1 00:00:14,520 --> 00:00:17,440 Speaker 1: Hello, and welcome to the Credit Edge for Weekly Markets podcast. 2 00:00:17,840 --> 00:00:20,800 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:21,480 --> 00:00:23,360 Speaker 1: This week, we're very pleased to have on the show 4 00:00:23,600 --> 00:00:27,000 Speaker 1: Way Sho, who covers credit markets for Bloomberg News in 5 00:00:27,080 --> 00:00:27,600 Speaker 1: Hong Kong. 6 00:00:27,960 --> 00:00:30,760 Speaker 2: How are you Way, I'm good, it's a nice day 7 00:00:30,800 --> 00:00:31,440 Speaker 2: in Hong Kong. 8 00:00:31,920 --> 00:00:34,400 Speaker 1: Great, Okay. We're also delighted to welcome back to the 9 00:00:34,400 --> 00:00:37,239 Speaker 1: show him Manshu Bakshi, who focuses on banks at Bloomberg 10 00:00:37,280 --> 00:00:39,800 Speaker 1: Intelligence in New York. We'll be coming back to him 11 00:00:39,800 --> 00:00:42,640 Speaker 1: Anshew in a bit later to talk about trouble bringing 12 00:00:42,640 --> 00:00:46,199 Speaker 1: in Canada. So do stay with us. But first way, 13 00:00:46,320 --> 00:00:50,240 Speaker 1: Joe with Bloomberg News, let's talk about China. You're writing 14 00:00:50,240 --> 00:00:52,640 Speaker 1: a lot about local government finances at the moment, and 15 00:00:52,640 --> 00:00:55,520 Speaker 1: there's a bit of a crisis going on. What are 16 00:00:55,840 --> 00:00:59,240 Speaker 1: local government financing vehicles and how do they work here? 17 00:01:00,200 --> 00:01:04,720 Speaker 2: They are special vehicles set by the local governments of 18 00:01:04,840 --> 00:01:11,600 Speaker 2: China to usually help with infrastructure projects like subways or 19 00:01:11,760 --> 00:01:15,320 Speaker 2: high roads. They are kind of like what's first set 20 00:01:15,400 --> 00:01:21,600 Speaker 2: up to skirt around the bank. Municipal authorities borrow directly 21 00:01:21,680 --> 00:01:25,240 Speaker 2: from banks or selling bounds directly in the market. 22 00:01:26,160 --> 00:01:29,920 Speaker 1: So instead of going to the market the municipality or 23 00:01:29,920 --> 00:01:31,679 Speaker 1: the state. Is it a city as. 24 00:01:31,560 --> 00:01:36,440 Speaker 2: Well, Yeah, it's on both a city level, county level, 25 00:01:36,560 --> 00:01:37,720 Speaker 2: or provincial level. 26 00:01:38,319 --> 00:01:42,800 Speaker 1: Okay, so they go they set up a special special 27 00:01:42,880 --> 00:01:47,520 Speaker 1: purpose vehicle in order to get funding for an infrastructure project. 28 00:01:47,920 --> 00:01:53,280 Speaker 2: Yeah, it's usually the case because generally LGF within China, 29 00:01:53,360 --> 00:01:58,680 Speaker 2: they are kid grass as a corporate dat so investors 30 00:01:58,720 --> 00:02:03,160 Speaker 2: generally assume that local governments are held responsible for them. 31 00:02:03,440 --> 00:02:07,040 Speaker 1: Okay, so how much debt do they have and what 32 00:02:08,240 --> 00:02:10,280 Speaker 1: form is it in? I guess it's in local bonds. 33 00:02:10,720 --> 00:02:16,600 Speaker 2: Yeah, they constitute a large part bunk of the local 34 00:02:16,720 --> 00:02:22,440 Speaker 2: debt market. It is estimate they have about a thirteen 35 00:02:22,480 --> 00:02:26,440 Speaker 2: point five trillion un of outstanding on shore bounds at 36 00:02:26,639 --> 00:02:30,840 Speaker 2: end of twenty twenty two, to give you an idea, 37 00:02:31,040 --> 00:02:35,760 Speaker 2: that's probably about forty percent of China's non financial corporate 38 00:02:35,880 --> 00:02:41,960 Speaker 2: debt market. So that's a significant part of the market. 39 00:02:42,200 --> 00:02:43,600 Speaker 1: Do we know that is in dollars? 40 00:02:43,960 --> 00:02:46,639 Speaker 2: Yeah, that's about like two trillion dollars. 41 00:02:46,720 --> 00:02:50,040 Speaker 1: Actually, well, it's a big chunk of debt. So you 42 00:02:50,080 --> 00:02:52,440 Speaker 1: say that they set up these vehicles. You know, if 43 00:02:52,480 --> 00:02:55,399 Speaker 1: we look at the US muni market, for example, we'd 44 00:02:55,440 --> 00:02:58,320 Speaker 1: expect the state or the local government's borrowing to be 45 00:02:58,400 --> 00:03:01,239 Speaker 1: directly responsible for paying that much back. Do the vehicles 46 00:03:01,760 --> 00:03:05,720 Speaker 1: help these borrowers somewhat like skirt the obligation. 47 00:03:06,400 --> 00:03:10,680 Speaker 2: Yeah, because, as I said, theoretically they are actually coperated 48 00:03:10,760 --> 00:03:16,800 Speaker 2: that so the local government are not naturally assumed to 49 00:03:16,919 --> 00:03:22,520 Speaker 2: hold responsible for them. But in reality, everybody know it's 50 00:03:22,560 --> 00:03:25,720 Speaker 2: the dat issued by the government. So I guess the 51 00:03:25,760 --> 00:03:28,720 Speaker 2: local government kind of have the model has the issue 52 00:03:28,760 --> 00:03:34,160 Speaker 2: here because investors do expect them to come to rescue 53 00:03:34,240 --> 00:03:36,360 Speaker 2: if there is a problem, right. 54 00:03:36,280 --> 00:03:38,480 Speaker 1: So right now we do have a problem. Can you 55 00:03:38,520 --> 00:03:41,960 Speaker 1: talk us through the actual crisis that's going on right now? 56 00:03:42,240 --> 00:03:47,000 Speaker 2: Yeah, I guess the problem. You know, it's always there, 57 00:03:47,120 --> 00:03:51,880 Speaker 2: but it's only made apparent better pandemic because during the 58 00:03:52,000 --> 00:03:56,520 Speaker 2: three year of pandemics, the local garment's physical revenue they 59 00:03:57,000 --> 00:04:01,640 Speaker 2: have they were like dropping in the meantime because of 60 00:04:01,800 --> 00:04:07,240 Speaker 2: a crisis related to the China's privaty market. Uh, the 61 00:04:07,280 --> 00:04:11,200 Speaker 2: big chunk of local garments revenue, which is land sale, 62 00:04:11,840 --> 00:04:16,640 Speaker 2: also come to a slide. So I guess like the 63 00:04:16,680 --> 00:04:20,680 Speaker 2: local governments are really struggling