Investors brace for further decline in profits and higher provisions at Canadian banks
TORONTO (Reuters) – Investors and analysts brace for a massive drop in Canadian bank profits this fiscal year, after second-quarter profits halved as they set aside billions of dollars to cover losses. loan losses due to the coronavirus pandemic and a struggling energy sector.
Market watchers have warned that the four-fold increase in provisions, to nearly C $ 11 billion ($ 8 billion), in the three months through April may not be enough to absorb potential loan losses. from some of the six largest banks, with further increases likely. weigh on performance this year.
“This was the most negative quarter I can remember in 25 years,” said Brian Madden, portfolio manager at Goodreid Investment Counsel. “So for the year it’s not difficult to get a figure down from 35% to 40%. “
Canadian Imperial Bank of Commerce CM.TO and the Toronto-Dominion Bank TD.TO Thursday ended the bank’s profit reporting period, during which four of six estimates missed.
TD stocks fell 3.9% and CIBC fell 2.2% in the afternoon, pushing the banking sub-index down 1.9%, underperforming the 0.2% gain in the afternoon. Toronto Stock Index.
CIBC’s cautious provisions will help boost returns on equity in the coming quarters, but they will only rebound noticeably when transaction volumes improve as the economy recovers, the chief financial officer told Reuters Hratch Panossian.
Bank of Montreal BMO.TO and the Bank of Nova Scotia BNS.TO provisions may be insufficient and need to be topped up in the next few quarters, analysts say. Even some better funded lenders, like TD Bank, have refused to rule out further increases if economic conditions deteriorate.
Provisions for losses represent about 0.65% of loans from the five largest banks, said Edward Jones analyst James Shanahan, who expects profits to decline 16% in fiscal 2020.
Impaired energy loans account for 3% of total oil and gas portfolios, up from a peak of 6% in the 2016 rout, and are likely to rise to that level again, suggesting that “reserves are not as high. solid than they should be, ”he said.
While capital ratios will likely continue to decline as the better performing loans included in provisions turn sour, they will remain above required levels.
This will keep the dividends intact, Madden said.
Reporting by Noor Zainab Hussain and Nichola Saminather; additional reporting by Abhishek Manikandan in Bangalore; Editing by Maju Samuel, Alistair Bell and Dan Grebler