Canada’s housing bubble could trip up PrivateBank’s Richman – Finance News

on May11

10 May 2017 | 10:30 am

Larry Richman and his fellow refugees of the old LaSalle Bank know in the most painful way possible how damaging the bursting of a housing bubble can be. The CEO of PrivateBancorp saw his bank’s stock plummet to single digits from $43.50 per share in less than six months in late 2008 and early 2009. PrivateBank arguably was the hardest hit of the mid-sized Chicago commercial banks in the aftermath of the U.S. housing bust thanks to its heavy commercial real estate exposure.

So it’s ironic, now that PrivateBancorp has recovered, that Richman and his board are asking their shareholders to take on heavy exposure to a worrisome housing bubble north of the border: PrivateBancorp’s deal to sell to Toronto-based CIBC, set for May 12 shareholder vote, will give PrivateBancorp investors a suddenly personal stake in how Canada addresses its real estate mania given that 55 percent of the purchase price is in CIBC stock.

It was one of the issues that led prominent proxy adviser Institutional Shareholder Services to urge investors to reject the deal for the third time on May 6. “Should investor concern about Canadian real estate heighten, CIBC’s stock could decline more than its peers, as CIBC is smaller than its four main competitors in Canada and its exposure to Canadian residential mortgages … appears proportionally greater than the exposure faced by any of those four peers,” ISS wrote.

Since touching its 52-week high of $91.10 on Feb. 23, CIBC’s stock has fallen 13.4 percent. Other Canadian banks have experienced similar weakness.

“History suggests that … a (housing) correction could be severe,” wrote Jason Bilodeau, analyst with Macquarie Capital in Toronto, in a comprehensive Jan. 10 report on the emerging housing bubble. In Previous Canadian housing corrections since the 1970s, real estate values fell from 5 to 25 percent. Bank stocks have fallen 20 to 25 percent in previous corrections, he wrote. “But this time could be different … and we mean worse,” Bilodeau added, since housing market metrics are at never-before-seen levels in Toronto.

BEEN THERE, DONE THAT

The Canadian airwaves are saturated with ads promising investors can get rich flipping homes. What does this sound like? Haven’t we seen this show before?

Richman and company sure have. Their timing when they descended en masse at far smaller PrivateBank from LaSalle Bank, Chicago’s top business lender at the time, couldn’t have been worse.

They launched an unprecedented organic growth campaign, poaching old clients from LaSalle after its acquisition by Bank of America. They doubled PrivateBank’s assets to $10 billion in 2008, just as the financial world was melting down. They tacked on another $2 billion the following year when the old real estate loans they’d assumed started souring at an alarming rate.

After PrivateBancorp’s stock tanked toward the end of 2009, it didn’t begin to really recover for two years.

Now, Richman has been hit with another case of terrible timing. The deal he negotiated with CIBC last summer as a capstone to a highly successful 40-plus-year banking career in Chicago foundered on the unexpected election of President Donald Trump. With U.S. bank stocks propelled by visions of tax cuts and loosened regulations, being tied to the stock of a Canadian bank was a singularly bad place to be.

Shareholders were scheduled to bless Richman’s deal just a month after the election, but instead the meeting was postponed for lack of support for the deal. CIBC finally succumbed to the inevitable and raised its bid for the Chicago bank by 20 percent in March. But it had to up the ante one more time last week after its sliding stock eroded the value of its offer. Now, it’s again uncertain whether shareholders will approve the deal.

Spokeswomen for PrivateBancorp and CIBC declined to comment for this article.

To be sure, there are differences between the Canadian and U.S. housing markets that make a full-scale meltdown like the one that kneecapped the U.S. economy less likely. And, with only five banks of any size in Canada, the Canadian government is sure to be aggressive about protecting its financial sector. But that’s a far cry from the blue skies that investors in U.S. bank stocks see at the moment.

We’ll know later this week whether Richman will have defeated the gods of bad timing this time around.



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