with their physical revenue, so 64 00:04:20,720 --> 00:04:26,960 Speaker 2: they have fewer abilities to give subsidies to this local 65 00:04:27,000 --> 00:04:32,600 Speaker 2: garnment financing vehicles. In the meantime, the local government financing 66 00:04:32,680 --> 00:04:38,120 Speaker 2: vehicles are not really self sustainable, so we can see 67 00:04:38,320 --> 00:04:42,279 Speaker 2: a few cases of last minute payment or cases of 68 00:04:42,480 --> 00:04:45,839 Speaker 2: technical default of df with this year. 69 00:04:46,440 --> 00:04:49,080 Speaker 1: So all of this money, there's there's two trillion dollars 70 00:04:49,120 --> 00:04:52,480 Speaker 1: worth of money, and we're starting to see defaults on 71 00:04:52,880 --> 00:04:53,200 Speaker 1: some of that. 72 00:04:53,800 --> 00:04:59,120 Speaker 2: It's not really like default but more like technical defaults 73 00:04:59,160 --> 00:05:03,440 Speaker 2: that only hours laid, hours past the deadline, but it 74 00:05:03,560 --> 00:05:07,440 Speaker 2: still show the you know, the amount of pressure that 75 00:05:07,520 --> 00:05:08,239 Speaker 2: they are facing. 76 00:05:08,800 --> 00:05:11,839 Speaker 1: So the revenue that's coming in may not be enough 77 00:05:11,880 --> 00:05:14,680 Speaker 1: to cover the money that they owe or the debt payments. 78 00:05:15,040 --> 00:05:21,039 Speaker 2: Yeah, in fact, they would not be sustainable if they 79 00:05:21,080 --> 00:05:25,200 Speaker 2: don't have the subsidies. Last year they receive the highest 80 00:05:25,279 --> 00:05:30,120 Speaker 2: amount of subsidies on records, So without subsidies, a lot 81 00:05:30,160 --> 00:05:34,960 Speaker 2: of them are actually operating at lost. That's not really 82 00:05:35,000 --> 00:05:37,279 Speaker 2: a sustainable pattern for the future. 83 00:05:37,720 --> 00:05:39,479 Speaker 1: Do we expect the subsidies to go away? 84 00:05:40,200 --> 00:05:44,920 Speaker 2: The subsidies probably won't go away like right away, but 85 00:05:45,480 --> 00:05:49,000 Speaker 2: we do not. Like China's economy is having a difficult 86 00:05:49,240 --> 00:05:54,320 Speaker 2: year this year, and the unemployment rate is skyrocketing high. 87 00:05:55,080 --> 00:06:00,840 Speaker 2: So the local government they are having difficulties, you know, 88 00:06:01,040 --> 00:06:05,520 Speaker 2: like collecting physical revenues themselves as well. So it's not 89 00:06:05,839 --> 00:06:11,760 Speaker 2: a certain how long they can continue that amount of 90 00:06:12,080 --> 00:06:13,640 Speaker 2: subsidies in the long run. 91 00:06:14,080 --> 00:06:18,200 Speaker 1: So we are starting to see what you could describe 92 00:06:18,279 --> 00:06:19,679 Speaker 1: the default wave happening. 93 00:06:20,520 --> 00:06:25,560 Speaker 2: We probably won't say a huge default wave happening soon, 94 00:06:26,160 --> 00:06:30,760 Speaker 2: but we do say cases of financial stress, such as 95 00:06:30,960 --> 00:06:34,760 Speaker 2: you know, like the agreements with the local banks to 96 00:06:34,920 --> 00:06:41,480 Speaker 2: extend long terms, or like miss deadline for a few hours. 97 00:06:42,440 --> 00:06:47,400 Speaker 2: So these cases of last minute payment do show that 98 00:06:47,640 --> 00:06:51,360 Speaker 2: there is significant amount of stress in the market because 99 00:06:51,839 --> 00:06:56,039 Speaker 2: it shows they basically exhaust all means to try to 100 00:06:56,680 --> 00:07:00,400 Speaker 2: you know, make the payments. But I'm not sure how 101 00:07:00,480 --> 00:07:03,440 Speaker 2: long they can you know, continue to do it in 102 00:07:03,480 --> 00:07:04,080 Speaker 2: the long run. 103 00:07:04,920 --> 00:07:07,040 Speaker 1: So, as you said, the subsidies are going away for 104 00:07:07,880 --> 00:07:12,000 Speaker 1: these local government financing vehicles. That the acronym that we 105 00:07:12,040 --> 00:07:15,000 Speaker 1: hear a lot is l g f V. In this context, 106 00:07:15,960 --> 00:07:20,280 Speaker 1: the danger is that some of them just can't pay, 107 00:07:21,080 --> 00:07:23,240 Speaker 1: maybe a lot of them can't pay. How does that 108 00:07:23,280 --> 00:07:26,800 Speaker 1: all end them mean? It sounds pretty worrying if if 109 00:07:26,880 --> 00:07:30,400 Speaker 1: all of that debt you know, are trillion dollars, two 110 00:07:30,400 --> 00:07:33,080 Speaker 1: trillion dollars. Sorry, if US dollars in debt, if all 111 00:07:33,160 --> 00:07:36,360 Speaker 1: that defaults at once, do we do we really expect 112 00:07:36,560 --> 00:07:38,320 Speaker 1: a major catastroph at this point. 113 00:07:39,440 --> 00:07:45,040 Speaker 2: Actually, even like those local garments that are struggling the 114 00:07:45,200 --> 00:07:52,280 Speaker 2: most appear to be prioritizing timely bound payments because it's 115 00:07:52,440 --> 00:07:56,400 Speaker 2: really would be a catastrophic signal it would send if 116 00:07:56,520 --> 00:08:00,760 Speaker 2: it were unable to pay their way. But yeah, as 117 00:08:00,760 --> 00:08:03,840 Speaker 2: I said, like some lf they've been really struggling and 118 00:08:04,160 --> 00:08:09,520 Speaker 2: they've been making last minute payments. Yeah, but in a 119 00:08:09,560 --> 00:08:12,640 Speaker 2: short term at least, the local governments are really trying 120 00:08:12,760 --> 00:08:14,920 Speaker 2: to make dos at the moment. 121 00:08:15,880 --> 00:08:21,720 Speaker 1: Okay, So, given the size of this crisis, and you know, 122 00:08:21,760 --> 00:08:25,080 Speaker 1: the possible magnitude of it, what impact does it have? 123 00:08:25,160 --> 00:08:27,280 Speaker 1: More broadly, does it start to affect growth in the 124 00:08:27,360 --> 00:08:28,240 Speaker 1: Chinese economy? 