But it doesn’t look like Canada will hold its edge for long. If the oil boom fades and the financial market continues to bleed money from structured product losses, then Canada might face a serious economic slowdown.

At last count, total write-downs at Canada’s six largest banks stand at approximately US$11 billion. That’s roughly 5% of the total global sub-prime write-downs to date. Once US$11 billion may have seemed like a large loss, but now it pales in comparison to the US$200 billion banks have written off their books since last summer worldwide. It’s also far less than just Union Bank of Switzerland’s (UBS) cumulative US$38 billion in losses alone.

Canada, however, is not immune to the woes now affecting its largest trading partner, the United States.

Canada Is Already Slowing – Even During a Raging
Bull Market for Raw Materials

If you can look past the bull market in raw materials that has enormously benefited Canadian exports and the Canadian dollar, then you’ll see the country is starting to show strains in lending, housing, and manufacturing.

Indeed, a slowdown has already arrived. Canada’s economy contracted in the first quarter for the first time in five years. The economy slowed mainly because the surging Canadian dollar and weak U.S. auto sales caused a slump in auto manufacturing.

Meanwhile, some Canadian banks can’t escape the relentless wrath of sub-prime and other losses tied to illiquid structured financial products.

First quarter profits at Canada’s largest six chartered banks points to an acceleration of write-downs for Royal Bank of Canada (RBC) and Canadian Imperial Bank of Commerce, or CIBC.

Canada’s biggest six banks logged a first quarter profit of US$2.5 billion in the January to March period, down almost 50% from a year earlier when combined earnings were US$4.7 billion. Most of these losses, however, are tied to CIBC and Bank of Montreal – the hardest hit since 2007.

CIBC Hit the Hardest, While TD Escapes Sub-prime Wrath

Some Canadian banks have fared much better than their peers since the advent of the credit crisis last year. Of these, Toronto-Dominion Bank (TD) has almost escaped without any serious losses at all since last July. Meanwhile, the Bank of Nova Scotia has also easily absorbed modest losses tied to sub-prime and other structured products.

In fact, TD Bank ranks among one of the best-performing major banks in North America in 2008 – up 8% compared to a loss of 14% for the KBW Bank Index in the United States.

Here’s What the Best Performing Bank in North America Looks Like

But the story is altogether different for Canada’s other big banks.

RBC and CIBC now share the dubious distinction of being featured on the “sub-prime hit list.” Both banks are on the global banking sectors’ top 40 list for the largest write-downs and credit losses since the banking sector started hemorrhaging last fall. And Bank of Montreal (BMO) is ranked second only behind CIBC for posting rising losses tied to structured products and other write-downs in Canada. RBC is Canada’s largest bank by stock-market value.

From its all-time high last year, the Bank of Montreal has seen its stock plunge 31%. CIBC, which takes the booby-prize for Canada’s biggest loser in the sub-prime crisis because of its largest U.S. presence, is 33% off its best level.

CIBC has already written off a cumulative US$6.7 billion since the onset of the sub-prime crisis. That number is almost twice the figure posted by Canada’s other five largest banks put together.

Since last fall earnings have eroded and write-downs have accelerated. In short, the U.S. credit crunch that battered the U.S. housing sector has knocked the wind out of the banks’ sails. Everything from consumer and corporate lending to mortgages has been adversely affected as Canada finally begins to feel the impact of an American slowdown or recession. Over 85% of Canada’s trade is with the United States – the two largest trading partners in the world measured by the volume of goods and services.

But the news isn’t all gloomy. Dividends were largely unchanged over the first quarter while Bank of Nova Scotia actually raised its payout.

In addition to sub-prime losses, many banks were also hit by exposure in asset-backed commercial paper or ABCP. Other smaller lenders and brokers, including Canaccord Capital, saw losses in the hundreds of millions tied to illiquid short-term commercial paper.

