prima stress testing for financial institutions november 8, 2012 presented by: angus watt advisory...
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PRIMA
Stress Testing forFinancial
InstitutionsNovember 8, 2012
Presented by:
Angus Watt Advisory Group
Stress Testing After the Stress Testing After the US ElectionUS Election
National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada. The National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX).** The securities or sectors mentioned herein are not suitable for all types of investors. Please consult your investment advisor to verify whether the securities or sectors suit your investor’s profile as well as to obtain complete information, including the main risk factors, regarding those securities or sectors.*** The information contained herein has been prepared by Angus Watt, an Investment Advisor with National Bank Financial; the opinions expressed do not necessarily reflect those of National Bank Financial.**** While opinions expressed are based on analysis and interpretation of historical data believed to be accurate the underlying data is not necessarily guaranteed as to accuracy.
Stress Testing After the US Election
Stress Testing After the US Election
DisclaimerDisclaimer
Stress Testing After the US Election
Stress Testing After the US Election
Messages over the YearsMessages over the Years
Market SizeMarket Size
Stress Testing After the US Election
Stress Testing After the US Election
Stress Testing After the US Election
Stress Testing After the US Election
Since 2008. . .
Year Total National Debt
December, 2008 10.7 trillion
December, 2009 $12.3 trillion
December, 2010 $14.0 trillion
December, 2011 $15.2 trillion
December, 2012 Estimate $16.4 trillion
2015 Estimate $19.0 trillion
United States of AmericaUnited States of America
National Debt Since 2008. . .
Stress Testing After the US Election
Stress Testing After the US Election
When Will Debt Ratios When Will Debt Ratios Peak?Peak?
NBFG Economy & Strategy (data via International Monetary Fund , July 2012)
Monetary StimulusMonetary StimulusFederal Reserve
+ Keeping interest rates at historically low levels
+ Increasing the amount of money available through QE by increasing money supply
+ Effective lowers the value of $US, increasing potential for inflation
European Central Bank
+ Maintaining liquidity and low interest rates
+ Buying bonds with maturity > 3 years
+ “Sterilizing”: purchasing bonds of one security while selling another for a net neutral position
Stress Testing After the US Election
Stress Testing After the US Election
Will there be effective Fiscal Policy?
Inflation
Deflation
Stagflation
Economic ProbabilitiesEconomic Probabilities
Stress Testing After the US Election
Stress Testing After the US Election
Stress Testing After the US Election
Stress Testing After the US Election
C&I Loans – USA C&I Loans – USA Commercial BanksCommercial Banks
NBFG Economy & Strategy
1,640
1,600
1,560
1,520
1,480
1,440
1,400
1,360
1,320
1,280
1,240
1,200
1,1602007 2008 2009 2010 2011
2012
Stress Testing After the US Election
Stress Testing After the US Election
Profit Margins: Non-Financial Profit Margins: Non-Financial CorporationsCorporations
NBFG Economy & Strategy
16
15
14
13
12
11
10
9
8
7
61970 1975 1980 1985 1990 1995 2000 2005 2010
Stress Testing After the US Election
Stress Testing After the US Election
Financial Stress in the USAFinancial Stress in the USA
NBFG Economy & Strategy
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.51994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Stress Testing After the US Election
Stress Testing After the US Election
Leading Indicator: USALeading Indicator: USA
NBFG Economy & Strategy (data via ECRI)
2005 2006 2007 2008 2009 2010 2011 2012 2013
ECRI
148
144
140
136
132
128
124
120
116
112
108
104
Stress Testing After the US Election
Stress Testing After the US Election
USA: JobsUSA: Jobs
NBFG Economy & Strategy
Stress Testing After the US Election
Stress Testing After the US Election
USA: Consumers have USA: Consumers have deleverageddeleveraged
NBFG Economy & Strategy (data via Federal Reserve)
19.2
18.8
18.4
18.0
17.6
17.2
16.8
16.4
16.0
15.6
15.280 82 84 86 88 90 92 94 96 9 8 0 0 0 2 04 06 08 10 12
Financial Obligation
Ratio
Financial Obligation
Ratio
