Speaker 1: Hello, and welcome to the Credit Edge for Weekly Markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to have on the show
Speaker 1: Way Sho, who covers credit markets for Bloomberg News in
Speaker 1: Hong Kong.
Speaker 2: How are you Way, I'm good, it's a nice day
Speaker 2: in Hong Kong.
Speaker 1: Great, Okay. We're also delighted to welcome back to the
Speaker 1: show him Manshu Bakshi, who focuses on banks at Bloomberg
Speaker 1: Intelligence in New York. We'll be coming back to him
Speaker 1: Anshew in a bit later to talk about trouble bringing
Speaker 1: in Canada. So do stay with us. But first way,
Speaker 1: Joe with Bloomberg News, let's talk about China. You're writing
Speaker 1: a lot about local government finances at the moment, and
Speaker 1: there's a bit of a crisis going on. What are
Speaker 1: local government financing vehicles and how do they work here?
Speaker 2: They are special vehicles set by the local governments of
Speaker 2: China to usually help with infrastructure projects like subways or
Speaker 2: high roads. They are kind of like what's first set
Speaker 2: up to skirt around the bank. Municipal authorities borrow directly
Speaker 2: from banks or selling bounds directly in the market.
Speaker 1: So instead of going to the market the municipality or
Speaker 1: the state. Is it a city as.
Speaker 2: Well, Yeah, it's on both a city level, county level,
Speaker 2: or provincial level.
Speaker 1: Okay, so they go they set up a special special
Speaker 1: purpose vehicle in order to get funding for an infrastructure project.
Speaker 2: Yeah, it's usually the case because generally LGF within China,
Speaker 2: they are kid grass as a corporate dat so investors
Speaker 2: generally assume that local governments are held responsible for them.
Speaker 1: Okay, so how much debt do they have and what
Speaker 1: form is it in? I guess it's in local bonds.
Speaker 2: Yeah, they constitute a large part bunk of the local
Speaker 2: debt market. It is estimate they have about a thirteen
Speaker 2: point five trillion un of outstanding on shore bounds at
Speaker 2: end of twenty twenty two, to give you an idea,
Speaker 2: that's probably about forty percent of China's non financial corporate
Speaker 2: debt market. So that's a significant part of the market.
Speaker 1: Do we know that is in dollars?
Speaker 2: Yeah, that's about like two trillion dollars.
Speaker 1: Actually, well, it's a big chunk of debt. So you
Speaker 1: say that they set up these vehicles. You know, if
Speaker 1: we look at the US muni market, for example, we'd
Speaker 1: expect the state or the local government's borrowing to be
Speaker 1: directly responsible for paying that much back. Do the vehicles
Speaker 1: help these borrowers somewhat like skirt the obligation.
Speaker 2: Yeah, because, as I said, theoretically they are actually coperated
Speaker 2: that so the local government are not naturally assumed to
Speaker 2: hold responsible for them. But in reality, everybody know it's
Speaker 2: the dat issued by the government. So I guess the
Speaker 2: local government kind of have the model has the issue
Speaker 2: here because investors do expect them to come to rescue
Speaker 2: if there is a problem, right.
Speaker 1: So right now we do have a problem. Can you
Speaker 1: talk us through the actual crisis that's going on right now?
Speaker 2: Yeah, I guess the problem. You know, it's always there,
Speaker 2: but it's only made apparent better pandemic because during the
Speaker 2: three year of pandemics, the local garment's physical revenue they
Speaker 2: have they were like dropping in the meantime because of
Speaker 2: a crisis related to the China's privaty market. Uh, the
Speaker 2: big chunk of local garments revenue, which is land sale,
Speaker 2: also come to a slide. So I guess like the
Speaker 2: local governments are really struggling with their physical revenue, so
Speaker 2: they have fewer abilities to give subsidies to this local
Speaker 2: garnment financing vehicles. In the meantime, the local government financing
Speaker 2: vehicles are not really self sustainable, so we can see
Speaker 2: a few cases of last minute payment or cases of
Speaker 2: technical default of df with this year.
Speaker 1: So all of this money, there's there's two trillion dollars
Speaker 1: worth of money, and we're starting to see defaults on
Speaker 1: some of that.
