Canadian Bank Provisions Profits Mask Operational Challenges
TORONTO, Feb.26 (Reuters) – Canadian banks are expected to experience slower growth in their major retail and business banking divisions in the coming quarters due to an uncertain economic recovery, but overall profits could rise then that lenders recover some of the C $ 20 billion ($ 15.9 billion) in provisions they took last year.
With government assistance in the event of a pandemic, Canadian banks have brought bad debts under control, allowing them to gradually release some of the money set aside to cover loan losses.
Canada’s six largest banks closed their first quarter results on Thursday, beating street estimates and raising profits to pre-pandemic levels, helped by lower-than-expected bad debt provisions and strong capital markets and wealth management companies.
But it masked challenges in their banking units from individuals and businesses, which have seen their profits decline or show sluggish growth excluding the impact of provisions.
“It’s easy to make the main numbers look better than the underlying numbers… but below the surface it’s a lot more of a mixed bag,” Avenue Investment Management portfolio manager Bryden Teich said.
The Royal Bank of Canada, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Bank of Montreal and the Canadian Imperial Bank of Commerce have set aside approximately C $ 1.6 billion to cover potential bad debts during the three months preceding January, or less than half of the planned amount.
Banks have reported increased loan losses over the next few quarters, but said their current allowances were sufficient to cover them.
Investors and analysts have warned that the sluggish performance of banks’ core operations could continue for longer than expected if risks persist, such as a new wave of coronavirus infections or delays in vaccination rollouts.
“Until the immunization program in Canada accelerates, there is always this surplus,” said Robert Colangelo, senior vice president of credit ratings at DBRS Morningstar. “Things could be delayed a quarter or two and the recovery could be later this year and early next year.”
The Canadian banks index rose 2.1% since Monday’s close before starting to release first quarter results.
If business closures continue, higher margin areas like credit cards and commercial loans will remain limited, with low margin mortgages remaining the main source of loan growth, investors said.
But the rise in long-term bond yields indicates that markets are optimistic about a recovery. If this continues, it could help offset some of the margin issues posed by increased mortgage exposure, Colangelo said.
“The big question at all levels is what the real number (of bad debts) is, because there are so many government stimulus in the system,” said Greg Taylor, chief investment officer of Purpose Investments. “The government is in no rush to resume this. “
$ 1 = C $ 1.2598 Report by Nichola Saminather; Editing by Stephen Coates