%%
Stress Testing After the US Election
Stress Testing After the US Election
USA: Inventory of Unsold USA: Inventory of Unsold Homes on Resale MarketHomes on Resale Market
NBFG Economy & Strategy
4.0
3.8
3.6
3.4
3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.82 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2
Stress Testing After the US Election
Stress Testing After the US Election
USA: Home ResalesUSA: Home Resales
NBFG Economy & Strategy
Stress Testing After the US Election
Stress Testing After the US Election
USA: Home Prices on USA: Home Prices on Resale MarketResale Market
NBFG Economy & Strategy
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
16
12
8
4
0
-4
-8
-12
-16
-20
20% (y/y)% (y/y)
Source: Bureau of Census, US Commerce Department
Stress Testing After the US Election
Stress Testing After the US Election
US Housing Starts US Housing Starts (Annual Rate)(Annual Rate)
0
500
1,000
1,500
2,000
2,500
3,000(Thousands)
©2012 National Association of REALTORS®
Stress Testing After the US ElectionStress Testing After the US Election
US Housing AffordabilityUS Housing Affordability
Year
Median Priced Existing Single Family Home
Mortgage Rate
Monthly P & I
Payment
Payment as % of Income
Median Family Income
Qualifying Income**
Affordability Index
Composite2009 172,100 5.14 751 14.8 61,082 36,048 169.42010 173,100 4.89 734 14.4 60,609 35,232 174.02011 166,200 4.67 687 13.6 61,455 32,976 174.6
2011 Aug 171,200 4.69 710 13.9 61,510 34,080 180.52011 Sep 165,400 4.51 671 13.2 61,526 32,208 191.02011 Oct 161,100 4.32 639 12.6 61,591 30,672 200.82011 Nov 164,000 4.33 652 12.9 61,545 31,296 196.72011 Dec 162,600 4.27 641 12.6 61,604 30,768 200.22012 Jan 154,600 4.37 617 12.1 61,558 29,616 207.92012 Feb 156,100 4.21 611 12.0 61,603 29,328 210.02012 Mar 165,100 3.96 628 12.4 61,637 30,144 204.52012 Apr 174,100 4.04 668 13.1 61,648 32,064 192.32012 May 180,200 3.92 682 13.4 61,666 32,736 188.42012 June 189,600 3.81 708 13.9 61,688 33,984 181.52012 July 188,600 3.78 701 13.6 61,708 33,648 183.42012 Aug 188,700 3.70 695 13.5 61,717 33,360 185.0
4.6% between 2009 and 2015
4.6% between 2009 and 2015
0% between 2000 and 2008
0% between 2000 and 2008
US Demographics remain positive (Population 21-40 yrs)
Source: NBF Economy & Strategy (data via Census Bureau)
Stress Testing After the US Election
Stress Testing After the US Election
US HousingUS Housing
+Home prices are gradually increasing again. . . . . . but not as much as the headline numbers indicate
+Delinquencies are dropping, and current loans are performing better
+Credit is still very hard to get: many buyers are investors
+New construction has been too low for years
+Housing finance reform is difficult and will take a long time
PIMCO – Near TermPIMCO – Near Term
Stress Testing After the US ElectionStress Testing After the US Election
Stress Testing After the US Election
Stress Testing After the US Election
Current to 30 Transition Rate Current to 30 Transition Rate by Vintageby Vintage
PIMCO, CoreLogic: Sept 20/12
+2-3 million foreclosures still need to take place; most are behind us
+Recent originations are going delinquent at very low rates
+Investors are buying more units and renting them out
Key Themes: PIMCOKey Themes: PIMCO
Stress Testing After the US ElectionStress Testing After the US Election
Stress Testing After the US Election
Stress Testing After the US Election
Most Newly Forming Most Newly Forming Households: RentalsHouseholds: Rentals
PIMCO, JCHS tabulations of US Census Bureau, Housing Vacancy Surveys
Annual Change in Households(thousands)
Annual Change in Households(thousands)
Homeownership Rate %
Homeownership Rate %
Stress Testing After the US Election
Stress Testing After the US Election
Canada: House Prices rose Canada: House Prices rose 5.4% in June on a YoY Basis5.4% in June on a YoY Basis
House price composite index Teranet-National Bank and S&P
House Price Composite Index, Canada and USA
seasonally adjusted
House Price Composite Index, Canada and USA
seasonally adjusted
* Based on 2012 Statistics Canada data, Median total income (all census families). ** National Bank of Canada 5 Year Fixed Mortgage Rate of 3.99%*** Based on a 25% qualifying ratio for monthly housing expense to gross monthly income with a
20% down payment over 25 years.