Speaker 2: It's not really like default but more like technical defaults
Speaker 2: that only hours laid, hours past the deadline, but it
Speaker 2: still show the you know, the amount of pressure that
Speaker 2: they are facing.
Speaker 1: So the revenue that's coming in may not be enough
Speaker 1: to cover the money that they owe or the debt payments.
Speaker 2: Yeah, in fact, they would not be sustainable if they
Speaker 2: don't have the subsidies. Last year they receive the highest
Speaker 2: amount of subsidies on records, So without subsidies, a lot
Speaker 2: of them are actually operating at lost. That's not really
Speaker 2: a sustainable pattern for the future.
Speaker 1: Do we expect the subsidies to go away?
Speaker 2: The subsidies probably won't go away like right away, but
Speaker 2: we do not. Like China's economy is having a difficult
Speaker 2: year this year, and the unemployment rate is skyrocketing high.
Speaker 2: So the local government they are having difficulties, you know,
Speaker 2: like collecting physical revenues themselves as well. So it's not
Speaker 2: a certain how long they can continue that amount of
Speaker 2: subsidies in the long run.
Speaker 1: So we are starting to see what you could describe
Speaker 1: the default wave happening.
Speaker 2: We probably won't say a huge default wave happening soon,
Speaker 2: but we do say cases of financial stress, such as
Speaker 2: you know, like the agreements with the local banks to
Speaker 2: extend long terms, or like miss deadline for a few hours.
Speaker 2: So these cases of last minute payment do show that
Speaker 2: there is significant amount of stress in the market because
Speaker 2: it shows they basically exhaust all means to try to
Speaker 2: you know, make the payments. But I'm not sure how
Speaker 2: long they can you know, continue to do it in
Speaker 2: the long run.
Speaker 1: So, as you said, the subsidies are going away for
Speaker 1: these local government financing vehicles. That the acronym that we
Speaker 1: hear a lot is l g f V. In this context,
Speaker 1: the danger is that some of them just can't pay,
Speaker 1: maybe a lot of them can't pay. How does that
Speaker 1: all end them mean? It sounds pretty worrying if if
Speaker 1: all of that debt you know, are trillion dollars, two
Speaker 1: trillion dollars. Sorry, if US dollars in debt, if all
Speaker 1: that defaults at once, do we do we really expect
Speaker 1: a major catastroph at this point.
Speaker 2: Actually, even like those local garments that are struggling the
Speaker 2: most appear to be prioritizing timely bound payments because it's
Speaker 2: really would be a catastrophic signal it would send if
Speaker 2: it were unable to pay their way. But yeah, as
Speaker 2: I said, like some lf they've been really struggling and
Speaker 2: they've been making last minute payments. Yeah, but in a
Speaker 2: short term at least, the local governments are really trying
Speaker 2: to make dos at the moment.
Speaker 1: Okay, So, given the size of this crisis, and you know,
Speaker 1: the possible magnitude of it, what impact does it have?
Speaker 1: More broadly, does it start to affect growth in the
Speaker 1: Chinese economy?
Speaker 2: I guess, like the the Chinese economy is already having
Speaker 2: like a bump pay year this year, and if there
Speaker 2: is really a case of default happening in the market,
Speaker 2: it would create panic in the market, just like how
Speaker 2: it happened with the property crisis. You know, nobody expects
Speaker 2: every grand to default but once it's default, it's kind
Speaker 2: of uh, you know, the whole A series of other
Speaker 2: defauts follow suit. So I guess like no local government
Speaker 2: really want to be the first case. So they are
Speaker 2: trying to, you know, get all the support they need,
Speaker 2: including help from the central government to help make these
Speaker 2: timely payments.
Speaker 1: And obviously the government has a lot of capacity to help,
Speaker 1: and you know they've they've been applying stimulus the economy
Speaker 1: and all sorts of things. Ultimately, do we expect the
Speaker 1: government to backstop all these these local government financing vehicles
Speaker 1: and step in and help them.
Speaker 2: Definitely, And I think they have a lot of tools.
Speaker 2: For example, most China's biggest banks are stay owned. The
Speaker 2: government for example, could ask the state banks to start
Speaker 2: providing relief, like they can ask the banks to offering
Speaker 2: longer term loans to this iltf thisse.
