and their toxic-asset exposure is probably manageable. Encouraged by this, Canadian Prime Minister Stephen Harper has suggested they score some international trophies, possibly in the U.S.

That is a strange call. Canada’s central-bank governor says the economy likely experienced the deepest contraction since 1961 in the first quarter, and unemployment stands at 7.7%.

A weak economy hurts domestic banking operations, with business and consumer borrowers struggling to cope. Peter Rozenberg of UBS reckons loan-loss provisions will rise to 0.73% of total loans in 2009 from 0.44% last year.

Given those pressures, purchases of beaten-down U.S. banks would be seriously risky. Existing U.S. operations already are weighing on the Canadians. Toronto-Dominion Bank, for example, has 30% of its loan assets in the U.S. Loss provisions on U.S. loans rose 78% sequentially in the bank’s first fiscal quarter, while provisions for Canadian loans rose 27%.

True, there are opportunities further afield. But aside from Bank of Nova Scotia, Canadian banks have little experience beyond North America. Changing a fundamental strategy would be distracting, at best, right now.

Mr. Harper should be happy his country’s banks are still in decent shape and encourage them to stay that way — not risk their stability on calling the bottom of the banking crisis overseas.