Eisman Sees `20% Plus' Drop in Canada Bank Stocks on Short Call

(Bloomberg) -- Steve Eisman, the money manager who foresaw the collapse of the U.S. housing market, is now predicting a “20 percent plus" decline for Canadian bank stocks as credit conditions “normalize” and loan losses jump.

Eisman said that he’s shorting Royal Bank of Canada, the country’s biggest lender, along with Canadian Imperial Bank of Commerce and Laurentian Bank of Canada. In an interview Tuesday with BNN Bloomberg Television, he also said he’s targeting mortgage insurer Genworth MI Canada Inc. and alternative lender Home Capital Group Inc.

Eisman said his Canadian bet pertains mostly to "a normalization" of credit conditions and how much the banks are setting aside for loan losses. He said the lenders aren’t “provisioning appropriately” for future losses, which will lower the banks’ capital ratios and eventually share prices.

“Canada has not had a credit cycle in a few decades and I don’t think there’s a Canadian bank CEO that knows what a credit cycle really looks like," he said. “I just think psychologically they’re extremely ill prepared."

Eisman, the money manager at Neuberger Berman Group, said this isn’t going to be “The Big Short: Canada” -- referring to the 2010 book by Michael Lewis that helped propel his reputation. He said it’s not a call on the country’s housing market or the economy.

Not Massive Losses

“I’m not calling for some enormous, massive losses,” he said in the interview. “The Canadian banks are not going to have to be bailed out by the Canadian government. There’s none of that.”

“At the end of the day, the Canadian banks will still be standing," he added.

Short calls by U.S. investors like Eisman have been dismissed by Canadian bank executives, including Bank of Nova Scotia Chief Executive Officer Brian Porter. Shorting Canadian banks has long made for a poor bet by U.S. funds, and this time will be no different, he said Tuesday.

“U.S. hedge funds, from time to time, have appeared in this country over the last 10 years with the same hypothesis of shorting Canadian banks, and it hasn’t worked well for them,” he said at the company’s annual meeting in Toronto in response to an investor’s question.

Loan Values

While Porter said “there’s clearly a concern out there about the state of the Canadian housing market,” no hedge funds have talked to Scotiabank about the company’s assets or balance sheet. Canadian mortgages are the largest asset class on Scotiabank’s books, he said.

“There’s a lot of buffer in there for any significant downturn,” he said. The bank stress-tests its loans daily against “very harsh metrics” -- including a 600-basis point increase in interest rates and huge jump in unemployment -- to make sure it would remain profitable and be able to pay a dividend, Porter added.

“There are always going to be those that take an opposing view,” he said. “We’ll prove them wrong in the long term.”

Laurentian Bank said shorting stocks is normal.

“Where we have to be careful though is where this process may be used to short organizations and then create negative hype by social media or other means," Francois Desjardins said on BNN Bloomberg. "In general, I think that Canadian banks are strong. They can withstand this."

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, David Scanlan, Daniel Taub

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