Canada’s big banks are regarded immune from the impact of disruptions like COVID-19 and unexpected financial crisis such as the 2008-2009 recession.
The system is stable, watched closely by regulators, and lacks the cutthroat competition some countries experience.
Investors roll their eyes when someone questions the stability of Canadian banks.
The next quarterly report from these banks in early December should be an interesting read to see how the banks fared as the COVID lockdown ended and policies that kept money flowing to consumers and small business wind down or end.
Banks took a hit in the second quarter when the lockdown was at its worst and again in the third quarter ended July 31.
In the second quarter the Big Five banks — Royal, TD, BMO, CIBC and Nova Scotia – took $10.9 billion cumulative provisions for credit losses. For some, that was a 500 per cent increase from the same quarter in 2019.
The provisions for credit losses amounted to more than one-third of 2019 net earnings for Royal, TD, BMO, and CIBC. That’s quite a hit.
Bank of Nova Scotia has been omitted from this article as the large foreign component and currency risks deem it less comparable.
In the third quarter ended July 31, the four banks accumulated another $3.76 billion credit losses.
Amazingly, the banks still managed to keep their ratios of capital required for financial integrity well above the mandated level. Indeed, some increased the ratio.
What saved the banks from even lower profits in the face of significantly higher credit loss provisions was the strength of wealth management, capital markets and insurance.
Without strength in these operations, bank profits would have slipped even more than they did.
The fourth quarter results in December will indicate how the banks have fared now that the lockdown is sort of over and what plans they have to meet the challenging future.
Within months the $2,000 a month Canadian Emergency Relief Benefit will end or be reduced leaving thousands of people with drastically less income to pay mortgages and loans. The commercial rent support program will end too.
Loan payment deferments for customers will also catch up to the banks.
For instance, TD has deferred payments on eight per cent of real estate loans in Canada and six per cent in the United States as well as some commercial and personal loans.
The next six months will tell investors just how strong the Canadian banks have become, how they will weather the situation and any second lockdown.
Analysts are cautious with not as many buy recommendations as usual.
For the Royal, trading at $94.35, there are seven buys, three holds.
The TD, priced at $60.80, has two buys, seven hold recommendations while BMO, $79.17, has three buys, six holds and one sell. CIBC, $101.82, has five buys, five holds.
CAUTION: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.
Ron Walter can be reached at [email protected]
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
