Savings Rate, Household Debt: U.S. vs. Canada
Canada avoided much of the impact of the global financial crisis especially with regards to its financial system. Canadian banks and regulators alike won praise from investors worldwide for following prudent,conservative policies with respect to risk management. While for many quarters the big five Canadian banks met or exceeded expectations, recently however Bank of Montreal and Royal Bank reported disappointing earnings for the second quarter.
Savings Rate:
In the past, Americans used to save less than Canadians. But the phenomenon is changing. Nowadays due to de-leveraging the personal savings rate in the U.S. is higher than Canada as shown in the chart below:
Click to Enlarge
Source: The Boeckh Investment
From the latest edition of The Boeckh Investment report:
“While Canada has deservedly had a good ride in recent years particularly through the global recession, due to strong Federal Government finances and a strong balance sheet, all is not quite as rosy as meets the eye. Chart 16 shows that, while the U.S. savings rate has gone from 2% to 6.5% since 2007, the Canadian savings rate, after a brief rally, has collapsed to about 2 1/2%. Canadian households have continued to add to their debt, oblivious to the changed world environment. House prices rose to new highs during the recovery, while U.S. house prices are down over 30% from their peak. Moreover, while federal debt levels and trends are good by world standards, provincial debts are disastrous. There is even some talk of Ontario going the way of California. Its per capita public debt is ten times that of California whose bonds are rated slightly less risky than Croatia’s.”
Household Debt:
Canadian household debt continued to increase in 2008 and 2009 while in the U.S. it decreased as shown in the table below:
Source: Where is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge, The Certified General Accountants Association (CGA) of Canada
From the CGA study:
“A cross-country comparison of household debt in Canada and in the US may be a useful exercise for a number of reasons. Both countries have relatively high levels of per capita income and living standards, are located in geographical proximity to one another, and share close historical and commercial ties. Both countries have experienced similar rates of inflation in the past decade and exhibit great resemblance in demographic characteristics when it comes to aging population, levels of labour force participation, and high reliance on immigration.
Similar to the situation in Canada, US households have been rapidly increasing their indebtedness in the past two decades with total household debt outgrowing consumer spending and disposable income. However, during the most recent recessionary period, some noticeable differences emerged in the debt dynamic of Canada and the US. Specifically, in Canada, mortgages and particularly consumer credit continued to expand in 2008 and 2009 at annual rates very similar to those seen prior to the economic downturn. In contrast, the US saw brisk contraction in both components of household debt (Table 2). In turn, a dramatic drop in interest rates that occurred in both Canada and the US at the end of 2008 did not much alter the household debt-service burden in either country, leaving it at approximately the same level in 2009 as it stood in 2006.”
It must be noted however that difference in the debt-service ratios between U.S. and Canada is large because of the methodology used to calculate the figures. In the U.S. mortgage interest paid is tax deductible but it is not allowed in Canada. This creates an incentive for borrowing in the U.S.
Overall while on the surface Canada appears to be much stronger than the U.S., in reality it is not based on some factors. Unlike the U.S., Canada is still a commodity-based economy and is heavily dependent on trade with the US. Should the housing market in Canada collapse and the US economy enter another recession, the Canadian economic strength will be tested significantly.
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On August 23rd, the British-banking giant HSBC Holdings (HBC) bid for Nedbank(OTC: NDBKY), South Africa’s fourth largest bank. HSBC is trying to buy the majority stake held in Nedbank by Anglo-South African insurer Old Mutual. The deal potentially valued at $6.8B would give HSBC a 70% stake in Nedbank and offer the bank a strong presence in Africa’s largest economy.
With talks of a double-dip recession in the US economy and many Western banks still suffering from effects of the financial crisis,investors looking to gain exposure to international banks may consider the following emerging market bank stocks that are traded on the OTC markets in the US. Please note that these stocks are sponsored ADRs and have very light daily trading volumes.
1.Istanbul, Turkey-based Akbank (OTC: AKBTY) is Turkey’s most valuable bank based on market capitalization with 877 branches and assets of over $69B at the end of 2009. The capital adequacy ratio stood at 21% at the end of last year and Euromoney magazine selected Akbank as the “Best Bank in Turkey”. The current dividend yield of the ADR is 1.49% and the stock is up over 10% YTD.
2. Commercial International Bank (OTC: CIBEY) is the largest private sector bank in Egpyt based on loans. Last year the bank was ranked the best bank in Egypt by Euromoney, Global Finance and The Banker magazines. CIBEY is up over 29% YTD and the current yield is 2.02%.
3. Johannesburg, South Africa-based NedBank (OTC: NDBKY) is one of the largest banks in South Africa. The bank has the second largest deposit base from retail customers. The stock pays a dividend of 3.03% and the price has grown by about 13% YTD.
4.Turkiye Garanti Bankasi (OTC: TKGBY) is Turkey’s second largest private bank with an asset base of $78B at the end of 2009. Garanti has about 9 million customers and 792 branches. The current dividend yield on the ADR is 1.01% and the stock is trading under $5.
5. Czech-republic based Komercni Banka (OTC: KMBNY) is part of France’s Societe Generale(OTC: SCGLY) group. Komercni has operations in Central and Eastern Europe as well. Societe Generale holds 60.35% of the bank. Komercni has 1.62 million customers and 398 branches. As of second quarter this year, the capital adequacy ratio stood at 14.7% and Tier 1 capital ratio was 13.5%. The ADR pays a 4.38% dividend.
Ten Components of the S&P/TSX Capped Energy Index
The S&P/TSX Capped Energy Index consists of Canadian energy sector stocks that are listed on the TSX. The iShares S&P/TSX Capped Energy ETF (XEG.TO) tracks the performance of this index. The top 10 components of this fund are listed below together with their ticker in the US markets and the current dividend yield:
1 .Suncor Energy Inc (SU)
Current Dividend Yield: 1.26%
2. Canadian National Resources (CNQ)
Current Dividend Yield: 0.92%
3. Encana Corp (ECA)
Current Dividend Yield: 3.01%
4. Cenovus Energy Inc (CVE)
Current Dividend Yield: 3.04%
5. Talisman Energy Inc (TLM)
Current Dividend Yield: 1.50%
6. Canadian Oil Sands Trust (OTC: COSWF)
Current Dividend Yield: 8.16%
7. Nexen Inc (NXY)
Current Dividend Yield: 1.07%
8. Imperial Oil (IMO)
Current Dividend Yield: 1.15%
9. Penn West Energy Trust (PWE)
Current Dividend Yield: 8.85%
10. Crescent Point Energy Corp
Current Dividend Yield: N/A
Chart: Comparing Personal Disposable Income Among BRIICS
Last week, China overtook Japan to become the world’s second largest economy. While this was a major news in the global media, it was a non-event in China. China is still considered as a poor country.The per capita GDP of China was $6,675 last year compared to $32,443 for Japan.
In terms of per capita annual personal disposable income, among the BRIICS countries (Brazil, Russia, India, Indonesia, China and South Africa), Russia ranks the highest as the chart shows below:
Source: Euromonitor International
Brazil ranks the second with a per capita annual personal disposable income of capita $5,141 in 2009 compared to $5,324 of Russia. For many years India and Indonesia have had the lowest per capita annual disposable incomes.
Consumer spending is a major factor in the BRIICS countries. However it varies widely between some countries. For example, private consumption accounted for 62% of the GDP in Brazil in 2009 compared to just 34.7% in China.
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