The glass looks both half full and half empty for Canada’s major banks as they prepare to release fourth quarter financial results this week, ending a tumultuous fiscal year.
The good news is that fears of a possible wave of defaults have eased, but not gone, after hundreds of thousands of deferrals recently expired. Analysts expect banks to top up their reserves to cover future losses, after collectively allocating $ 17.7 billion in new credit loss provisions over the past two quarters. But no further major increases in provisions are expected, even as cases of the new coronavirus spike and parts of the Canadian economy are once again on lockdown.
In contrast, bank revenues are under pressure on several fronts. Persistently low interest rates lower the margins that banks draw on loans. Demand for new loans is lower in categories that generate higher returns, such as commercial loans. And banks are inundated with deposits that can also eat into margins as customers store cash to weather the pandemic.
All in all, analysts expect profits to continue falling, with earnings per share falling 16% to 20% from the same quarter a year ago, according to some estimates. But the focus will likely be on how the banks plan to bring a court back to higher profits in the coming year.
“As credit problems diminish, investors are focusing more on the growth challenges facing the sector,” said Gabriel Dechaine, analyst at National Bank Financial Inc., in a note to clients.
These investors will be looking for “any bank that demonstrates revenue momentum,” he added.
Fee revenues, which have been hit hard by the economic lockdown measures, have shown early signs of a rebound, but could “remain sluggish given changing spending habits and [a] a higher savings rate, ”said Meny Grauman, analyst at Scotia Capital Inc., in a research note. And income from financial markets, which have supported bank profits with record results over the past two quarters as the pandemic ravaged markets, are expected to return to more normal levels.
With limited options for increasing their income, banks should also keep a close eye on costs, and several analysts have said they haven’t ruled out the possibility of some banks taking restructuring charges. The most likely candidates, according to Mihelic, are the Bank of Nova Scotia or the National Bank of Canada, after the Bank of Montreal and the Canadian Imperial Bank of Commerce each recorded those fees in the past year.
In the near term, the slowdown in profits as banks stocked up on provisions for credit losses – funds set aside to cover loans that may not be repaid in the future – should continue to ease. Darko Mihelic, an analyst at RBC Dominion Securities Inc., estimates that banks could set up additional provisions of $ 4.5 billion in the fourth quarter, which would be a decrease of 26% from the previous three months – but still 89 % -cent higher than a year ago.
Promising early results from several vaccine trials, combined with the prospect of greater stability and predictability in the United States under President-elect Joe Biden, “reduced the benefit of having additional reserves for downside scenarios. Said Paul Holden, analyst at CIBC World Markets Inc.
But the health of banks’ loan books is clouded by uncertainty over the severity of a recent spike in COVID-19 infections, which has prompted some provincial governments to reimpose tougher limits on businesses and guidelines. Stricter physical distancing.
In this context, the growth of capital reserves held by the six banks is a comforting trend. Analysts expect banks’ average Tier 1 (CET1) ordinary capital ratio – a key measure of their ability to absorb losses and continue lending – to increase by around 20 basis points to 11 .9% (100 basis points equals one percentage point). The Canadian banking regulator recently signaled that it was in no rush to lift restrictions that prevent banks from increasing dividend payments or buying back shares.
With banks sitting on substantial excess capital and bank mergers and acquisitions picking up in the United States – most recently, PNC Financial Services Group, Inc. acquired the U.S. subsidiary of Banco Bilbao Vizcaya Argentaria SA for $ 11.6 billion this month – “We think banks will increasingly be faced with questions about potential transactions,” Dechaine said. “In our opinion, TD [Toronto-Dominion Bank] and BMO are the most likely to make acquisitions of US regional banks. “
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