“The Canadian banks are just different, eh.” That is what we are told. While the US banking sector is going through a time of tumult, we are assured that in Canada everything is fine. My instinct is to doubt that conclusion. Part of that is the contrarian in me. But part of it is that a bank is a bank. Why would a bank be different just because it is in Canada? If there was any trouble, the Market is saying it’s going to happen in TD Bank (TD-NYSE/TSX). It’s one of, if not THE most shorted bank in the world. Their deposits are costing them an extra $8 billion per QUARTER than just five quarters ago. Yet this team continues to show a remarkably resilient net profit margin. How do they do that? Could one of the next banks to fall really be from…Canada? (If it is, know that we are sorry, really sorry.) Yet with another installment of quarterly earnings, we got more evidence that this is the case. For some reason all Canadian banks report off quarter. While the usual reporting schedule for companies line up with year-end (December 31st, March 30th, etc) for the Canadian banks they report a month off: January 31st, April 30th and so on. Don’t ask me why. Whatever the reason, the timing is helpful for deeper dives. Last week all the big Canadian banks reported their fiscal second quarter earnings. I went through most of those reports. The results were far from amazing. The Canadian banks have many of the same headwinds that their US counterparts do. But the results also weren’t all that bad. I’m left thinking that if something bad is imminent, there are not a lot of signs of it. In the USA, that’s not the case—I always worry about the next shoe to drop. IF TD IS A CANARY, IT’S STILL CHIRPING Of particular interest for me is TD Bank (TD – TSX). TD has caught investor attention the last few months. Many headlines have been reporting that TD has a very large short-interest. In reality, this is only kind of true. TD’s short interest in percent terms (the percentage of shares outstanding) is only around 3-4%. That isn’t all that large. But TD is a really big company. The market capitalization of TD is over US$100 billion. Compared to the US banks, only JP Morgan (JPM – NYSE), Bank of America (BAC – NYSE) and Wells Fargo (WF – NYSE) are bigger. That means that the actual $ amount of the shares short is quite large, probably the largest of any bank in North America. Why is TD shorted more than other banks? There could be a bunch of reasons, but I think the main one’s are: 1. TD owns a lot of Charles Schwab (SCHW – NYSE) 2. A material amount of TD’s deposits are tied to Charles Schwab 3. TD has a sizable US banking operation TD’s SWEEP WITH SCHWAB The worries about TD largely stem from their ties to Charles Schwab. To understand the connection, we have to go back nearly 20 years, to a time when TD operated their own US based brokerage, TD Waterhouse. In 2006 TD Waterhouse merged with another online-focused broker, Ameritrade. Ameritrade was a very well known and long-running discount brokerage. Together they formed an online-discount brokerage behemoth. After the merger TD owned a sizable amount of shares in the combined public company, TD-Ameritrade. In 2019 TD-Ameritrade was bought Charles Schwab. TD became a shareholder of Schwab. Today TD owns 12% of Charles Schwab. TD receives their proportionate share of Schwab earnings every quarter. It is included as equity earnings in their financials. These earnings have declined recently due to reduced earnings at Schwab. |