Credit Suisse (NYSE:CS) is about to be bought out by UBS Group (NYSE:UBS) for US$2 billion. This follows five years of falling Credit Suisse shares, due to a series of scandals that the bank was ill-prepared to deal with. First, one of the bank’s executives got caught spying on UBS. Then, the bank got stuck with losses stemming from the Archegos Capital implosion. Finally, Credit Suisse was got caught up in a drug smuggling scandal, in which it was convicted for helping a smuggling ring launder money.
It all added up to a stock price that fell 89% in the span of five years. On Sunday, the company’s value dipped even further, as the UBS deal priced CS stock at 75% lower than its already low stock price.
Which brings us to the topic of Canadian banks. Canadian banks are well known for their prudent risk management practices, and for being subject to strict Canadian regulations. All of these factors combined have given Canadian banks a great track record: in 150 years, Canada’s financial sector hasn’t experienced a single crisis. In this article, I will explore some reasons why Canadian banks are relatively safe compared to their international cousins like Credit Suisse.
Credit Suisse had issues going back to well before 2023
An important thing to remember about Credit Suisse is that its issues go back to well before this year. As mentioned previously, the bank has been involved in scandals going all the way back to 2020. When banks experience issues like the ones CS is going through now, there tend to be warning signs many months in advance. As I will show in the next section, Canadian banks are showing few “red flags” today.
Canadian bank stocks are relatively safe
In 2023, Canadian banks are looking relatively safe compared to their global peers. Today, most of them enjoy:
- Large deposits.
- High capital ratios (i.e., high quality capital divided by risk weighted assets).
- Strong growth.
Take Royal Bank of Canada (TSX:RY), for example. In its most recent quarter, it delivered 12.4% revenue growth and 7% growth in adjusted earnings. It had a 12.1% CET1 ratio (cash plus equity divided by risk weighted assets), higher than what regulators require. Its personal and commercial banking segment saw 8% growth in deposits. It had 9% growth in its capital markets business. Basically, it was a strong quarter that saw RY’s business grow, not shrink. You normally don’t see these kinds of numbers from banks that are collapsing. So, RY looks relatively safe here, compared to some of the alternatives.
2023 has been a risky year for certain banks. Between the smaller U.S. banks and the riskier international banks, there have been many issues. Credit Suisse has been something of a poster child for these problems. It has not only been losing money, but also running out of ways to stay afloat as a company. At this point, it looks like Credit Suisse shareholders are going to get burned. The same can’t be said for those holding TSX banks. Profitable, growing and well-capitalized, Canadian banks are in a good place.