125 00:08:29,160 --> 00:08:34,040 Speaker 2: I guess, like the the Chinese economy is already having 126 00:08:34,440 --> 00:08:38,960 Speaker 2: like a bump pay year this year, and if there 127 00:08:39,200 --> 00:08:42,240 Speaker 2: is really a case of default happening in the market, 128 00:08:43,240 --> 00:08:47,880 Speaker 2: it would create panic in the market, just like how 129 00:08:48,320 --> 00:08:52,920 Speaker 2: it happened with the property crisis. You know, nobody expects 130 00:08:53,080 --> 00:08:56,960 Speaker 2: every grand to default but once it's default, it's kind 131 00:08:57,000 --> 00:09:03,200 Speaker 2: of uh, you know, the whole A series of other 132 00:09:03,360 --> 00:09:08,560 Speaker 2: defauts follow suit. So I guess like no local government 133 00:09:08,720 --> 00:09:11,959 Speaker 2: really want to be the first case. So they are 134 00:09:12,040 --> 00:09:16,120 Speaker 2: trying to, you know, get all the support they need, 135 00:09:16,160 --> 00:09:21,720 Speaker 2: including help from the central government to help make these 136 00:09:22,080 --> 00:09:23,280 Speaker 2: timely payments. 137 00:09:23,559 --> 00:09:25,680 Speaker 1: And obviously the government has a lot of capacity to help, 138 00:09:25,720 --> 00:09:28,079 Speaker 1: and you know they've they've been applying stimulus the economy 139 00:09:28,080 --> 00:09:31,400 Speaker 1: and all sorts of things. Ultimately, do we expect the 140 00:09:32,040 --> 00:09:36,600 Speaker 1: government to backstop all these these local government financing vehicles 141 00:09:36,600 --> 00:09:38,480 Speaker 1: and step in and help them. 142 00:09:38,520 --> 00:09:41,400 Speaker 2: Definitely, And I think they have a lot of tools. 143 00:09:41,600 --> 00:09:46,920 Speaker 2: For example, most China's biggest banks are stay owned. The 144 00:09:46,960 --> 00:09:50,640 Speaker 2: government for example, could ask the state banks to start 145 00:09:50,840 --> 00:09:54,760 Speaker 2: providing relief, like they can ask the banks to offering 146 00:09:55,520 --> 00:09:58,240 Speaker 2: longer term loans to this iltf thisse. 147 00:09:58,720 --> 00:10:02,120 Speaker 1: You mentioned the per els with the housing crisis. You know, 148 00:10:02,120 --> 00:10:06,640 Speaker 1: there's been a lot of property developer distress, including Evergrand, 149 00:10:06,640 --> 00:10:09,360 Speaker 1: which is a huge situation. I think it's the biggest 150 00:10:09,360 --> 00:10:12,000 Speaker 1: distress debt situation in the world at the moment. In 151 00:10:12,000 --> 00:10:14,800 Speaker 1: that situation, it seems like investors will take a loss. 152 00:10:14,800 --> 00:10:16,960 Speaker 1: But do we do we expect investors to take a 153 00:10:16,960 --> 00:10:20,040 Speaker 1: loss on this kind of debt, which is eventually essentially 154 00:10:20,160 --> 00:10:23,000 Speaker 1: municipal debt. Do we do expect losses there for investors? 155 00:10:25,200 --> 00:10:31,280 Speaker 2: Well, a sector buildout is impossible in a way because 156 00:10:31,600 --> 00:10:35,520 Speaker 2: just because the amount of debt in this sector, it's 157 00:10:35,600 --> 00:10:44,880 Speaker 2: something beyond the garments are leveled, of beyond the garment's 158 00:10:44,920 --> 00:10:50,840 Speaker 2: ability to help. But also it's it involves the question 159 00:10:50,960 --> 00:10:55,560 Speaker 2: of moral hazard, right because the sector buildout would be 160 00:10:56,880 --> 00:11:03,199 Speaker 2: giving signals that the central garment is encourage this rackless 161 00:11:03,280 --> 00:11:08,360 Speaker 2: risk taking behavior. So in order to curb that thinking, 162 00:11:08,600 --> 00:11:12,680 Speaker 2: you kind of like can let people assume that state 163 00:11:12,760 --> 00:11:15,600 Speaker 2: would always come to the rescue when since go wrong. 164 00:11:16,440 --> 00:11:18,120 Speaker 1: And that's exactly what seems to have happened in the 165 00:11:18,120 --> 00:11:20,720 Speaker 1: property crisis, which is still going on, as you've been 166 00:11:20,760 --> 00:11:23,640 Speaker 1: writing a lot about. I'm interested also in the developer 167 00:11:23,720 --> 00:11:26,439 Speaker 1: side of the Chinese debt story and what's going on there, 168 00:11:26,440 --> 00:11:29,160 Speaker 1: because we've seen Wonder bonds dropped a lot this week, 169 00:11:29,160 --> 00:11:31,680 Speaker 1: We've seen lots of other developers under a lot of strain. 170 00:11:32,559 --> 00:11:34,880 Speaker 1: Is that crisis still going as well? 171 00:11:35,000 --> 00:11:39,400 Speaker 2: Yeah, that's an ongoing crisis. A lot of attention has 172 00:11:39,480 --> 00:11:44,280 Speaker 2: been paid to the July twenty third bound payment because 173 00:11:44,480 --> 00:11:48,240 Speaker 2: that's bounds is assumed, you know, like it's gonna to 174 00:11:49,080 --> 00:11:53,920 Speaker 2: make timely payments, and it was treated above nineties just 175 00:11:53,960 --> 00:11:58,520 Speaker 2: a week ago, so investors do acpect it to make 176 00:11:58,600 --> 00:12:03,319 Speaker 2: the repayment. But the surprise came when one that told 177 00:12:03,720 --> 00:12:08,040 Speaker 2: creditors that it still has a two one hundred million 178 00:12:08,120 --> 00:12:13,600 Speaker 2: dollars short shortfall on the maturing bound on Monday. So 179 00:12:13,840 --> 00:12:17,600 Speaker 2: as soon as you know it told creditors news, the 180 00:12:17,679 --> 00:12:21,719 Speaker 2: bound fell twenty two cents on the day and continue 181 00:12:21,800 --> 00:12:26,840 Speaker 2: failing on qday. So I guess like now we're just 182 00:12:26,960 --> 00:12:31,360 Speaker 2: like less than a week from that maturity date, but 183 00:12:31,480 --> 00:12:35,240 Speaker 2: people are still not sure whether bunned up when that 184 00:12:35,320 --> 00:12:39,360 Speaker 2: would make that payment. That's something everybody is watching now. 185 00:12:40,160 --> 00:12:42,520 Speaker 1: Interesting, that's a that's another one like Evergham that has 186 00:12:42,520 --> 00:12:44,920 Speaker 1: a lot of debt in dollars, so there will be 187 00:12:46,320 --> 00:12:49,280 Speaker 1: you know, exposure from investors all over the world in 188 00:12:49,280 --> 00:12:49,600 Speaker 1: that one. 189 00:12:49,679 --> 00:12:54,000 Speaker 2: Yeah, correct, he does want to be a disimblant of China. 