The Best Way to Profit on Canadian Banks

01/10/2012 6:30 am EST


Stuart Graham

Executive Vice President, Head of PIMCO Canada, PIMCO

Canadian banks, which are in far better condition than American ones, offer safe but expensive debt, and there are better ways into this market, says Stuart Graham.

Stuart, tell us about the Canadian banks and what is important for investors to know about if their interested in taking a position in some of these.

Well, Canadian banks have actually come through this most recent crisis exceptionally well.

As you know, what you’ve seen throughout the world is a lot of bank failures and the need for a lot of those banks to raise capital. Canadian banks went into this crisis very well capitalized, and also didn’t make a lot of the mistakes or missteps that maybe other banks around the world made.

You know, specifically I think you can really trace it back to the very different nature of the Canadian housing market. Stateside, a lot of those mortgages were securitized and sold off, and that really kind of created a fundamental problem with a lot of the US banks.

We didn’t have that same situation in Canada. For the most part, we have a very solid and bullish banking sector, and that has allowed Canadians to weather this particular storm exceptionally well.

Understanding of course that you come from a fixed-income perspective, what should investors do if they do want to take advantage of the strength in that sector?

Well, certainly a lot of the debt that is issued by Canadian banks we would consider to be very secure. What we would say, though, is that the spread that is offered on those Canadian banks is very, very tight.

So while sometimes—certainly from a quality perspective it’s terrific—we find that from a spread perspective that it’s really quite expensive. So there is opportunity selectively to take advantage of bank credit in other markets and then hedge some of that risk back to Canada.

So, what would be some actionable steps an investor can take to follow up on some of these ideas?

Well, certainly individual investors can buy the bonds issued by any of the major banks in Canada, which we would consider to be very safe and liquid investment.

You know, if people were constructing a more balanced portfolio, certainly look at investment strategies like ours that actually offer mutual-fund solutions where a lot of that bank paper is embedded in the funds that actually provides attractive yields for investors really looking for yield.

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