Speaker 1: You mentioned the per els with the housing crisis. You know,
Speaker 1: there's been a lot of property developer distress, including Evergrand,
Speaker 1: which is a huge situation. I think it's the biggest
Speaker 1: distress debt situation in the world at the moment. In
Speaker 1: that situation, it seems like investors will take a loss.
Speaker 1: But do we do we expect investors to take a
Speaker 1: loss on this kind of debt, which is eventually essentially
Speaker 1: municipal debt. Do we do expect losses there for investors?
Speaker 2: Well, a sector buildout is impossible in a way because
Speaker 2: just because the amount of debt in this sector, it's
Speaker 2: something beyond the garments are leveled, of beyond the garment's
Speaker 2: ability to help. But also it's it involves the question
Speaker 2: of moral hazard, right because the sector buildout would be
Speaker 2: giving signals that the central garment is encourage this rackless
Speaker 2: risk taking behavior. So in order to curb that thinking,
Speaker 2: you kind of like can let people assume that state
Speaker 2: would always come to the rescue when since go wrong.
Speaker 1: And that's exactly what seems to have happened in the
Speaker 1: property crisis, which is still going on, as you've been
Speaker 1: writing a lot about. I'm interested also in the developer
Speaker 1: side of the Chinese debt story and what's going on there,
Speaker 1: because we've seen Wonder bonds dropped a lot this week,
Speaker 1: We've seen lots of other developers under a lot of strain.
Speaker 1: Is that crisis still going as well?
Speaker 2: Yeah, that's an ongoing crisis. A lot of attention has
Speaker 2: been paid to the July twenty third bound payment because
Speaker 2: that's bounds is assumed, you know, like it's gonna to
Speaker 2: make timely payments, and it was treated above nineties just
Speaker 2: a week ago, so investors do acpect it to make
Speaker 2: the repayment. But the surprise came when one that told
Speaker 2: creditors that it still has a two one hundred million
Speaker 2: dollars short shortfall on the maturing bound on Monday. So
Speaker 2: as soon as you know it told creditors news, the
Speaker 2: bound fell twenty two cents on the day and continue
Speaker 2: failing on qday. So I guess like now we're just
Speaker 2: like less than a week from that maturity date, but
Speaker 2: people are still not sure whether bunned up when that
Speaker 2: would make that payment. That's something everybody is watching now.
Speaker 1: Interesting, that's a that's another one like Evergham that has
Speaker 1: a lot of debt in dollars, so there will be
Speaker 1: you know, exposure from investors all over the world in
Speaker 1: that one.
Speaker 2: Yeah, correct, he does want to be a disimblant of China.
Speaker 3: Yeah.
Speaker 1: Yeah, so in both cases, I mean on the local
Speaker 1: government financing vehicle side that you've done so well explaining
Speaker 1: to us, there seems to be more of a domestic exposure,
Speaker 1: but to the property developers which in a similar mess
Speaker 1: there there is likely to be losses for bondholders all
Speaker 1: around the world.
Speaker 2: Yeah, that's it has a lot of global investors.
Speaker 1: So the longer term impact on this, I mean, I
Speaker 1: guess you know, we talked to investors here that that
Speaker 1: must affect risk appetite for Chinese bonds, particularly junk bonds,
Speaker 1: you know, which haven't performed particularly well this year. Is
Speaker 1: this all telling us that we should be much more vigilant,
Speaker 1: much more careful when it comes to Chinese credit risk.
Speaker 2: Yeah, and I think a lot of the investors are
Speaker 2: already start doing that, right. It's now like a lot
Speaker 2: of investors are choosing Chinese property bonds as they are
Speaker 2: a priority for investments. Some are saying, you know, like
Speaker 2: if went that word to fail to repay this bound,
Speaker 2: it will be another nail in the coffin for Chinese
Speaker 2: hio properly bounds. A lot of investors are training away
Speaker 2: from investments like that. Like another big Chinese developer, Country Garden,
Speaker 2: it's now having its bound treaty in the twenties or thirties.
Speaker 2: So that's suggesting people are not really having face about
Speaker 2: its own time repayment.
