Steve Eisman, who successfully predicted the U.S. housing bubble collapse over a decade ago, is not backing down on his short on Canadian banks.
The Neuberger Berman portfolio manager announced that he is standing by his current projections for the Canadian financial system, especially after the latest round of earnings reports.
“I’ve been adding to positions,” Eisman told BNN Bloomberg. “I would say, when we spoke about two, two-and-a-half months ago, my conviction level on the idea was about a seven out of 10. After looking at the Canadian banks’ reporting season, I think I’m more like a nine.”
“Psychologically, they’re extremely ill-prepared,” he said of the country’s banking executives.
Eisman noted that the largest banks’ “exceptionally poor” Q2 figures were “among the poorest [he has] seen in many, many years.” Much-weaker commercial credit and impaired loans particularly grabbed his attention.
“It’s very hard to predict when a credit cycle begins, what’s going to go bad first?” he explained. “I think everybody, including myself, anticipated that housing would go bad first. It turns out that it’s not housing that’s going bad first, it’s commercial credit that’s going bad first.”
Eisman added that the Canadian banks are simply not doing enough to buttress themselves against potential downturns, although he emphasized that he is calling for a “normalization” in the credit cycle and not “Armageddon.”
“At this stage in the credit cycle, what you should be seeing is increasing levels of reserves that increase faster than impaired loans, because essentially what you want to do is build money for a rainy day,” he stated. “You did not see that at all in Canadian banks. In fact, what you saw was reserves were basically flat.”