Canada Now Slowing But Will Avoid Recession

The Canadian economy is now slowing in 2008. Stripping away booming oil and gas exports, the country’s merchandise trade balance is now in deficit. Without commodity exports, Canada would probably be in an economic recession.

First quarter GDP data confirm this trend. Manufacturing belts in Ontario and Quebec continue to suffer from a soaring Canadian dollar, up over 50% since 2002 versus the U.S. dollar while the unemployment rate is rising, housing is showing signs of slowing and commercial bank lending is gradually contracting.

The Canadian economy should escape a serious slowdown this year. The country’s trade balance and budget surpluses are indeed shrinking amid a slowing global economy but remain well managed compared to most industrialized economies.

Canada’s housing market is also in far better shape than America’s. That’s mostly because “zero-money down” was never a part of the country’s housing culture. But a continued strengthening of the Canadian dollar and more losses tied to structured investment products could tilt the nation into recession if combined with a significant decline in crude oil and gas prices.

ERIC ROSEMAN, Investment Director

Source: Even Commodity Rich Canada Is Not Immune to This Global Slowdown

A collapse would make it the biggest LBO ever to fail. Indeed, BCE would top the list of 62 LBOs – with a combined value of $174 billion – that were announced last year and then later abandoned as borrowing costs more than tripled, Bloomberg News reported.

BCE had expected to complete the buyout by next month.

The shares of the No. 1 Canadian telephone company plunged as much as 16% yesterday – and closed at $33.10, down $4.73, or 12.5% – after a Quebec judge had ruled that bondholders can challenge the sale because they weren’t treated fairly. The ruling throws the takeover deal in jeopardy, and could require the buyers to renegotiate the deal’s terms if they opted to proceed.

The decline was the biggest since 1983, when the company traded in its longstanding “Bell Canada” name for a new listing as “BCE.”

One of the suitors, the Canada Pension Plan Investment Board, said it has no interest in making a renewed bid for BCE.

But in a late development yesterday, reports surfaced in the Canadian business press containing speculation that the all-but-certain collapse of the BCE-Teachers deal could prompt another bid by BCE rival Telus Corp. (TU), Canada’s No. 2 phone company. After much groundwork last year – much of it under the glare of close media scrutiny – Telus finally decided not to make a bid for BCE.

The current BCE LBO deal has been the subject of intense speculation over the past several months thanks to a declining capital market and lower trading prices than the offered $42.75 per share.

Back in June, BCE agreed to a $43.44-a-share offer from a group led by the Ontario Teachers’ Pension Plan. The market price of BCE’s U.S. stock is now 24% below the offering price the deal was based upon.

“The probability of the deal closing at [the agreed-upon price] on June 30 is almost zero,” Craig MacAdam, a portfolio manager at Aurion Capital in Toronto, told Bloomberg. “But there’s still room to maneuver. The deal is not completely dead yet. All the stakeholders will have to get back to the table and renegotiate.”

The bondholders – including CIBC Global Asset Management Inc., a unit of Canadian Imperial Bank of Commerce (CM) – say the LBO would overload the telecom firm with debt, substantially boosting the risk of a default. CIBC is one of Canada’s so-called “Big Four” banks.

According to details of the deal contained in regulatory filings, the teachers would raise about $34.56 billion in debt (C$34 billion). The equity value of the deal is more than the debt, according to published reports.

Some of the teachers’ partners in the deal include Providence Equity Partners Inc., of Rhode Island and Madison Dearborn Partners LLC of Chicago. The buyout unit of New York-based Merrill Lynch & Co. Inc. (MER) joined the deal later on.

“The decision effectively terminates the proposed transaction,” Mark Meland, a Montreal lawyer representing the bondholder group, said in an interview with Bloomberg. “Unless the decision is overruled, the plan of arrangement is now defeated.”

Source: Shares of Canada’s BCE Plunge After Investors Learn Proposed LBO is in Jeopardy