Banks report Q3 growth but hold on to rainy day funds amid uncertain economic outlook

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TORONTO — Canada’s Big Six banks were optimistic on the economy this week as they reported a jump in profits from last year, but they continue to hold significant loan loss reserves as uncertainty remains around COVID-19 variants and what it means for the recovery.

The combined profits of the six largest banks in the third quarter amounted to about $15.24 billion, compared with about $9.75 billion in the same quarter last year as earnings were boosted by shifting cash to profit from provisions for bad loans.

The reduced provisions came as the bank CEOs said they were seeing signs of growth in many areas of the economy.

“The economy and our customers have shown remarkable resilience to an evolving landscape of pandemic-related restrictions,” said Darryl White, chief executive of BMO, during a conference call with financial analysts.

“With those now lifting and vaccination rates continuing to climb, the Canadian and U.S. economies remain poised for the strongest growth in decades.”

Given what the latest round of results showed, analyst James Shanahan, said the banks are likely being overly cautious.

“I think the Canadian banks are holding reserves that are too high for the risk profile of their portfolio, and especially given recent trends from a credit standpoint,” said Shanahan, senior equity research analyst for North American financials at Edward Jones.

Bank earnings could have been even higher if the banks had further wound down their reserves, but concerns about the potential impacts of the highly contagious Delta variant have prompted them to hold back.

“It’s really the Delta variant that led to the overall macro factors tempering our release this quarter,” said Ajai Bambawale, chief risk officer for TD Bank, on an earnings call.

“The pandemic is not over. So you should expect continued prudence from us.”

Bank of Montreal said it had only released about 21 per cent of the reserves it built up last year as it strives to balance economic momentum with uncertainty around variants, said Patrick Cronin, chief risk officer at BMO.

“We think we’re in a fairly cautious position should the adverse scenario play out.”

Shanahan said loan growth at Canadian banks in the quarter was quite good overall, driven by continued strength in mortgage lending, and while it does raise concerns about the potentially overheated housing market, the growth is undeniable.

“Canadian banks are delivering loan growth, and the U.S. banks just aren’t. So clearly that’s a significant differentiator for the big Canadian banks versus the U.S. banks.”

Loan income from credit cards still remains low as more Canadians are paying their balance in full. The trend follows Canadians paying off a record amount of credit card debt in the first year of the pandemic, dropping the total balance owing by $20.6 billion.

Credit card loans, however, make up just a few percentage points of Canadian bank loan income, compared with upwards of 25 per cent for some American banks, Shanahan said, so it has less affect on their bottom line.

The banks have also showed surprisingly good numbers on key income categories related to the markets, which have continued to show elevated activity, said Shanahan.

“I’ve been surprised by the resiliency of key income categories that are linked to the markets. So, securities trading, investment banking advisory.”

Income is somewhat down on the wealth management and investment management fees side, he said.

Looking ahead, Shanahan said the key question for later this year will be capital return. Canada’s federal banking regulator has banned banks from raising dividends or share buybacks though the pandemic, but analysts expect those restrictions to be lifted later this year.

Companies in this story: (TSX:RY, TSX:BNS, TSX:BMO, TSX:NA, TSX:TD, TSX:CM)

Ian Bickis, The Canadian Press