Danger signs in Canada’s economy and housing markets create a pessimistic view of Canada's Big Six
As members of Canada’s Big Six banks face challenges in key business lines, they’re starting to get attention from short sellers, including one made famous by a best-selling book and movie.
February’s round of fiscal first-quarter result announcements from Canada’s big banks was largely underwhelming, with four reporting earnings misses due to increased loan loss provisions — something that all but one of the banks did — and challenges in their capital-markets divisions. Spokespersons for the banks have downplayed their lower-than-expected earnings as not particularly concerning or stemming from unique events
The disappointing results weren’t a total surprise. Before the banks’ reports, some market observers pointed to lowing mortgage growth and high levels of housing debt as indicators of risk to the space. Now doubts are growing, as is the number of short sellers willing to bet on a collapse in the share prices of Canada’s financial giants.
“I’m calling for a simple normalisation of credit that hasn’t happened in 20 years,” Steve Eisman, a portfolio manager at Neuberger Berman who was made famous by The Big Short, told the Financial Times.
Eisman and others like him are taking short positions in TD Bank, RBC, and the like. The writing has arguably been on the wall for years: incomes have been lagging property prices, which have been boosted by loose lending, low interest rates, and lax controls on foreign money.
But with tighter mortgage rules and new taxes on foreign investment in place, the housing market has begun to cool. The broader economy has also begun to falter; Canada saw lower-than-expected GDP growth last year, according to recent numbers from Statistics Canada. Expectations of slowed-down consumer spending, rising debt costs, and challenges in the oil sector have also prompted more dovish Canadian GDP forecasts.
“This is not ‘The Big Short: Canada’ — I’m not calling for a housing collapse,” Eisman said, explaining that his forecast of credit normalization would hurt banks and the real estate sector, but not to the same extent that the 2008 financial crisis hurt the US market.
Citing data from S3 Partners, the Times said wagers against Canadian banks have risen 19% since the start of the year, reaching US$12.3 billion. According to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, declines in the country’s property market after years of growth are driving that activity.
“Unsold inventories are beginning to stack up,” Dusaniwsky said. “Even the turbocharged markets of Vancouver and Toronto are experiencing slowing demand and price fragility.”
Eisman has been bearish on Canadian housing for as far back as 2013, when he presented a short thesis at the Ira Sohn hedge fund conference in New York, according to the Times. In 2018, he took short positions against Canadian banks, and increased those positions this year; he didn’t reveal names or the extent of his positions.
“Canadian banks are an oligopoly,” he said. “They’re not mentally prepared.”