Canadian banks boost exposure to U.S. market

U.S. money market fund allocations to Canadian banks continue to grow

By: James Langton
May 2, 2013 May 2, 2013
10:05

Canadian banks are increasing their exposure to the U.S. market, and their funding from U.S. money market funds is growing too, says Fitch Ratings.

In a new report, the rating agency says that U.S. prime money market fund (MMF) allocations to Canadian banks have continued to grow in early 2013, “highlighting the banks’ interest in broadening sources of low-cost wholesale funding.”

Fitch says that it believes that the big Canadian banks “are seeking to maintain diverse sources of funding at a time when diminished growth opportunities in Canada have already led those banks to expand their retail deposit and capital markets businesses in the U.S.”

Among the banks relying more heavily on MMF funding, Fitch says that Royal Bank of Canada has increased lending in the U.S. as it expanded its U.S. capital markets business. And, other banks, including TD Bank and Bank of Montreal (BMO), have focused on developing their U.S. retail bank networks in recent years.

The firm reports that the most recent data from the Bank for International Settlements (BIS) shows significant growth in U.S. financial claims for the Canadian banks over the last two years. Between the end of 2010 and the end of 2012, it says, total U.S. claims increased by approximately 30% as Canadian institutions grew their footprints south of the border.

This growth in U.S. exposure is reflected in their increased reliance on U.S. MMFs for funding. Fitch says that the Canadian banks remain the largest source of national exposure for these funds, at 13.4% of total MMF assets. On a dollar basis, exposure to Canadian banks increased by 9% in March, it says. And, it notes that four of the big banks — Bank of Nova Scotia, RBC, BMO and TD — were on the list of the top 15 sources of bank exposure among prime MMFs during March.

“For MMF investors, increased exposure to Canadian banks represents an opportunity to diversify away from Eurozone bank exposure, which declined significantly in March, in part due to the Cyprus crisis and political turmoil in Italy,” it says. Indeed, it reports that MMF exposure to the Canadian banks is 40% higher than in May 2011, “when the intensification of the Eurozone crisis began pushing MMF flows away from Eurozone banks to other institutions, primarily in Canada, Australia and Japan.”