Canadian Banks Among Strongest In The World, Bloomberg Markets Survey Finds

Canada’s banks may have needed massive financial aid during the banking crisis of 2008, but they’ve recovered nicely -- or at least better than many banks elsewhere,according to a survey from Bloomberg Markets.

The financial magazine’s annual survey of the world’s strongest banks shows Canadian financial institutions dominating the list for this year, with five of Canada’s banks in the top 20.

CIBC was the highest-ranked Canadian bank on the list, at third place, while TD Bank, RBC, Scotiabank and the National Bank of Canada all made the top 20. Only the Bank of Montreal didn’t rank.

Singapore’s Oversea-Chinese Bank came in first on the list, followed by BOC Hong Kong Holdings.

To be fair, the competition was a little thin this year. The Bloomberg survey automatically disqualified any bank that posted a loss or failed a government stress test in 2011, and that includes many of the world’s largest banks.

The Bank of America posted quarterly losses last year, while Citigroup failed a stress test, disqualifying those two banks.

In Europe, the situation was even more dire, with some of the continent’s largest banks -- such as the Royal Bank of Scotland, Credit Suisse and Unicredit -- posting losses.

To determine how strong banks are, Bloomberg Markets analyzed the banks’ balance sheets to determine how well they could withstand a shock to the economy. The survey looked at what portion of the banks’ holdings are considered top-quality assets, and compared that to the banks’ overall assets.

The survey looked at what percentage of the banks’ assets were “nonperforming,” and also at the bank’s efficiency, by comparing costs to revenue.

“Canadian banks invoke their strong capital levels, the country’s conservative lending culture and strict regulatory oversight under a single supervisor as reasons for their showing,” Bloomberg Markets noted. “The supervisor requires Canadian banks to hold a higher level of capital than do international standards.”

While it’s true that Canadian banks hold larger capital reserves than most banks elsewhere, making them theoretically more stable, some analysts have questioned the value of those holdings.

And Canadian banks’ “conservative” lending culture may be unravelling, to an extent. Moody's ratings agency has suggested that Canadian banks may be overexposed to fragile mortgage debt, and the Office of the Superintendent of Financial Institutions (OSFI) recently said that Canada’s mortgage lending market is increasingly beginning to resemble the subprime mess in the United States.

Perhaps heeding the regulator's warning, the federal government recently placed the Canada Housing and Mortgage Corp., the government-run mortgage insurer, under OSFI’s control.

All this suggests that, while Canadian banks are riding high at the moment, they should watch for signs of weakness, especially as the housing market softens.