Speaker 1: And so before we talk to himanship actually bloom back intelligence,
Speaker 1: what's the next big thing to watch out for a
Speaker 1: way I mean we're talking about more maturities. Is there
Speaker 1: more distress coming? Is there anything else on your calendar
Speaker 1: that we should be aware of.
Speaker 2: I guess a lot of investors they are generally interested
Speaker 2: in the Chinese Chinese government's attitude about the property sector
Speaker 2: and the LDF sector because in China the state just
Speaker 2: plays the chin important role and if the government has
Speaker 2: more stimulus or subsidies given to this subsidies, we can
Speaker 2: really say a shift of attitude in investors investment, but
Speaker 2: don't chosen. I guess a lot of investors are just
Speaker 2: taking a wait and say attitude and say what's going
Speaker 2: to happen and what's the next stops, next steps that
Speaker 2: government is going.
Speaker 1: To take great stuff. Way Joe from Bloomberg News, thank
Speaker 1: you so much for joining us. Thank you important story.
Speaker 1: We should all be watching it wherever we are sitting.
Speaker 1: Read all of Waye's scoops on the Bloomberg terminal and
Speaker 1: of course at Bloomberg dot com. So, as I mentioned earlier,
Speaker 1: there's a lot going on in Canada right now, and
Speaker 1: we're very pleased to have with us him Manchu Bakshi,
Speaker 1: who covers the banking sector up there for Bloomberg Intelligence
Speaker 1: based in New York. How's it going, Hi Manchu.
Speaker 3: Hi Jims. Thank you for having me.
Speaker 1: How are you very well? Thanks? I know you're very
Speaker 1: busy with earnings at the moment, but as you've been
Speaker 1: writing about, there's a bit of a problem with housing
Speaker 1: right now, and I wonder if you could just walk
Speaker 1: us through that.
Speaker 3: Sure. So housing has always been a concern for Canadian banks. Recently,
Speaker 3: what we're seeing is because of higher rates on adjustable
Speaker 3: rate mortgages. We're seeing that because the mortiket rates are
Speaker 3: going up in twenty twenty five and twenty twenty six
Speaker 3: mortgage that will be due to renew those borrowers will
Speaker 3: be facing higher mortgage payments and that's a risk to
Speaker 3: banks asset quality.
Speaker 1: So those just find those are mortgages that are short
Speaker 1: term and they're coming up for a reset on the rates.
Speaker 3: That's that's right. So in Canada it's a little different
Speaker 3: than in the US. They have the mortgages in Canada
Speaker 3: have a contractual maturity of five year and amortization period
Speaker 3: of twenty five years, and most of the mortgages in Canada,
Speaker 3: or the adjustable rate mortgages, the way they work is
Speaker 3: their adjustable rate fixed payments, which means when market rates
Speaker 3: go up, the monthly payments don't go up immediately, they
Speaker 3: go up at the reset. And so right now, the
Speaker 3: concern is that all the mortgages that reset at a
Speaker 3: higher rate, they will squeeze borrowers. But that's only if
Speaker 3: we assume that rates will stay higher for longer. But
Speaker 3: on the positive side, we may see wage growth through
Speaker 3: twenty twenty five, twenty twenty six, so borrows should be
Speaker 3: able to absorb some of those pressure.
Speaker 1: But so rates, you know, since the Canadian consumers last,
Speaker 1: you know, when they first took out those mortgages, let's
Speaker 1: say five years ago, how how much higher have rates gone?
Speaker 1: I mean, how much is the mortgage in the customer
Speaker 1: right now in Canada?
Speaker 3: So right now it's over six point eight seven percent,
Speaker 3: because right now the overnight rate is now five percent,
Speaker 3: and all these borrowers, especially if you look at twenty eighteen,
Speaker 3: twenty nineteen, even early twenty twenty, they took mortgages are
Speaker 3: less than two percent now, all these borrowers were stress
Speaker 3: tested at five point two five percent at least, but
Speaker 3: again mortgage 'es are where above that. So if they
Speaker 3: if they have a reset date coming up, then those
Speaker 3: marketers will be reset higher and their mortgage payments will
Speaker 3: go up.
Speaker 1: And at the same time, housing prices have shut up,
Speaker 1: haven't they in Canada?
