The collapse of Silicon Valley Bank has stoked fears in some investors regarding potential risks to Canadian banks, but one analyst said the nation’s banks are largely insulated.

Mike Rizvanovic, an analyst at Keefe, Bruyette & Woods, said in a note to clients Sunday that Canadian banks are predominantly shielded from issues that contributed to the collapse of the U.S.-based bank. 

“So in the Canadian bank context, first off is that diversification goes a long way in ensuring that you don't get these types of situations and secondly Canadian banks did not have the same type of surge that some of the U.S. banks did,” Rizvanovic said in a phone interview Monday.

Three major factors appear to provide a cushion to Canada’s banks including a large diversified base of clients with less exposure to technology, fewer deposit runoff issues in Canada and higher ratios of loans to deposits, according to Rizvanovic. 

“Let’s just call it less hot money coming into the Canadian banking sector than what we saw with some of these small regional lenders that are very focused on a specific niche part of the loan market in the deposit market,” he said, adding that Canadian banks are generally more conservative.

“So [it’s] very tough to draw a parallel and because of some of those dynamics, [it’s] extremely low risk that you see anything of that nature in Canada.”

Declines in the share prices of Canada’s big six banks because of issues with Silicon Valley Bank would be “unwarranted,” according to Rizvanovic’s note.

Five out of the six big Canadian banks finished the trading day down on Monday, with only Scotiabank closing marginally higher. Toronto-Dominion Bank had the largest decline among the group, with shares down 3.43 per cent at the end of the session.

CLIENT BASE

Canada’s banking sector does not face significant risks related to its deposit base, which remains “well-diversified across industries,” Rizvanovic said in the note.

Additionally, he stated that lending to the technology industry is lower among Canada’s major banks.

DEPOSIT RUNOFF ISSUES 

When compared to their U.S. counterparts, Rizvanovic said in the note that Canada’s big six banks have not experienced comparable deposit runoffs in the past few quarters. 

“For the U.S. banks in our selected group, total deposits have declined by [approximately] four per cent cumulatively over the past three quarters ending [in] December 2022, while increasing by more than six per cent for the big six Canadian banks for the three quarters ending [in] January 2023,” Rizvanovic wrote in the note. 

He added that U.S. banks had a larger surge in deposits since the beginning of the pandemic, which could carry higher risks related to falling balances. 

Rizvanovic said in the note that over the previous three quarters, declines in non-interest-bearing deposits in both the U.S. and Canadian banking sectors have been comparable. However, he said that Canadian-based banks have “outperformed in growing interest-bearing deposits.”

LOAN-TO-DEPOSIT RATIOS 

The aggregate loan-to-deposit ratio in the first quarter of 2023 was 82 per cent among Canada’s big six banks, Rizvanovic said in the note, while the ratio for a sample of large U.S. banks was 60 per cent in the fourth quarter of 2022. 

“We believe that higher ratio for the Canadian banks highlights a more favourable funding mix and helps reduce disruption in times of economic uncertainty,” he said in the note.