Steven Eisman, of The Big Short fame, went on BNN Bloomberg on August 23 and explained why he is shorting Canadian banks and Canadian Tire (CTC.A). Eisman’s conviction in shorting Canadian banks is at 9/10.
First, he explains his bank position:
Credit quality did not deteriorate quarter over quarter. The increase in non-performing loans or NPLs continued. You could interpret the quarter as positive or negative. Two puzzles:
1) There are private banks in Alberta like ATB. It has had an explosion in NPLs over the last year. Canadian Banks don’t show NPLs on a regional basis but this does not seem to be showing up in their book and he can’t explain it yet.
2) Canadian banks are growing their commercial loan books double-digit. With all the uncertainty out there this should be the last time you should grow your loan book double-digit.
ATB NPLs are up over 100% according to Eisman. It only makes loans in Alberta. That part of Canada is going through a severe recession right now.
Eisman is surprised there is an increase in NPLs in Canada but can’t explain why it doesn’t show up to a greater degree. Personal bankruptcies are up enormously and he just can’t explain why the Canadian banks don’t see this reflected in their numbers. He expects it will be reflected in the next quarter or two.
The Canadian economy is weaker than it was several years ago. Why would you suddenly have large percentages in loan growth?
Banks that accelerate their loans at the end of the cycle tend to suffer from those loans as the cycle ends.
The time frame on Eisman's short ideas tends to be from 9 months to 3 years. We are a quarter of the way through the story.
- Royal Bank of Canada (TSE:RY)
- CIBC
- Laurentian Bank of Canada (TSE:LB)
- Home Capital (TSE:HG)
- Genworth (TSE:MIC)
Provisions for losses will have to go up. As a result net income will go down.
If he’s right he expects the stocks to decline significantly.
What could change his mind?
If the level of NPL stop going up but go down that could change his mind. Interest rate level doesn’t interest him much. It is a benefit.
Eisman thinks odds are very low Canadian banks will run up a lot. If he’s right he expects the stocks to decline significantly. Making for an asymmetric trade.
Non-bank short: Canadian Tire
Eisman is also short Canadian Tire based on a dual thesis. They have a significant credit card portfolio. It is also a large retailer and large quarters they have had real margin pressure. They are feeling the heat from Amazon.
Finally, Eisman adds European banks are going significantly lower.
Disclosure: no positions
