{"id":19970,"date":"2023-06-08T10:30:55","date_gmt":"2023-06-08T14:30:55","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/canadian-banks-perpetual-stalemate-offers-opportunity-through-mean-reversion-strategy\/"},"modified":"2023-06-08T10:30:57","modified_gmt":"2023-06-08T14:30:57","slug":"canadian-banks-perpetual-stalemate-offers-opportunity-through-mean-reversion-strategy","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=19970","title":{"rendered":"Canadian Banks: Perpetual Stalemate Offers Opportunity Through Mean Reversion Strategy"},"content":{"rendered":"
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Thesis<\/h2>\n

For decades, the Canadian banking sector has been locked in a perpetual stalemate uniquely held together by a combination of interdependence and regulatory safeguarding. When deployed in an oligopolistic and relatively stable market structure, the concept of mean reversion can be a powerful strategy to consider here. Coupled with attractive fundamentals, holding a mean reverting index of Canadian banks offers the opportunity to consistently reinvest when one bank market cap dips relative to others, creating value over time insofar as this stability continues.<\/span><\/p>\n

Notes: Big 5 banks are: RBC (RY), TD (TD), Scotiabank (BNS), BMO (BMO), and CIBC (CM). Unless otherwise stated, all figures in CAD Dollars.<\/em><\/p>\n

Why the Stalemate?<\/h2>\n

It would be forgivable if you were avoiding banks like the plague right now – and much like the plague – banks can and often do infect one another. Financial contagion spreads fast and can collapse an institution both abruptly and without remorse. History, both past and present, is rich with such examples.<\/span><\/p>\n

Between the 5 major Canadian banks exists an oligopolistic market structure and interdependent equilibrium, where no firm holds a majority market capitalization or industry dominance. And unlike their US counterparts, these banks are protected by a firewall of regulatory barriers, effectively outlawing all external competition (with few exceptions). This in turn creates an environment of extreme stability which prevents any one firm from attaining industry dominance.<\/p>\n

If, for example, one Canadian ‘Big 5’ were to fail, the contagion would be extreme and immediate. So, while the Canadian banks certainly do fiercely compete with one another, they also depend on one another much more so than in the US. Therefore, no bank wants to completely kill another, and they compete in a much more stringent environment of regulations to promote tame risk management practices.<\/p>\n

With little competition, in Canada the big 5 banks control more than 80% of the market share by deposits. Conversely, in the US, the top 5 bank market share is closer to 50% and there are roughly 4500 chartered banks. For context, in Canada there are ~80 banks in total, or 1 for every 438,000 people. In the US, on the other hand, this figure is approximately one bank for every 78,000 people – representing a per capita difference of nearly 6x!<\/p>\n

This seeming stability in the Canadian banking sphere can be seen in the figures below:<\/p>\n

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\"Canadian<\/span>
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Author’s Calculations<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

<\/span><\/p>\n\n\n\n\n
2001-2023<\/em><\/td>\nRBC<\/strong><\/td>\nTD<\/strong><\/td>\nScotia<\/strong><\/td>\nCIBC<\/strong><\/td>\nBMO<\/strong><\/td>\n<\/tr>\n
Mean Market Cap Share<\/strong><\/td>\n29.6%<\/td>\n24.5%<\/td>\n20.5%<\/td>\n11.4%<\/td>\n14.0%<\/td>\n<\/tr>\n
Yearly Standard Deviation<\/strong><\/td>\n2.1%<\/td>\n3.5%<\/td>\n3.0%<\/td>\n1.9%<\/td>\n1.6%<\/td>\n<\/tr>\n<\/table>\n

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