Speaker 3: I won't say shut up, but in recently what we
Speaker 3: saw since the Bank of Canada starting raising rates last March,
Speaker 3: we saw a decline in correction in housing prices. We
Speaker 3: saw a little optic in May after eleven months of decline,
Speaker 3: but we may see more correction because that was because
Speaker 3: the Central Bank actually stopped raising rates in chain. But
Speaker 3: we have seen two hikes since then, so we may
Speaker 3: see a little more correction through this year.
Speaker 1: So from the credit standpoint, we look at this more
Speaker 1: from the perspective of the banks. You know, the banking
Speaker 1: system in Canada is quite different. There's only a few
Speaker 1: of them and they're you know, they're pretty conservative and
Speaker 1: they're quite stable. But how much exposure do they have
Speaker 1: to this problem of the mortgage refi and the consumers
Speaker 1: coming under so much pressure.
Speaker 3: So the big five six banks in Canada actually control
Speaker 3: eighty to ninety percent of eighty percent of the lending
Speaker 3: and they hold eighty percent of the deposits, so their
Speaker 3: exposure to housing is about fifty percent. CIBC Canadian Imperial
Speaker 3: Bank of Commerce being the most exposed, and Bank of
Speaker 3: Montreal leased, so it's a pretty big significant exposure of
Speaker 3: their total portfolio.
Speaker 1: So when you say CIBC is most exposed, you think
Speaker 1: they're going to sustain substantial losses.
Speaker 3: So that's not our base case. So we think not
Speaker 3: just CIBC, but all Canadian banks have first of all,
Speaker 3: their highly profitable banks and so they have that earning
Speaker 3: scussion to absorb higher provisions if they need to. And
Speaker 3: then also the banks have been increasing their regulator has
Speaker 3: been increasing their capital requirements and therefore the banks are
Speaker 3: increasing their common equity of one capital, so they have
Speaker 3: good first line defense in the form of earnings, and
Speaker 3: they also have good last defense as their capital. So
Speaker 3: not just CIBC, all the bank should be comfortable. We
Speaker 3: actually stress tested all the banks at a five percent
Speaker 3: loss straight on their uninsured mortgage portfolio, and even though
Speaker 3: the capital ratios declined from where they were in two
Speaker 3: q but all the banks remain well capitalized.
Speaker 1: And to be clear, five percent is way more than
Speaker 1: anyone's expecting.
Speaker 3: It's way more than anybody's expecting. It's way more than
Speaker 3: we start during the nineteen ninety one housing downtown And
Speaker 3: just to give you an idea, when the Bank of
Speaker 3: Canada actually stress tested banks, they forecasted that the losses
Speaker 3: on their uninsured mortgages will be point seven percent?
Speaker 1: Are they being overly optimistic though at that point?
Speaker 3: Well maybe, But we tried to do a direct in
Speaker 3: our stress test analysis. We try to do like a
Speaker 3: dict head to capital, so we don't We didn't assume
Speaker 3: any capital management actions from the bank. It was just
Speaker 3: a point in time dict had to capital. Can the
Speaker 3: bank survive? And we think, yes they can. It will
Speaker 3: not be a capital issue, it will be earning this
Speaker 3: issue for the banks.
Speaker 1: And again from a credit standpoint, I mean, how do
Speaker 1: you position as an investor here and do you expect
Speaker 1: see IBC spreads to widely substantially versus comparables or how
Speaker 1: does that play?
Speaker 2: So?
Speaker 3: Yes, that's right. So because CIBC is most exposed if
Speaker 3: we see a larger than expected housing price correction, the
Speaker 3: bonds of banks which which are most more exposed to housing,
Speaker 3: like CIBC, will be sensitive to housing price correction. Again,
Speaker 3: our base cases not that we'll see a big drop
Speaker 3: in house prices because in Canada it's mostly a supply
Speaker 3: issue and so we don't see that happening. But if
Speaker 3: that happens, I think the bonds of CIBC will be
Speaker 3: more sensitive than all the other banks in Canada.
Speaker 1: And what does best in this scenario? I'm sorry which
Speaker 1: bank performs best in that.
Speaker 3: S so Bank of Montreal. If you're only looking at
Speaker 3: housing portfolio, Bank of Montreal has the least exposure. They
Speaker 3: also really big in the US, SO Bank of Montreal
Speaker 3: will be best position. And after that, I would say
Speaker 3: TD and RBC the two pick.
