Canadian Banks: Risk-Averse, Not Immune

I think the management teams and boards of the Canadian banks should be congratulated for managing their businesses so well, especially when compared to the greed and recklessness that their global competitors were operating under. I believe the market's discounting of the Canadian banks stock prices in the past year is not a reflection of what they've done, but concern over what's ahead.

The biggest concern facing Canadian banks is the future health of the Canadian economy. Although Canada rode the oil and resource boom through last June to low unemployment and a booming dollar (which at its peak was worth C$1.10 for every US $1), and many in Canada assumed that the country was "decoupled" from the problems afflicting the U.S. even as late as last September, we now know that the northern economy is tightly connected to the U.S. and world economies.

In the '80s and '90s, Canada consistently and stubbornly hung on to a higher unemployment rate than the U.S. Canadian workers have been less mobile than their American counterparts, and retraining certain swaths of society has been difficult. In the last major downturn or the early '90s, the spread between Canada and U.S. unemployment grew to over 4%.

What's more, this gap remained at these levels until 1998, when the gap started to close to only about 2% by 2002 and recently closed entirely as the U.S. rate started to tick up before Canada's did.

Quite simply, Canada lags the U.S. when it goes into an economic slowdown and takes longer to come out of it. Despite the resource boom, a large part of Canada's economy remains tied to manufacturing and shipping those goods to the U.S. A weaker Canadian dollar for much of the last decade gave these Canadian manufacturers a big advantage sending goods to the U.S. As the Canadian dollar rose to parity with the U.S. dollar in the last 18 months, that cost advantage went away, but oil, resources and the Canadian economy remained healthy.