190 00:12:54,559 --> 00:12:54,800 Speaker 3: Yeah. 191 00:12:55,120 --> 00:12:58,120 Speaker 1: Yeah, so in both cases, I mean on the local 192 00:12:58,160 --> 00:13:01,280 Speaker 1: government financing vehicle side that you've done so well explaining 193 00:13:01,559 --> 00:13:04,920 Speaker 1: to us, there seems to be more of a domestic exposure, 194 00:13:04,920 --> 00:13:08,319 Speaker 1: but to the property developers which in a similar mess 195 00:13:08,360 --> 00:13:13,480 Speaker 1: there there is likely to be losses for bondholders all 196 00:13:13,520 --> 00:13:14,400 Speaker 1: around the world. 197 00:13:14,920 --> 00:13:18,680 Speaker 2: Yeah, that's it has a lot of global investors. 198 00:13:19,040 --> 00:13:21,240 Speaker 1: So the longer term impact on this, I mean, I 199 00:13:21,240 --> 00:13:23,920 Speaker 1: guess you know, we talked to investors here that that 200 00:13:24,000 --> 00:13:29,040 Speaker 1: must affect risk appetite for Chinese bonds, particularly junk bonds, 201 00:13:29,080 --> 00:13:32,880 Speaker 1: you know, which haven't performed particularly well this year. Is 202 00:13:33,240 --> 00:13:37,000 Speaker 1: this all telling us that we should be much more vigilant, 203 00:13:37,200 --> 00:13:40,360 Speaker 1: much more careful when it comes to Chinese credit risk. 204 00:13:40,760 --> 00:13:42,959 Speaker 2: Yeah, and I think a lot of the investors are 205 00:13:43,120 --> 00:13:48,720 Speaker 2: already start doing that, right. It's now like a lot 206 00:13:48,760 --> 00:13:53,320 Speaker 2: of investors are choosing Chinese property bonds as they are 207 00:13:54,000 --> 00:13:58,280 Speaker 2: a priority for investments. Some are saying, you know, like 208 00:13:58,400 --> 00:14:01,280 Speaker 2: if went that word to fail to repay this bound, 209 00:14:01,440 --> 00:14:05,360 Speaker 2: it will be another nail in the coffin for Chinese 210 00:14:05,440 --> 00:14:10,000 Speaker 2: hio properly bounds. A lot of investors are training away 211 00:14:10,040 --> 00:14:15,760 Speaker 2: from investments like that. Like another big Chinese developer, Country Garden, 212 00:14:16,120 --> 00:14:19,800 Speaker 2: it's now having its bound treaty in the twenties or thirties. 213 00:14:20,280 --> 00:14:24,080 Speaker 2: So that's suggesting people are not really having face about 214 00:14:24,400 --> 00:14:26,040 Speaker 2: its own time repayment. 215 00:14:26,600 --> 00:14:29,600 Speaker 1: And so before we talk to himanship actually bloom back intelligence, 216 00:14:29,880 --> 00:14:32,240 Speaker 1: what's the next big thing to watch out for a 217 00:14:32,280 --> 00:14:35,080 Speaker 1: way I mean we're talking about more maturities. Is there 218 00:14:35,120 --> 00:14:37,480 Speaker 1: more distress coming? Is there anything else on your calendar 219 00:14:37,520 --> 00:14:38,360 Speaker 1: that we should be aware of. 220 00:14:38,840 --> 00:14:42,360 Speaker 2: I guess a lot of investors they are generally interested 221 00:14:42,440 --> 00:14:48,480 Speaker 2: in the Chinese Chinese government's attitude about the property sector 222 00:14:48,560 --> 00:14:51,840 Speaker 2: and the LDF sector because in China the state just 223 00:14:51,920 --> 00:14:56,960 Speaker 2: plays the chin important role and if the government has 224 00:14:57,160 --> 00:15:03,240 Speaker 2: more stimulus or subsidies given to this subsidies, we can 225 00:15:03,360 --> 00:15:09,080 Speaker 2: really say a shift of attitude in investors investment, but 226 00:15:09,200 --> 00:15:11,800 Speaker 2: don't chosen. I guess a lot of investors are just 227 00:15:11,920 --> 00:15:15,600 Speaker 2: taking a wait and say attitude and say what's going 228 00:15:15,640 --> 00:15:19,480 Speaker 2: to happen and what's the next stops, next steps that 229 00:15:19,600 --> 00:15:20,600 Speaker 2: government is going. 230 00:15:20,480 --> 00:15:23,800 Speaker 1: To take great stuff. Way Joe from Bloomberg News, thank 231 00:15:23,840 --> 00:15:26,600 Speaker 1: you so much for joining us. Thank you important story. 232 00:15:26,640 --> 00:15:29,080 Speaker 1: We should all be watching it wherever we are sitting. 233 00:15:29,520 --> 00:15:32,520 Speaker 1: Read all of Waye's scoops on the Bloomberg terminal and 234 00:15:32,640 --> 00:15:35,840 Speaker 1: of course at Bloomberg dot com. So, as I mentioned earlier, 235 00:15:35,960 --> 00:15:38,000 Speaker 1: there's a lot going on in Canada right now, and 236 00:15:38,000 --> 00:15:40,240 Speaker 1: we're very pleased to have with us him Manchu Bakshi, 237 00:15:40,240 --> 00:15:43,120 Speaker 1: who covers the banking sector up there for Bloomberg Intelligence 238 00:15:43,320 --> 00:15:45,920 Speaker 1: based in New York. How's it going, Hi Manchu. 239 00:15:45,920 --> 00:15:47,080 Speaker 3: Hi Jims. Thank you for having me. 240 00:15:47,120 --> 00:15:49,240 Speaker 1: How are you very well? Thanks? I know you're very 241 00:15:49,280 --> 00:15:51,800 Speaker 1: busy with earnings at the moment, but as you've been 242 00:15:51,840 --> 00:15:54,240 Speaker 1: writing about, there's a bit of a problem with housing 243 00:15:54,360 --> 00:15:56,080 Speaker 1: right now, and I wonder if you could just walk 244 00:15:56,160 --> 00:15:56,600 Speaker 1: us through that. 245 00:15:57,240 --> 00:16:02,920 Speaker 3: Sure. So housing has always been a concern for Canadian banks. Recently, 246 00:16:02,960 --> 00:16:06,840 Speaker 3: what we're seeing is because of higher rates on adjustable 247 00:16:06,920 --> 00:16:11,240 Speaker 3: rate mortgages. We're seeing that because the mortiket rates are 248 00:16:11,280 --> 00:16:14,640 Speaker 3: going up in twenty twenty five and twenty twenty six 249 00:16:14,720 --> 00:16:19,400 Speaker 3: mortgage that will be due to renew those borrowers will 250 00:16:19,440 --> 00:16:22,560 Speaker 3: be facing higher mortgage payments and that's a risk to 251 00:16:22,640 --> 00:16:23,680 Speaker 3: banks asset quality. 