With Toronto-Dominion Bank laying out $8.5-billion and Royal Bank of Canada forking over $2.2-billion in a pair of big foreign acquisitions, the largest players in the country's banking sector are sending a signal that they are not too concerned about the spillover from the asset-backed commercial paper mess.
There's been some talk that banks would have to eat such a big chunk of ABCP to support the floundering market that they won't be able to use capital for anything else. Bank executives confirm that from time to time their trading desks are holding more ABCP in inventory as the market is still choppy, a development that is nibbling away at capital, but the market is improving and it's happening less and less.
And by their actions, Ed Clark and Gordon Nixon are saying they believe the worst is past.
To be sure, TD is a bit player in the ABCP market, but Royal Bank is one of the biggest, with a large securitization program and about $40-billion of paper for which it has given liquidity guarantees. If Mr. Nixon was really all that concerned that he'd end up holding $40-billion of paper on his books, there's no way he'd be burning precious capital on the acquisition trail.
And even if a fair amount of that paper did end up on the banks' balance sheets, Canadian lenders are so sturdily capitalized it would scarcely matter, BMO Nesbitt Burns analyst Ian de Verteuil wrote in a recent report.
"The current 'boogey man' -- the possible unwinding of bank sponsored conduits -- isn't nearly as scary as some might think," he wrote, noting that "a full assumption of the conduits (with punitive assumptions for risk weightings) has the potential to lower Tier 1 ratios to 8.7% from the current level of 9.6%. While this is not an inconsequential change, Canadian banks could handle such a development and their Tier 1s would still be among the best in the world."
The analyst went on to point out that when a similar situation developed in Australia, where the CP market also convulsed and banks had to support the securities by taking them back, bank shares barely moved.