Hilliard MacBeth isn't only criticizing the country's real estate markets but banks as well, specifically their growing emphasis on wealth management.
Hilliard MacBeth isn't only criticizing the country's real estate markets but banks as well, specifically their growing emphasis on wealth management.
The controversial author whose new book calls for a big crash in real estate prices, also believes that the big banks will soon face their own day of reckoning when they must decide where their bread is truly buttered.
Since the beginning of March every one of the big six banks has commented on Canadians’ high consumer debt load yet none has sounded the alarm with most analysts suggesting low interest rates make these debt loads manageable — at least for the moment.
MacBeth sees the move by banks into wealth management, which started in the 1980s with the acquisition of independent brokerage firms such as Dominion Securities, as a turning point in the Canadian financial services industry, that up until then had kept the four pillars relatively separate.
“The banks didn’t use to be in the brokerage industry,” says MacBeth. “When I started in the industry [1978] they weren’t allowed to be but then in 1987 they started buying firms such as Pit field, MacKay, Ross; after that you couldn’t avoid working for the banks at some point.”
The problem with this scenario is that should the “housing bubble” burst, the banks will be ones most affected by the fallout. First, similar to what happened in the U.S., they’ll be left holding paper on properties severely under water. Second, the big advisor networks of those banks will suffer considerable damage to their assets under management as clients sell assets to shore up their real estate.
MacBeth points out the obvious.
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“The banks want people to borrow more money. The ideal client [in a housing bubble] for the advisor is somebody who doesn’t borrow money, who has a modest house and saves a lot of money. This client is not interesting to the banks because they can’t make any money off them.”
“Where the banks make all their money, really 95 percent of profits, is from clients borrowing money for mortgages, HELOC’s, and credit cards.”
The banks are doing harm to their overall business by pushing growth in wealth management where the return on equity isn’t nearly as attractive as they are in lending. It’s a policy of pursuing growth for growth’s sake but at the expense of its overall returns for shareholders.
“They [RBC] could double their wealth management division and their profits wouldn’t even go up 5 percent. They’re trying to expand in an area where the ROE isn’t even 10 percent…There’s a fundamental mismatch between the two activities.”
It seems hard to imagine the big banks retreating from wealth management at this point. But then again, a 50 percent crash in Canadian housing prices also seems improbable.
Will the banks go back to lending exclusively? If MacBeth’s real estate call comes true, they might not have a choice.
The controversial author whose new book calls for a big crash in real estate prices, also believes that the big banks will soon face their own day of reckoning when they must decide where their bread is truly buttered.
Since the beginning of March every one of the big six banks has commented on Canadians’ high consumer debt load yet none has sounded the alarm with most analysts suggesting low interest rates make these debt loads manageable — at least for the moment.
MacBeth sees the move by banks into wealth management, which started in the 1980s with the acquisition of independent brokerage firms such as Dominion Securities, as a turning point in the Canadian financial services industry, that up until then had kept the four pillars relatively separate.
“The banks didn’t use to be in the brokerage industry,” says MacBeth. “When I started in the industry [1978] they weren’t allowed to be but then in 1987 they started buying firms such as Pit field, MacKay, Ross; after that you couldn’t avoid working for the banks at some point.”
The problem with this scenario is that should the “housing bubble” burst, the banks will be ones most affected by the fallout. First, similar to what happened in the U.S., they’ll be left holding paper on properties severely under water. Second, the big advisor networks of those banks will suffer considerable damage to their assets under management as clients sell assets to shore up their real estate.
MacBeth points out the obvious.
#pb#
“The banks want people to borrow more money. The ideal client [in a housing bubble] for the advisor is somebody who doesn’t borrow money, who has a modest house and saves a lot of money. This client is not interesting to the banks because they can’t make any money off them.”
“Where the banks make all their money, really 95 percent of profits, is from clients borrowing money for mortgages, HELOC’s, and credit cards.”
The banks are doing harm to their overall business by pushing growth in wealth management where the return on equity isn’t nearly as attractive as they are in lending. It’s a policy of pursuing growth for growth’s sake but at the expense of its overall returns for shareholders.
“They [RBC] could double their wealth management division and their profits wouldn’t even go up 5 percent. They’re trying to expand in an area where the ROE isn’t even 10 percent…There’s a fundamental mismatch between the two activities.”
It seems hard to imagine the big banks retreating from wealth management at this point. But then again, a 50 percent crash in Canadian housing prices also seems improbable.
Will the banks go back to lending exclusively? If MacBeth’s real estate call comes true, they might not have a choice.