252 00:16:24,440 --> 00:16:28,680 Speaker 1: So those just find those are mortgages that are short 253 00:16:28,760 --> 00:16:31,480 Speaker 1: term and they're coming up for a reset on the rates. 254 00:16:31,720 --> 00:16:34,480 Speaker 3: That's that's right. So in Canada it's a little different 255 00:16:34,480 --> 00:16:36,920 Speaker 3: than in the US. They have the mortgages in Canada 256 00:16:36,920 --> 00:16:39,560 Speaker 3: have a contractual maturity of five year and amortization period 257 00:16:39,600 --> 00:16:44,520 Speaker 3: of twenty five years, and most of the mortgages in Canada, 258 00:16:44,640 --> 00:16:47,240 Speaker 3: or the adjustable rate mortgages, the way they work is 259 00:16:47,240 --> 00:16:50,920 Speaker 3: their adjustable rate fixed payments, which means when market rates 260 00:16:50,960 --> 00:16:53,880 Speaker 3: go up, the monthly payments don't go up immediately, they 261 00:16:53,920 --> 00:16:58,360 Speaker 3: go up at the reset. And so right now, the 262 00:16:58,480 --> 00:17:03,600 Speaker 3: concern is that all the mortgages that reset at a 263 00:17:03,640 --> 00:17:09,480 Speaker 3: higher rate, they will squeeze borrowers. But that's only if 264 00:17:09,680 --> 00:17:13,320 Speaker 3: we assume that rates will stay higher for longer. But 265 00:17:13,480 --> 00:17:19,360 Speaker 3: on the positive side, we may see wage growth through 266 00:17:19,400 --> 00:17:21,920 Speaker 3: twenty twenty five, twenty twenty six, so borrows should be 267 00:17:22,000 --> 00:17:23,439 Speaker 3: able to absorb some of those pressure. 268 00:17:23,840 --> 00:17:27,720 Speaker 1: But so rates, you know, since the Canadian consumers last, 269 00:17:27,800 --> 00:17:30,400 Speaker 1: you know, when they first took out those mortgages, let's 270 00:17:30,400 --> 00:17:33,720 Speaker 1: say five years ago, how how much higher have rates gone? 271 00:17:33,760 --> 00:17:35,760 Speaker 1: I mean, how much is the mortgage in the customer 272 00:17:35,800 --> 00:17:36,520 Speaker 1: right now in Canada? 273 00:17:36,560 --> 00:17:39,560 Speaker 3: So right now it's over six point eight seven percent, 274 00:17:39,680 --> 00:17:42,560 Speaker 3: because right now the overnight rate is now five percent, 275 00:17:43,320 --> 00:17:46,520 Speaker 3: and all these borrowers, especially if you look at twenty eighteen, 276 00:17:46,560 --> 00:17:50,119 Speaker 3: twenty nineteen, even early twenty twenty, they took mortgages are 277 00:17:50,200 --> 00:17:54,040 Speaker 3: less than two percent now, all these borrowers were stress 278 00:17:54,160 --> 00:17:58,720 Speaker 3: tested at five point two five percent at least, but 279 00:17:58,800 --> 00:18:01,639 Speaker 3: again mortgage 'es are where above that. So if they 280 00:18:02,040 --> 00:18:04,840 Speaker 3: if they have a reset date coming up, then those 281 00:18:04,880 --> 00:18:07,440 Speaker 3: marketers will be reset higher and their mortgage payments will 282 00:18:07,480 --> 00:18:07,840 Speaker 3: go up. 283 00:18:08,040 --> 00:18:10,280 Speaker 1: And at the same time, housing prices have shut up, 284 00:18:10,320 --> 00:18:11,240 Speaker 1: haven't they in Canada? 285 00:18:12,240 --> 00:18:14,320 Speaker 3: I won't say shut up, but in recently what we 286 00:18:14,400 --> 00:18:18,840 Speaker 3: saw since the Bank of Canada starting raising rates last March, 287 00:18:19,320 --> 00:18:23,080 Speaker 3: we saw a decline in correction in housing prices. We 288 00:18:23,119 --> 00:18:27,400 Speaker 3: saw a little optic in May after eleven months of decline, 289 00:18:27,840 --> 00:18:30,560 Speaker 3: but we may see more correction because that was because 290 00:18:30,600 --> 00:18:33,119 Speaker 3: the Central Bank actually stopped raising rates in chain. But 291 00:18:33,400 --> 00:18:35,880 Speaker 3: we have seen two hikes since then, so we may 292 00:18:35,920 --> 00:18:39,480 Speaker 3: see a little more correction through this year. 293 00:18:40,160 --> 00:18:42,480 Speaker 1: So from the credit standpoint, we look at this more 294 00:18:42,520 --> 00:18:45,760 Speaker 1: from the perspective of the banks. You know, the banking 295 00:18:45,800 --> 00:18:48,200 Speaker 1: system in Canada is quite different. There's only a few 296 00:18:48,240 --> 00:18:50,520 Speaker 1: of them and they're you know, they're pretty conservative and 297 00:18:50,520 --> 00:18:53,320 Speaker 1: they're quite stable. But how much exposure do they have 298 00:18:53,359 --> 00:18:58,000 Speaker 1: to this problem of the mortgage refi and the consumers 299 00:18:58,000 --> 00:18:59,240 Speaker 1: coming under so much pressure. 300 00:18:59,520 --> 00:19:02,480 Speaker 3: So the big five six banks in Canada actually control 301 00:19:02,520 --> 00:19:04,840 Speaker 3: eighty to ninety percent of eighty percent of the lending 302 00:19:04,880 --> 00:19:07,680 Speaker 3: and they hold eighty percent of the deposits, so their 303 00:19:07,720 --> 00:19:12,280 Speaker 3: exposure to housing is about fifty percent. CIBC Canadian Imperial 304 00:19:12,320 --> 00:19:15,040 Speaker 3: Bank of Commerce being the most exposed, and Bank of 305 00:19:15,119 --> 00:19:19,800 Speaker 3: Montreal leased, so it's a pretty big significant exposure of 306 00:19:19,840 --> 00:19:20,879 Speaker 3: their total portfolio. 307 00:19:21,560 --> 00:19:23,960 Speaker 1: So when you say CIBC is most exposed, you think 308 00:19:24,080 --> 00:19:27,080 Speaker 1: they're going to sustain substantial losses. 