Are Canadian banks truly "pulling back"?
News report: Private Debt Steps In for Canadian Companies as Banks Pull Back
As Bloomberg headlines go, this one is pretty exciting to a private debt fund. Banks pulling back, despite pressure from government, SME interest groups and the marketplace. The question is simple: is it true?
Like everything our blog shows an interest in, whether it be politics, the state of the IPO market (see representative prior post “Canadian tech IPO market remains AWOL, despite impressive 5 yr. outperformance of TSX Information Technology Index” Sept. 27-16), venture capital flows, corporate governance or you-know-who, there are stats to review.
Facts are paramount if you want to have credibility in the blogosphere.
For years, we’d regularly look at the rolling bank lending figures as released by the Bank of Canada. During the financial crisis, it was compelling to see just how much loan capital was removed from the Canadian economy. Just as it was fascinating to see how long it took for those same dollars to make their way back into the jeans of entrepreneurs and larger corporate names.
Although the disclosure now comes in a different form, we can still check in each month on the growth/collapse of the domestic loan books of Canadian banks. The ones who have allegedly “pulled back” from lending. The number that’s most of interest is the “business loans (other)” category, which is a subset of reported Canadian chartered bank assets.
Here are the official figures (June ’16 is the most recent number available):
June 2012: $193.96 billion
June 2016: $269.73 billion
For those who don’t have a calculator handy, Canadian banks grew their collective commercial and corporate loan books by 39% over a four year period. Despite a federal election, a large drop in oil prices, huge forest fires, unrest in Europe, political turmoil in the USA…all of which could have been justified to pull back on the throttle. Despite tepid annual economic growth of 1.5-2.5%. Despite increased pressure from Basel III regulations and OSFI to stockpile capital. ~10% per annum loan growth, when the economy was growing at a quarter of that pace. And these figures include the impact of the traditional and ongoing pay downs of existing business loans via amortization, for example.
The aggregate net increase in business loans is meaningful in hard figures, too: $75.77 billion. Our team is proud to have committed ~$365 million of capital to growth companies during this same four year period; it was hard work in a highly competitive environment. And yet, when you compare our efforts to deploy capital to the banking fraternity’s >$75 billion, the private innovation debt world seems almost irrelevant.
Of this there can be little doubt: a 39% increase should not be characterized as a “pull back”.
That’s not to say there isn’t an opportunity for private debt funds in Canada. Our modest success is proof of the market demand for flexible, private debt capital. South of the border, the fact that the U.S. government doesn’t compete with the private sector, as the Business Development Bank of Canada does here, makes for a very vibrant private debt industry. As proof, I can pass along that a smallish U.S. private debt fund manages US$9.5 billion — which was one of my key takeaways from a Chicago debt conference two weeks ago.
Although it makes for a good hook, I don’t think that a few deal anecdotes is proof that banks are “pulling back.” Bloomberg cited a $10 million Dynacor Gold (DNG:TSX) loan opportunity as evidence of the reticence of Canadian banks. That a bank didn’t think a loan to a small cap to complete an ore processing mill in Peru was a suitable place to allocate capital doesn’t shock me, despite the fact that the company in question was profitable in 2014 and 2015.
OSFI might have a role in this, as it is generally negative on any loan that commands a rate of LIBOR plus 1300 bps. On the bright side, Dynacor got its capital, it has continued to turn a profit for the first two quarters of 2016, and the stock is up 58% YTD. What’s more, LPs of the debt fund in question are earning an appropriate return on their capital, which is what the free market is all about.
As for “pure distressed-debt investor” Callidus (CBL:TSX), no one on Bay Street would be surprised that banks aren’t touching companies that fit that profile. I’d argue that it’s not about new bank capital regulations as much as sensible credit decisions. Make no mistake; the Callidus team has their business focus, and the stock market has been supportive of their efforts. Like everyone in specialty finance, the proof is in the pudding. Firms come, firms go, and some are built / managed to last a generation or more. There is plenty of demand to keep us all busy for the rest of our careers, but that’s not necessarily a pox on the banking house.
$75.8 billion. Net new Canadian commercial and corporate lending. Since June 2012. Wow.