RE:HCG at these levelsThank you for sharing your thought process with us.
Personally, I do not think it is very likely that Canadian banks will go to zero. Banking system is an indirect extension of government and presents one of a very few remaining levers government has to influence the economy. With fairly rational competitors and understanding regulators, I doubt banking system as a whole will be impaired in Canada in the long term. It might have losses in the short term and no or little profitability in the medium term but I doubt any Canadian banks will go under because of COVID.
We all know that banking and our whole monetary system is a big ponzi game because it is based on an assumption of an exponentially increasing debt which will never be possible to pay back in full (banks magic up new money every time they type up a loan with fractional reserves in their computer and expect the full amount of principal plus a "not yet existing" interest to be returned to them). As a result, our current money system only works with exponential population and productivity growth with few occasional deleveraging cycles and economic “whoopsies” like defaults, debt forgiveness, and inflation to help offset mismatch due to lack of "real" growth.
The most worrying “big picture” economic news I have noticed so far was that the UK government has by-passed the financial market and essentially printed new money without borrowing the money from the market (even though it would have been just a formality since central banks have been buying up their own government bonds on the market anyways). This was a dangerous precedence since once politicians are able to print money directly, it almost always leads to irresponsible overspending on populist policies which cause hyperinflation and economic instability. On the other hand, the current system appears to be broken and austerity policies seem to cause more harm than good (google professor Mark Blyth who argues against belt tightening policies). I do not know enough about economics and do not have access to appropriate data to weigh how much economic woes in Japan and EU are because of population declines, real estate bubble, bond bubble, money supply, or other factors I am not even aware of. I also do not know what makes overnight millions of people redundant or their homes worthless. Capital should be a sum of accumulated work and that should not change overnight. We still live on the same planet, with same resources, same technology, and same skilled workers... and yet one day everyone was happy, employed, planning holidays and starting new companies and the next day people are laid off and we have doom and gloom – people being evicted, workers lining up in bread lines, families delaying having kids, and hardworking skilled people killing themselves. I (and probably most of the general public) do not understand why this happens. To some alien observing Earth from space it would probably appear as very strange behaviour.
Now going back to Canada and HCG, the secret sauce for Canada’s economic success in the recent past (in my understanding) has been twofold – petrochemicals export to US and massive immigration. We have had no gains in productivity and naturally declining/aging population for many years now. Currently, both of the secret ingredients of our success are impaired. Canadian oil is probably impaired permanently at this point (and hence little new net foreign investment and export surplus coming to Canada). Nonetheless, once the travel resumes, immigration (and foreign students and offshoring of assets from a certain red country) will pick and so will demand for housing, new construction, and HCG services. Canada remains an attractive place to live and raise families due to its rule of law, good safety, low pollution, etc. COVID has not changed this.
HCG’s underlying business model is borrowing long term deposits and lending out for shorter term mortgages. Once the economy restarts and government restrictions on courts and mortgage deferrals are no longer in place (so that mortgages can be settled before the expiration of the termed deposits), the alt-a business model should still be sound. The big issue is now that people are deferring paying their mortgages beyond the terms on which HCG has borrowed its deposits and originally agreed to lend the money. This could cause liquidity crunch (and subsequent second run on the bank) without appropriate government supports. Longer term, even if many HCG’s customers will default, I think this should not pose existential issues for HCG beyond 1-2 years of possible losses, increased PCLs, and significant impairment of shareholder equity. The extent of the losses is unknown and so is whether it has been appropriately reflected into the current share price. My uneducated guess is that Q2 will reveal a need for additional PCLs.
Even though economists complain about high debt to disposable income levels in Canada, many Canadians have only little leverage or own freehold homes without any mortgages. This gives many (older and/or affluent) families untapped equity capacity to buy investment properties in the big cities (or help younger relatives with down payment) if the prices will drop by a lot. There will not be any new land in Toronto or Vancouver and so there should be some natural floor on the prices, especially given "lower for longer" interest rates. Moreover, HCG only serves a relatively small segment of the market. It is a niche lender which might own a few homes on a street unlike RBC or TD which might own half of them. We could certainly have a wave of bankruptcies and a stagnating real estate prices in near to mid future. However, I think most of the properties which serve as collateral on HCG’s mortgages should be fairly liquid and should find buyers even in a down market, especially given the robust LTV buffer. The commercial/construction/retail loans on the other hand I view with increasing suspicion and nervousness.
Sorry for the long rant.
Have a nice day!
PS: Out of curiosity, what broker do you use so that you can buy international/Japanese companies in Canada? Are you happy with it?