309 00:19:27,640 --> 00:19:30,760 Speaker 3: So that's not our base case. So we think not 310 00:19:30,800 --> 00:19:33,920 Speaker 3: just CIBC, but all Canadian banks have first of all, 311 00:19:33,920 --> 00:19:37,359 Speaker 3: their highly profitable banks and so they have that earning 312 00:19:37,440 --> 00:19:40,840 Speaker 3: scussion to absorb higher provisions if they need to. And 313 00:19:40,880 --> 00:19:43,959 Speaker 3: then also the banks have been increasing their regulator has 314 00:19:43,960 --> 00:19:47,120 Speaker 3: been increasing their capital requirements and therefore the banks are 315 00:19:47,240 --> 00:19:50,359 Speaker 3: increasing their common equity of one capital, so they have 316 00:19:51,200 --> 00:19:54,280 Speaker 3: good first line defense in the form of earnings, and 317 00:19:54,320 --> 00:19:58,760 Speaker 3: they also have good last defense as their capital. So 318 00:19:58,800 --> 00:20:01,320 Speaker 3: not just CIBC, all the bank should be comfortable. We 319 00:20:01,359 --> 00:20:03,639 Speaker 3: actually stress tested all the banks at a five percent 320 00:20:03,720 --> 00:20:07,399 Speaker 3: loss straight on their uninsured mortgage portfolio, and even though 321 00:20:07,400 --> 00:20:09,600 Speaker 3: the capital ratios declined from where they were in two 322 00:20:09,720 --> 00:20:11,960 Speaker 3: q but all the banks remain well capitalized. 323 00:20:12,280 --> 00:20:14,800 Speaker 1: And to be clear, five percent is way more than 324 00:20:14,840 --> 00:20:15,640 Speaker 1: anyone's expecting. 325 00:20:15,880 --> 00:20:18,560 Speaker 3: It's way more than anybody's expecting. It's way more than 326 00:20:19,080 --> 00:20:23,000 Speaker 3: we start during the nineteen ninety one housing downtown And 327 00:20:23,240 --> 00:20:25,840 Speaker 3: just to give you an idea, when the Bank of 328 00:20:25,880 --> 00:20:29,399 Speaker 3: Canada actually stress tested banks, they forecasted that the losses 329 00:20:29,440 --> 00:20:32,080 Speaker 3: on their uninsured mortgages will be point seven percent? 330 00:20:32,560 --> 00:20:34,480 Speaker 1: Are they being overly optimistic though at that point? 331 00:20:34,480 --> 00:20:39,719 Speaker 3: Well maybe, But we tried to do a direct in 332 00:20:39,720 --> 00:20:41,720 Speaker 3: our stress test analysis. We try to do like a 333 00:20:41,760 --> 00:20:44,119 Speaker 3: dict head to capital, so we don't We didn't assume 334 00:20:44,160 --> 00:20:46,800 Speaker 3: any capital management actions from the bank. It was just 335 00:20:46,880 --> 00:20:49,520 Speaker 3: a point in time dict had to capital. Can the 336 00:20:49,560 --> 00:20:51,520 Speaker 3: bank survive? And we think, yes they can. It will 337 00:20:51,520 --> 00:20:53,040 Speaker 3: not be a capital issue, it will be earning this 338 00:20:53,040 --> 00:20:53,879 Speaker 3: issue for the banks. 339 00:20:54,119 --> 00:20:56,040 Speaker 1: And again from a credit standpoint, I mean, how do 340 00:20:56,080 --> 00:20:59,439 Speaker 1: you position as an investor here and do you expect 341 00:20:59,720 --> 00:21:04,160 Speaker 1: see IBC spreads to widely substantially versus comparables or how 342 00:21:04,160 --> 00:21:04,680 Speaker 1: does that play? 343 00:21:04,800 --> 00:21:04,879 Speaker 2: So? 344 00:21:05,280 --> 00:21:08,000 Speaker 3: Yes, that's right. So because CIBC is most exposed if 345 00:21:08,040 --> 00:21:13,040 Speaker 3: we see a larger than expected housing price correction, the 346 00:21:13,080 --> 00:21:16,680 Speaker 3: bonds of banks which which are most more exposed to housing, 347 00:21:17,040 --> 00:21:21,840 Speaker 3: like CIBC, will be sensitive to housing price correction. Again, 348 00:21:22,119 --> 00:21:24,840 Speaker 3: our base cases not that we'll see a big drop 349 00:21:24,880 --> 00:21:28,080 Speaker 3: in house prices because in Canada it's mostly a supply 350 00:21:28,200 --> 00:21:30,440 Speaker 3: issue and so we don't see that happening. But if 351 00:21:30,480 --> 00:21:32,520 Speaker 3: that happens, I think the bonds of CIBC will be 352 00:21:32,520 --> 00:21:34,359 Speaker 3: more sensitive than all the other banks in Canada. 353 00:21:34,720 --> 00:21:37,960 Speaker 1: And what does best in this scenario? I'm sorry which 354 00:21:38,000 --> 00:21:39,360 Speaker 1: bank performs best in that. 355 00:21:39,320 --> 00:21:41,679 Speaker 3: S so Bank of Montreal. If you're only looking at 356 00:21:41,680 --> 00:21:45,080 Speaker 3: housing portfolio, Bank of Montreal has the least exposure. They 357 00:21:45,160 --> 00:21:48,280 Speaker 3: also really big in the US, SO Bank of Montreal 358 00:21:48,280 --> 00:21:51,400 Speaker 3: will be best position. And after that, I would say 359 00:21:51,440 --> 00:21:52,639 Speaker 3: TD and RBC the two pick. 360 00:21:53,200 --> 00:21:54,679 Speaker 1: You know, when I go up to Canada and I 361 00:21:54,840 --> 00:21:56,760 Speaker 1: tend to go to run to more than other cities. 362 00:21:57,280 --> 00:21:59,679 Speaker 1: There seems to have been for quite some time a 363 00:21:59,720 --> 00:22:02,119 Speaker 1: lot of overbuilding. I mean, you say that there's a 364 00:22:02,160 --> 00:22:06,400 Speaker 1: shortage of supply, but the overbuilding to me seems more 365 00:22:06,440 --> 00:22:11,000 Speaker 1: on the office side, and the return to office has 366 00:22:11,040 --> 00:22:14,439 Speaker 1: been slower in Toronto than other parts of you know, 367 00:22:14,480 --> 00:22:17,760 Speaker 1: compared to New York for example. Is that not a 368 00:22:17,760 --> 00:22:21,080 Speaker 1: big vulnerability for the banks that they that they're you know, 369 00:22:21,359 --> 00:22:24,840 Speaker 1: may be more exposed on the commercial mortgage side than 370 00:22:24,880 --> 00:22:26,280 Speaker 1: the reach sure. 371 00:22:26,400 --> 00:22:29,960 Speaker 3: So overall commercial is about on average forty percent of 372 00:22:30,160 --> 00:22:33,480 Speaker 3: banks loan poard for you overall, and specifically if you 373 00:22:33,520 --> 00:22:37,119 Speaker 3: look at CIRI, that's about ten percent on average. But 374 00:22:37,240 --> 00:22:40,520 Speaker 3: as you mentioned about offices, offices, office exposure is just 375 00:22:40,640 --> 00:22:44,000 Speaker 3: one percent of their total one part. So it's a risk, yes, 376 00:22:44,040 --> 00:22:46,959 Speaker 3: absolutely wide risk because if you look at office vacancies, 377 00:22:48,000 --> 00:22:51,000 Speaker 3: that's highest in a decade. It was I think it 378 00:22:51,040 --> 00:22:53,080 Speaker 3: was up eighteen percent in one Q. It's highest in 379 00:22:53,119 --> 00:22:55,600 Speaker 3: a decade. So, yes, that's a concern, that's a risk, 380 00:22:55,640 --> 00:22:58,280 Speaker 3: but that's a manageable risk because at one percent, we 381 00:22:58,400 --> 00:23:01,760 Speaker 3: actually stressed us to the office exposure of all the 382 00:23:01,800 --> 00:23:05,840 Speaker 3: banks and we found that actually their earnings can absorb 383 00:23:05,880 --> 00:23:08,320 Speaker 3: the provisions if we assume a two percent loss rate 384 00:23:08,359 --> 00:23:09,520 Speaker 3: on their office portfolio. 