The idea of shorting Canadian bank stocks has often been referred to as the Great White Short.  The name is a combo of our country’s nickname of The Great White North as well as the Great White Shark, the ocean’s most feared predator, thanks to this strategy’s history of sinking its teeth into those taking it on.  The resilience of our big six banks, even in the face of economic downturns and global financial crises has repeatedly thwarted short-sellers, leading to significant losses for those betting against them.

 

One of the primary reasons the Great White Short has been unsuccessful is the strength and stability of the Canadian banking system. Canada's banking sector is dominated by a small group of large banks, often referred to as the "Big Six": RBC, TD, Scotiabank, BMO, CIBC and National Bank. These institutions are well-capitalized, highly regulated, and have diversified business models that allow them to generate steady earnings across various economic cycles.

 

During the 2008 global financial crisis, when many banks worldwide were on the brink of collapse, Canadian banks emerged relatively unscathed. Their conservative lending practices, robust regulatory oversight, and strong capital positions helped them weather the storm. While U.S. and European banks were forced to take massive write-downs and seek government bailouts, Canadian banks maintained profitability and even continued paying dividends. This resilience not only protected the banks but also inflicted significant losses on short-sellers who had bet on their decline.  In fact if we look at the last 7 years of share price movement the Canadian banks have outperformed their US peers considerably:

 

 

In more recent years, short-sellers have continued to target Canadian banks, often citing concerns a prolonged period of rising real estate prices, leading to fears of a housing bubble.  Short-sellers argue that a sharp correction in the housing market could trigger a wave of defaults on mortgages and other loans, severely impacting the banks. While our housing market has already started a significant correction that we think is only in about the third or fourth inning, the write-downs on bad loans have not been nearly as bad as the shorts expected.   Our own bank CIBC has a $260 billion book of mortgages outstanding; roughly 20% of those are CMHC (Canadian Government) insured, the balance have a very modest loan to value ratio of 48% so even in the event of a further -30% drop in housing prices, overall the equity in the homes should protect CIBC from significant losses.   The other big banks are very similar so we don’t share this view that our residential real estate lending will be a major negative.  

 

These big banks have implemented strict lending standards over the past decade and hold substantial capital reserves, which have helped them manage any potential risks associated with the housing market.   The same can’t necessarily be said about some of the alternative lenders so this is an area in both the equity and credit markets that we have been actively avoiding.

 

Moreover, the Canadian banks' significant presence in international markets, particularly in the U.S. and Latin America, has provided them with additional revenue streams and growth opportunities. This diversification has helped offset potential weaknesses in the domestic market, making it even more difficult for short-sellers to profit from betting against them.

 

Over the years the Great White Short has historically been a losing strategy due to the strength, stability, and adaptability of the Canadian banking system. Despite numerous economic challenges and persistent doubts from short-sellers, Canadian banks have consistently demonstrated their ability to manage through crises and emerge stronger. This resilience has made shorting Canadian bank stocks a perilous and often costly endeavor.  Battling rising stock prices when one expected them to fall, all while being on the hook for large (and rising) dividend payments have made  The Great White Short a horror film for speculators.