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

Long time members of The Sovereign Society know that we never have recommended UBS as a Swiss bank for offshore accounts – and that was not only because of its monster size and impersonal service. What concerned us is the UBS anti-privacy policy.

The merger of Swiss Bank Corp and Union Bank of Switzerland creating UBS AG was approved by the U.S. Federal Reserve Board in 1999. But that was only after UBS agreed to provide the U.S. government with all information “necessary to determine and enforce compliance with . . . [U.S.] federal laws.”

This surrender went far beyond the normal financial information that Swiss banks must exchange with the U.S., under the current U.S.-Swiss Tax Treaty. This agreement also nullified Swiss bank secrecy laws that usually require a court order to release private banking information.

UBS caved in after the U.S. government threatened to shut down the bank’s extensive American financial operations. The UBS sell-out was bad news for financial privacy seekers -and it blew a large hole in the much vaunted concept of Swiss “bank secrecy.”

Then and now we advise U.S. and other potential depositors to avoid UBS AG and any Swiss bank that has active U.S. financial operations and offices beyond a mere “representative office.” (A similar privacy killing deal was made between the Fed and Credit Suisse when that leading Swiss bank merged with First Boston.)

Historically, there has long been a widespread belief that Switzerland is the place to safeguard cash and personal assets, especially in times of trouble. We think that still holds true.

Notwithstanding UBS, it is estimated that currently Swiss banks manage at least one third of all assets held offshore by the worlds wealthy. Total cash assets of the Swiss banking system are estimated at nearly US$2 trillion, while the value of total securities deposits are well over US$3 trillion. Assets under Swiss management have risen significantly in recent years, reaching a high of nearly US$4 trillion in 2007, according to the Swiss National Bank and the Swiss Bankers Association.

But the country’s political, financial and economic stability and strength are of far greater importance. Many of the world’s leading companies and hundreds of thousands of non-Swiss persons bank with the Swiss. Even the international intermediary banking institution for all other banks in the world, the Bank for International Settlements, is located in Basle, Switzerland.

Switzerland still is home to several hundred banks, including many small private and regional banks and more prudent large banks such as Bank Julius Baer, with branch offices in most of the world’s financial centers, from New York and Panama to Singapore and Hong Kong.

If nothing else, the UBS debacle is a stark warning to other Swiss bankers to stay with their traditional principles and, by all means, avoid Americanization.

BOB BAUMAN, Legal Counsel

P.S. To find banks around the world that have vigorously avoided Americanization and this sub-prime nonsense, consider joining us in Panama this May 14-17 for our Total Wealth Symposium. We’ve invited bankers from all over the world who can assist you with setting up your own bank account in some of the world’s strongest banking havens that vigorously guard your privacy, offshore investments and even your retirement account. Click here to learn more.