* Based on 2012 Statistics Canada data, Median total income (all census families). ** National Bank of Canada 5 Year Fixed Mortgage Rate of 3.99%*** Based on a 25% qualifying ratio for monthly housing expense to gross monthly income with a
20% down payment over 25 years.
Sources: Statistics Can 2012CREA, July 2012
National Bank Financial Group 2012
Stress Testing After the US Election
Stress Testing After the US Election
Canadian Housing Canadian Housing AffordabilityAffordability
Sep-12
Median Family
Income*
Median Priced Family
Home
Monthly P & I
Payment**
Payment as % of Income
Qualifying Income***
Affordability Index
Toronto $68,810 $503,662 $2,117 36.92% $101,616 67.72
Vancouver $67,090 $722,681 $3,038 54.34% $145,824 46.01
Calgary $89,490 $402,756 $1,693 22.70% $81,264 110.12
Edmonton $87,930 $323,803 $1,361 18.57% $65,328 134.60
Stress Testing After the US Election
Stress Testing After the US Election
USA: Auto Sales on the USA: Auto Sales on the RiseRise
NBFG Economy & Strategy (data via Bureau of Economic Analysis)
1980 1985 1990 1995 2000 2005 2010
22
21
20
19
18
17
16
15
14
1312
11
10
9
8
Stress Testing After the US Election
Stress Testing After the US Election
USA: Vehicle Stock has Never USA: Vehicle Stock has Never Been as OldBeen as Old
NBFG Economy & Strategy (data via Polk)
1941 1952 1960 1968 1976 1984 1991 1995 1999 2003 2007 2011
12
That is not the American dream !11
10
9
8
7
6
5
Average Age
(Years)
Average Age
(Years)
Stress Testing After the US Election
Stress Testing After the US Election
USA: Outlook calls for USA: Outlook calls for Relatively Stable ConsumptionRelatively Stable Consumption
NBFC Economy & Strategy (data via US Energy Information Administration {EIA})
Total Energy Consumption: Actual and
current EIA Forecast
Total Energy Consumption: Actual and
current EIA Forecast
Stress Testing After the US Election
Stress Testing After the US Election
USA: It was Supposed to be USA: It was Supposed to be Much Stronger than that!Much Stronger than that!
NBFG Economy & Strategy
A comparison between the EIA’s 2008
forecast and current forecast
A comparison between the EIA’s 2008
forecast and current forecast
Stress Testing After the US Election
Stress Testing After the US Election
USA: Where is the Production USA: Where is the Production Coming From?Coming From?
NBFG Economy & Strategy (data via EIA)
Primary Energy Production
Primary Energy Production
Stress Testing After the US Election
Stress Testing After the US Election
USA: Key Imports are USA: Key Imports are FallingFalling
NBFG Economy & Strategy (data via EIA)
Imports of Natural Gas
(monthly data)
Imports of Natural Gas
(monthly data)
Stress Testing After the US Election
Stress Testing After the US Election
USA: Outlook for Energy USA: Outlook for Energy ImportsImports
NBFG Economy & Strategy (data via EIA)
A Comparison between EIA’s 2008 forecast and current
forecast
A Comparison between EIA’s 2008 forecast and current
forecast
Stress Testing After the US Election
Stress Testing After the US Election
World: A New World Order World: A New World Order in 2012in 2012
NBFG Economy & Strategy (data via IMF)
Share of World GDP
Share of World GDP
Stress Testing After the US Election
Stress Testing After the US Election
World: Outlook for Energy World: Outlook for Energy ConsumptionConsumption
NBFG Economy & Strategy (data via EIA)
770770
Total Energy Demand
Total Energy Demand
SummarySummary
Stress Testing After the US Election
Stress Testing After the US Election
Stress Testing After the US Election
Stress Testing After the US Election