385 00:23:10,080 --> 00:23:11,720 Speaker 1: Okay, so what are we looking for in terms of 386 00:23:12,160 --> 00:23:15,439 Speaker 1: events key events? You mentioned the resets? You know, is 387 00:23:15,440 --> 00:23:18,760 Speaker 1: there is there a particular maturity hump here in terms 388 00:23:18,760 --> 00:23:21,840 Speaker 1: of the resets or is there some other some other 389 00:23:22,080 --> 00:23:24,840 Speaker 1: event on the calendar that could trigger, you know, an 390 00:23:24,880 --> 00:23:27,359 Speaker 1: unraveling of this in terms of defaults and mortgage is 391 00:23:27,359 --> 00:23:27,840 Speaker 1: that sort of thing. 392 00:23:27,960 --> 00:23:31,720 Speaker 3: I think the biggest uh factor that we're looking at 393 00:23:31,800 --> 00:23:34,800 Speaker 3: is how high the rates will go, because one thing 394 00:23:34,880 --> 00:23:38,160 Speaker 3: we I think I forgot to mention before that even 395 00:23:38,200 --> 00:23:40,400 Speaker 3: though on all these adjusts to rate mortgages, your monthly 396 00:23:40,440 --> 00:23:42,760 Speaker 3: payments don't go up immediately when rates go up. But 397 00:23:43,560 --> 00:23:46,520 Speaker 3: if the rates go high enough that your monthly payments 398 00:23:46,560 --> 00:23:50,439 Speaker 3: don't don't cover principle just interest, then it hits at 399 00:23:50,760 --> 00:23:53,240 Speaker 3: what we call it a trigger rate, and then your 400 00:23:53,280 --> 00:23:55,720 Speaker 3: monthly mortket you wan go up. So for us, though, 401 00:23:55,760 --> 00:23:59,000 Speaker 3: the one thing we're looking at right now is how 402 00:23:59,080 --> 00:24:00,800 Speaker 3: high the rates will go, because if the rates keep 403 00:24:00,840 --> 00:24:04,359 Speaker 3: going high, then most of these mortkeachs will head a 404 00:24:04,400 --> 00:24:07,200 Speaker 3: trigger rate, and that's not what you want because that 405 00:24:07,240 --> 00:24:08,159 Speaker 3: will pressure all the more. 406 00:24:08,359 --> 00:24:10,720 Speaker 1: Was then, is there a number that you're looking at 407 00:24:10,720 --> 00:24:11,520 Speaker 1: in that context? 408 00:24:11,960 --> 00:24:14,199 Speaker 3: We don't expect it to go over five and. 409 00:24:14,160 --> 00:24:16,800 Speaker 1: A half, okay, but if it does, then there'll be troubled. 410 00:24:16,840 --> 00:24:20,400 Speaker 3: Then it depends again how high it goes. But that's 411 00:24:20,440 --> 00:24:23,680 Speaker 3: something then will pay more attention to be already looking 412 00:24:23,720 --> 00:24:27,280 Speaker 3: at it very closely. But that's then that's something that 413 00:24:27,840 --> 00:24:31,760 Speaker 3: will require banks to start building provisions more aggressively if 414 00:24:31,760 --> 00:24:32,560 Speaker 3: that happens. 415 00:24:32,760 --> 00:24:35,920 Speaker 1: Okay. Obviously, Canada is a huge economy, and it's adjacent 416 00:24:35,960 --> 00:24:39,119 Speaker 1: to the US, and there's lots of trade ties and 417 00:24:39,160 --> 00:24:41,520 Speaker 1: so on, and you know, cultural ties. But if you're 418 00:24:41,560 --> 00:24:44,879 Speaker 1: not inside Canada, why do we care about this particular 419 00:24:45,520 --> 00:24:48,760 Speaker 1: issue with the housing and the exposure that banks have. 420 00:24:49,000 --> 00:24:50,439 Speaker 3: So I can give you two reason. If you are 421 00:24:50,560 --> 00:24:52,960 Speaker 3: just a regular person, if you have bank account Canadian 422 00:24:53,000 --> 00:24:57,280 Speaker 3: banks have operations in the US, I have an accounting TV. 423 00:24:57,520 --> 00:24:59,480 Speaker 3: Most people have accounting in Canadian banks. They may not 424 00:24:59,520 --> 00:25:02,520 Speaker 3: know that they're Indian banks. For detail, and for investors, 425 00:25:02,560 --> 00:25:05,560 Speaker 3: Canadian banks issue a lot of US dollar denominated debt. 426 00:25:05,640 --> 00:25:08,760 Speaker 3: So if you're an investor, you care about Canadian banks and. 427 00:25:08,760 --> 00:25:10,840 Speaker 1: They are issuing. I mean banks are coming out of 428 00:25:10,880 --> 00:25:12,879 Speaker 1: earnings now, we're seeing quite a few deals coming and 429 00:25:12,880 --> 00:25:15,679 Speaker 1: we're expecting a lot more from the regional banks. What 430 00:25:15,920 --> 00:25:20,080 Speaker 1: is the outlook for bond issuance from the banks? Sure? 431 00:25:20,200 --> 00:25:22,480 Speaker 3: So for the US banks, we know we were expecting 432 00:25:22,600 --> 00:25:25,320 Speaker 3: issuance from the US banks because of the regulatory changes 433 00:25:25,359 --> 00:25:28,960 Speaker 3: that we're expecting. So yes, the US regional banks, the 434 00:25:29,000 --> 00:25:32,920 Speaker 3: big chesips, they are all actively issuing tet in Canada 435 00:25:33,000 --> 00:25:36,080 Speaker 3: for the remainder of the year. We expect modest issuance 436 00:25:36,160 --> 00:25:40,200 Speaker 3: for three reasons. The first one is that the loan 437 00:25:40,280 --> 00:25:42,639 Speaker 3: growth is moderating, both in commercial and in housing. We 438 00:25:42,720 --> 00:25:46,200 Speaker 3: expect me to high