Speaker 1: You know, when I go up to Canada and I
Speaker 1: tend to go to run to more than other cities.
Speaker 1: There seems to have been for quite some time a
Speaker 1: lot of overbuilding. I mean, you say that there's a
Speaker 1: shortage of supply, but the overbuilding to me seems more
Speaker 1: on the office side, and the return to office has
Speaker 1: been slower in Toronto than other parts of you know,
Speaker 1: compared to New York for example. Is that not a
Speaker 1: big vulnerability for the banks that they that they're you know,
Speaker 1: may be more exposed on the commercial mortgage side than
Speaker 1: the reach sure.
Speaker 3: So overall commercial is about on average forty percent of
Speaker 3: banks loan poard for you overall, and specifically if you
Speaker 3: look at CIRI, that's about ten percent on average. But
Speaker 3: as you mentioned about offices, offices, office exposure is just
Speaker 3: one percent of their total one part. So it's a risk, yes,
Speaker 3: absolutely wide risk because if you look at office vacancies,
Speaker 3: that's highest in a decade. It was I think it
Speaker 3: was up eighteen percent in one Q. It's highest in
Speaker 3: a decade. So, yes, that's a concern, that's a risk,
Speaker 3: but that's a manageable risk because at one percent, we
Speaker 3: actually stressed us to the office exposure of all the
Speaker 3: banks and we found that actually their earnings can absorb
Speaker 3: the provisions if we assume a two percent loss rate
Speaker 3: on their office portfolio.
Speaker 1: Okay, so what are we looking for in terms of
Speaker 1: events key events? You mentioned the resets? You know, is
Speaker 1: there is there a particular maturity hump here in terms
Speaker 1: of the resets or is there some other some other
Speaker 1: event on the calendar that could trigger, you know, an
Speaker 1: unraveling of this in terms of defaults and mortgage is
Speaker 1: that sort of thing.
Speaker 3: I think the biggest uh factor that we're looking at
Speaker 3: is how high the rates will go, because one thing
Speaker 3: we I think I forgot to mention before that even
Speaker 3: though on all these adjusts to rate mortgages, your monthly
Speaker 3: payments don't go up immediately when rates go up. But
Speaker 3: if the rates go high enough that your monthly payments
Speaker 3: don't don't cover principle just interest, then it hits at
Speaker 3: what we call it a trigger rate, and then your
Speaker 3: monthly mortket you wan go up. So for us, though,
Speaker 3: the one thing we're looking at right now is how
Speaker 3: high the rates will go, because if the rates keep
Speaker 3: going high, then most of these mortkeachs will head a
Speaker 3: trigger rate, and that's not what you want because that
Speaker 3: will pressure all the more.
Speaker 1: Was then, is there a number that you're looking at
Speaker 1: in that context?
Speaker 3: We don't expect it to go over five and.
Speaker 1: A half, okay, but if it does, then there'll be troubled.
Speaker 3: Then it depends again how high it goes. But that's
Speaker 3: something then will pay more attention to be already looking
Speaker 3: at it very closely. But that's then that's something that
Speaker 3: will require banks to start building provisions more aggressively if
Speaker 3: that happens.
Speaker 1: Okay. Obviously, Canada is a huge economy, and it's adjacent
Speaker 1: to the US, and there's lots of trade ties and
Speaker 1: so on, and you know, cultural ties. But if you're
Speaker 1: not inside Canada, why do we care about this particular
Speaker 1: issue with the housing and the exposure that banks have.
Speaker 3: So I can give you two reason. If you are
Speaker 3: just a regular person, if you have bank account Canadian
Speaker 3: banks have operations in the US, I have an accounting TV.
Speaker 3: Most people have accounting in Canadian banks. They may not
Speaker 3: know that they're Indian banks. For detail, and for investors,
Speaker 3: Canadian banks issue a lot of US dollar denominated debt.
Speaker 3: So if you're an investor, you care about Canadian banks and.
Speaker 1: They are issuing. I mean banks are coming out of
Speaker 1: earnings now, we're seeing quite a few deals coming and
Speaker 1: we're expecting a lot more from the regional banks. What
Speaker 1: is the outlook for bond issuance from the banks? Sure?
