Originally published to BNNBloomberg.ca on April 10, 2019

Portfolio manager Steve Eisman – immortalized in Michael Lewis’ U.S. economic crisis book ‘The Big Short’ – says Canada’s bank CEOs are not prepared for potential credit losses if Canada’s economy slows.

“Canada has not had a credit cycle in a few decades,” Eisman, portfolio manager at Neuberger Berman told BNN Bloomberg in a Tuesday interview. “I don’t think there’s a Canadian bank CEO that knows what a credit cycle really looks like.”

“I just think, psychologically, they’re extremely ill-prepared. And, given how low the risk weights on their balance sheets are. I think they’re unprepared for how much their capital ratios could go down if there’s just a simple normalization of credit, not a calamity, just a simple normalization of credit.”

Eisman, who announced a short position on some of Canada’s banks in March, told BNN Bloomberg he expects the banks’ second-quarter results will not be pretty, even following an already disappointing first quarter.

“I think it’ll be another punkish quarter from a revenue perspective,” Eisman said, identifying his short targets as Royal Bank of Canada, Canadian Imperial Bank of Commerce and Laurentian Bank of Canada. Eisman also said he’s “involved” with Genworth MI Canada Inc. and Home Capital Group.

“Last quarter CIBC broke ranks. It was the first Canadian bank to say that their models indicated a deterioration in the Canadian economy and, yet, still CIBC reported negative loan-loss provisions for stage one… So to really get the story going you need to have a Canadian bank come out and say: ‘There’s some deterioration in the Canadian economy and as a result, we have a positive provision for stage one [current loan losses].’ And that would crush earnings.”

Laurentian’s CEO shrugged off short calls in a BNN Bloomberg interview earlier on Tuesday, citing the “resiliency” of the country’s banks.

“I think banks are strong. I think, especially Canadian banks, have a lot of resiliency and, in our case in particular, have a great credit history of being able to withstand any economic cycle,” Francois Desjardins told Amanda Lang.

Bank of Nova Scotia CEO Brian Porter also told investors in Toronto on Tuesday that U.S. hedge funds’ attempts to short Canada’s banks have failed in the past.

“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,” Porter said Tuesday at Scotia’s annual meeting.

“So we believe there’s a lot of buffer in there for any significant downturn.”

Eisman was reluctant to put a hard number on what kind of damage a credit cycle could do to the stock prices of Canadian banks, but when pressed he admitted he could see as much as a 20 per cent hit.

“They’ll go lower. How much lower? We’ll see,” he said. “Twenty per cent-plus. That’s about as much as I’ll bet at this point.”

However, Eisman stressed that his current short call on Canadian institutions should not be compared to his famed bet against the U.S. housing market prior to the 2008 financial crisis.

“This is not ‘The Big Short: Canada,’” Eisman said. “I don’t think the housing market in Canada is going to collapse. I don’t think Canada is going to fall into the ocean.”

“What I’m simply calling for is a normalization of credit losses, which Canada hasn’t seen in over 20 years. And I think the banks – in terms of their reserves and their balance sheets – are woefully unprepared for that.”