single digit. And the second I 439 00:25:46,280 --> 00:25:50,280 Speaker 3: would say is they have manageable maturities, have about twenty 440 00:25:50,320 --> 00:25:53,520 Speaker 3: billion maturing three end of the year. And the last 441 00:25:53,520 --> 00:25:56,040 Speaker 3: one I would say is, unlike the US, we don't 442 00:25:56,040 --> 00:25:59,439 Speaker 3: have any upcoming regulatory requirements to issue debt. For the 443 00:25:59,440 --> 00:26:03,280 Speaker 3: Canadian bank, there was a requirement to issue total loss 444 00:26:03,280 --> 00:26:05,960 Speaker 3: of stopping capacity that and so banks started issuing senior 445 00:26:06,000 --> 00:26:08,080 Speaker 3: bones a few years ago. But now as of now, 446 00:26:08,160 --> 00:26:11,000 Speaker 3: they all are away above their minimum requirements. So we 447 00:26:11,080 --> 00:26:12,520 Speaker 3: expect the modestations this year. 448 00:26:12,840 --> 00:26:14,159 Speaker 1: So less than the US, A. 449 00:26:14,800 --> 00:26:16,640 Speaker 3: Wee less than the US. I think they should about 450 00:26:16,680 --> 00:26:19,520 Speaker 3: seventy billion. They have twenty billion in maturity, so less 451 00:26:19,520 --> 00:26:21,280 Speaker 3: than one hundred billion is what we're expecting for the 452 00:26:21,320 --> 00:26:25,919 Speaker 3: second half. But we expect Bank of Montreal to be 453 00:26:25,960 --> 00:26:28,720 Speaker 3: more active and TD to be least active. 454 00:26:29,080 --> 00:26:31,080 Speaker 1: Okay, so when you look at the banking system in 455 00:26:31,119 --> 00:26:34,000 Speaker 1: Canada overall, and you mentioned that, you know, even though 456 00:26:34,000 --> 00:26:36,600 Speaker 1: there are these vulnerabilities On the houthing side, there's still 457 00:26:36,720 --> 00:26:39,720 Speaker 1: very well placed and they can do very well even 458 00:26:39,760 --> 00:26:42,680 Speaker 1: in a very harsh stress test that you've put them under. 459 00:26:43,200 --> 00:26:44,879 Speaker 1: How do you view them from a sort of a 460 00:26:44,920 --> 00:26:48,240 Speaker 1: more global perspective? You know, in the US there's there's 461 00:26:48,320 --> 00:26:50,720 Speaker 1: quite a lot of worries about going into a downturn, 462 00:26:51,240 --> 00:26:54,600 Speaker 1: potentially a recession, you know, potentially a lot more volatility 463 00:26:54,600 --> 00:26:59,000 Speaker 1: in credit markets. Does that make Canadian banks in relative 464 00:26:59,080 --> 00:26:59,919 Speaker 1: terms a sort. 465 00:26:59,760 --> 00:27:03,320 Speaker 3: Of I would see yes, And that's what we see 466 00:27:03,320 --> 00:27:05,159 Speaker 3: if you look at from a credit ctand point, they 467 00:27:05,200 --> 00:27:07,199 Speaker 3: are among the highest rated banks in the world, Canadian 468 00:27:07,200 --> 00:27:10,440 Speaker 3: banks and Australian banks, they are the highest rated. And 469 00:27:10,600 --> 00:27:12,760 Speaker 3: one of the main reasons that not many people know 470 00:27:12,760 --> 00:27:16,600 Speaker 3: about this is because of the regulator in Canada. First 471 00:27:16,640 --> 00:27:19,000 Speaker 3: of all, unlike US, we don't have as many regulators 472 00:27:19,040 --> 00:27:22,080 Speaker 3: in Canada or in Australia the iostacle of Australian banks. 473 00:27:22,600 --> 00:27:26,720 Speaker 3: So because you don't have you're not dealing with multiple regulators. 474 00:27:26,720 --> 00:27:29,720 Speaker 3: It's only one. It's easy to manage, and the regulator 475 00:27:29,760 --> 00:27:33,399 Speaker 3: in Canada is really very proactive, so they go above 476 00:27:33,440 --> 00:27:36,360 Speaker 3: and beyond of what the global requirements are. And then 477 00:27:36,400 --> 00:27:40,360 Speaker 3: they they don't wait for something to happen. And that's 478 00:27:40,359 --> 00:27:42,280 Speaker 3: what we have seen, like they've been increasing the capital 479 00:27:42,359 --> 00:27:45,159 Speaker 3: requirements from the banks, even though they already have so 480 00:27:45,240 --> 00:27:48,119 Speaker 3: much capital. They keep increasing the requirements so they know 481 00:27:48,160 --> 00:27:51,720 Speaker 3: that banks are holding enough capital, so they are prepared 482 00:27:51,760 --> 00:27:54,720 Speaker 3: for if you have a stress situation and they're. 483 00:27:54,560 --> 00:27:58,920 Speaker 1: Not huge risk takers as exactly. 484 00:27:58,440 --> 00:28:00,840 Speaker 3: The exactly they are, well, I will see fired and 485 00:28:00,880 --> 00:28:02,919 Speaker 3: then not as risky because he went on mortgages. You 486 00:28:02,960 --> 00:28:07,800 Speaker 3: compare what we saw doing the financial crisis, Gunadian bankstead fine. Again, 487 00:28:07,840 --> 00:28:09,640 Speaker 3: most of the mortgages are on their balance. They don't 488 00:28:09,640 --> 00:28:11,760 Speaker 3: securitize as much as the US bankstead back then. 489 00:28:12,119 --> 00:28:14,359 Speaker 1: So something to be said from a credit sandpoint for 490 00:28:14,440 --> 00:28:15,360 Speaker 1: being boring. 491 00:28:18,080 --> 00:28:18,800 Speaker 3: I can't say that. 492 00:28:21,080 --> 00:28:23,920 Speaker 1: Thank you very much, Manchu Backshi you for Bloomberg Intelligence. 493 00:28:23,960 --> 00:28:25,520 Speaker 3: Thank you for having me. James, thank you. 494 00:28:25,520 --> 00:28:27,280 Speaker 1: You can read all of his great analysis on the 495 00:28:27,280 --> 00:28:29,680 Speaker 1: Bloomberg Terminal. Do check it out and we hope to 496 00:28:29,720 --> 00:28:31,840 Speaker 1: see you back on the show soon. And thanks again 497 00:28:31,880 --> 00:28:34,960 Speaker 1: to Wajo from Bloomberg News. Read all of her great 498 00:28:35,000 --> 00:28:39,360 Speaker 1: credit scoops on the Bloomberg Terminal and at Bloomberg dot com. 499 00:28:39,960 --> 00:28:42,480 Speaker 1: I'm James Crumbie. It's been a pleasure having you join 500 00:28:42,560 --> 00:28:58,120 Speaker 1: us again next week on the Credit Edge.