Speaker 3: So for the US banks, we know we were expecting
Speaker 3: issuance from the US banks because of the regulatory changes
Speaker 3: that we're expecting. So yes, the US regional banks, the
Speaker 3: big chesips, they are all actively issuing tet in Canada
Speaker 3: for the remainder of the year. We expect modest issuance
Speaker 3: for three reasons. The first one is that the loan
Speaker 3: growth is moderating, both in commercial and in housing. We
Speaker 3: expect me to high single digit. And the second I
Speaker 3: would say is they have manageable maturities, have about twenty
Speaker 3: billion maturing three end of the year. And the last
Speaker 3: one I would say is, unlike the US, we don't
Speaker 3: have any upcoming regulatory requirements to issue debt. For the
Speaker 3: Canadian bank, there was a requirement to issue total loss
Speaker 3: of stopping capacity that and so banks started issuing senior
Speaker 3: bones a few years ago. But now as of now,
Speaker 3: they all are away above their minimum requirements. So we
Speaker 3: expect the modestations this year.
Speaker 1: So less than the US, A.
Speaker 3: Wee less than the US. I think they should about
Speaker 3: seventy billion. They have twenty billion in maturity, so less
Speaker 3: than one hundred billion is what we're expecting for the
Speaker 3: second half. But we expect Bank of Montreal to be
Speaker 3: more active and TD to be least active.
Speaker 1: Okay, so when you look at the banking system in
Speaker 1: Canada overall, and you mentioned that, you know, even though
Speaker 1: there are these vulnerabilities On the houthing side, there's still
Speaker 1: very well placed and they can do very well even
Speaker 1: in a very harsh stress test that you've put them under.
Speaker 1: How do you view them from a sort of a
Speaker 1: more global perspective? You know, in the US there's there's
Speaker 1: quite a lot of worries about going into a downturn,
Speaker 1: potentially a recession, you know, potentially a lot more volatility
Speaker 1: in credit markets. Does that make Canadian banks in relative
Speaker 1: terms a sort.
Speaker 3: Of I would see yes, And that's what we see
Speaker 3: if you look at from a credit ctand point, they
Speaker 3: are among the highest rated banks in the world, Canadian
Speaker 3: banks and Australian banks, they are the highest rated. And
Speaker 3: one of the main reasons that not many people know
Speaker 3: about this is because of the regulator in Canada. First
Speaker 3: of all, unlike US, we don't have as many regulators
Speaker 3: in Canada or in Australia the iostacle of Australian banks.
Speaker 3: So because you don't have you're not dealing with multiple regulators.
Speaker 3: It's only one. It's easy to manage, and the regulator
Speaker 3: in Canada is really very proactive, so they go above
Speaker 3: and beyond of what the global requirements are. And then
Speaker 3: they they don't wait for something to happen. And that's
Speaker 3: what we have seen, like they've been increasing the capital
Speaker 3: requirements from the banks, even though they already have so
Speaker 3: much capital. They keep increasing the requirements so they know
Speaker 3: that banks are holding enough capital, so they are prepared
Speaker 3: for if you have a stress situation and they're.
Speaker 1: Not huge risk takers as exactly.
Speaker 3: The exactly they are, well, I will see fired and
Speaker 3: then not as risky because he went on mortgages. You
Speaker 3: compare what we saw doing the financial crisis, Gunadian bankstead fine. Again,
Speaker 3: most of the mortgages are on their balance. They don't
Speaker 3: securitize as much as the US bankstead back then.
Speaker 1: So something to be said from a credit sandpoint for
Speaker 1: being boring.
Speaker 3: I can't say that.
Speaker 1: Thank you very much, Manchu Backshi you for Bloomberg Intelligence.
Speaker 3: Thank you for having me. James, thank you.
Speaker 1: You can read all of his great analysis on the
Speaker 1: Bloomberg Terminal. Do check it out and we hope to
Speaker 1: see you back on the show soon. And thanks again
Speaker 1: to Wajo from Bloomberg News. Read all of her great
Speaker 1: credit scoops on the Bloomberg Terminal and at Bloomberg dot com.
Speaker 1: I'm James Crumbie. It's been a pleasure having you join
Speaker 1: us again next week on the Credit Edge.