Tuesday, May 02, 2006

Cdn Banks Can Weather Auto Woes

The Globe and Mail, Allan Robinson, 2 May 2006

Canadian banks can withstand the troubles facing the North American auto industry despite the deteriorating credit quality of car manufacturers, said Brenda Lum, managing director of Canadian financial institutions for Dominion Bond Rating Service Ltd.

The domestic bank with the greatest exposure to auto manufacturers is Bank of Nova Scotia, according to a DBRS report. The bank's direct loans outstanding of $4.5-billion to the industry represent 25.1 per cent of its common equity and reserves, it said.

However, unlike some of the other banks, Scotiabank does not disclose separately the loans it makes to car dealers under plans to finance their inventories on the floor, Ms. Lum said. The data also do not include debt from car leases or retail loans.

Bank of Montreal has $551-million in direct loans to car manufacturers or 3.7 per cent of its common equity and reserves; Royal Bank of Canada has $2.6-billion in loans or 12.7 per cent of its capital; and Toronto-Dominion Bank has $1.3-billion in loans or 7.5 per cent of its capital.

Canadian Imperial Bank of Commerce does not disclose details on its loans to the auto manufacturing sector.

“As an industry, the banks are in good shape and Bank of Nova Scotia has strong earnings and can absorb loan losses should they be higher,” Ms. Lum said. During the past three years, banks have reduced their loans to the industry, she said.

Canadian banks were much more heavily exposed to the telecommunications and cable industry when the tech bubble burst in 2000, according to the report.

The collateralized debt obligation (CDO) markets have also escaped damages arising from recent defaults by auto parts makers such as Collins & Aikman Corp., Delphi Corp. and Dana Corp., according to DBRS.

Typically no single company accounts for more than 1 per cent of the pool of debt obligations within a CDO security and creditors have recovered some of the money owed by the defaulting companies. About 42 per cent of the debt was recovered from Collins & Aikman, while about 60 per cent and 70 per cent, respectively, have been recovered from Delphi and Dana, it said.

In Canada, CDOs outstanding at the end of 2005 totalled $16.9-billion, DBRS said. Exposure to auto makers and auto parts sectors within the CDO market is about 4 per cent, it said.

New York-based Fitch Inc., a credit ratings agency, said recently that auto debt put only a minor dent in CDOs even though Delphi and Dana “experienced a precipitous decline from investment grade to default in a short period.”

Delphi was in 88 per cent of the 173 CDO transactions, while Dana was in 34 per cent of the deals outstanding, according to Fitch.