As loan-loss provisions decline, question for banks becomes what to do with excess capital?

Some banks have other plans for those funds, in addition to paying shareholders after a year of not being able to raise dividends, such as potentially making acquisitions

Article content

Five of Canada’s Big Six banks reported expectation-beating quarters this week as they look toward a rebound in the country’s pandemic-ravaged economy.

The earnings beats were fuelled in large part by plummeting provisions for credit losses, which are funds that banks must reserve to cover potential losses from loan defaults. Now analysts are looking at how banks will deploy their extra cash reserves and when sluggish loan growth will rebound.

The lenders set aside billions of dollars last spring as a buffer against potential sour loans amid sweeping business closures and job losses. But with government subsidies for businesses and workers and bank loan deferral programs that helped prevent defaults, loans did not sour to the extent that lenders and analysts had expected.

See also  Peru's GDP up 18.21% in March as industry hits its stride

As the vaccine rollout ramps up across North America and the economy south of the border re-opens, the banks slashed their provisions, or in some cases released funds from the reserves.


This advertisement has not loaded yet, but your article continues below.

Article content

Bank of Montreal’s provisions fell to $60 million in the second quarter, as compared with $1.1 billion in the same period a year earlier and far less than analyst expectations of $219 million. CIBC and National Bank also set aside fewer provisions than expected, recording $32 million and $5 million in provisions respectively.

See also  Wall Street shakes off inflation rise and closes higher

Toronto-Dominion Bank booked the largest reversal in provisions, releasing $377 million that was previously set aside for loan losses. RBC also recovered some of the funds it had previously aside, releasing $96 million, as compared with the $2.8 billion it reported in the same period a year earlier. Analysts expected TD and RBC to set aside $457.8 million and $275.6 million respectively.

The trend signals that the banks are starting to “put the pandemic behind them,” according to Scotiabank analyst Meny Grauman.

“The economy came through this pandemic on a better footing, so credit losses turned out to be a fraction of what we were worried about last year,” Grauman said in an interview. “Even though the pandemic is not over in Canada —we’re behind the U.S. and we’re still under lockdowns here in Canada — we still have good sightline to be able to take those reserves off.”

The pandemic also brought opportunities to certain divisions. Mortgages surged as homebuyers eager to lock in low rates flooded Canada’s heated housing market. Balances at RBC jumped 12.6 per cent year-over-year and 10 per cent at BMO.


This advertisement has not loaded yet, but your article continues below.

Article content

Capital markets also boosted earnings due to a frenzy of corporate mergers and trading activity as businesses jumped on high stock valuations and excess liquidity. RBC led the pack, posting $1.07 billion in its capital markets division, with $563 million at BMO, $495 million at CIBC and $383 million at TD.

See also  Coronavirus latest: WHO to build ‘BioHub’ in Switzerland for global exchange of pathogens

But a sluggish recovery in loan demand weighed on earnings. While mortgages boosted personal loans, commercial loans largely remained flat. And credit card spending, while increasing slightly, has been slow to rebound.

See also  Vodafone Idea lenders may have to make more provisions

Analysts questioned whether excess deposits as consumers and businesses tucked away extra cash would cause a lag in demand for loans, especially with commercial clients.

RBC’s chief financial officer Rod Bolger said that while people may first spend their extra cash rather than take on debt, that should change as the economy reopens and spending on big items resumes.

Meanwhile, the trend toward savings benefitted some segments, with an uptick in clients investing with its wealth management division and companies looking to meet their merger and acquisition goals in its capital markets division.

“From a commercial standpoint, we don’t believe that that is a long-term impact on loan growth, that it should work its way through over the next couple of quarters,” Bolger said in an interview.

“Clients have more funds to invest in the market, and that has certainly benefited our wealth management businesses both in the U.S. and Canada, and it has also benefitted out capital markets business as we see our M&A pipeline is quite robust right now.


This advertisement has not loaded yet, but your article continues below.

Article content

But the banks are also riding on high capital levels, and are expected to continue to release further loan-loss provisions as the economy re-opens. Analysts are watching for how the lenders will allocate that cash.

At the outset of the pandemic, Canada’s banking regulator temporarily restricted banks from raising dividends and buying back shares. The lenders reported increases in their common equity Tier 1 (CET1) ratios, with TD’s jumping to 14.2 per cent and RBC’s climbing to 12.8 per cent.

See also  Vodafone Idea lenders may have to make more provisions

Across the board, bank executives said that they plan to send some of those funds to investors once the limitation is lifted. Some banks also have other plans for those funds, in addition to paying shareholders after a year of not being able to raise dividends.

“They’ll all put through some pretty health dividend increases, but there are some differences in preferences or thoughts between capital allocation toward organic growth, M&A and buybacks,” CIBC analyst Paul Holden said in an interview, adding that “TD has been the most vocal” about using its capital to potentially make acquisitions to grow its business.

TD chief executive officer Bharat Masrani said that the bank would certainly consider returning capital to shareholders, but that Canada’s second-largest bank has enough capital to look at acquisitions as well.

See also  UK and EU launch antitrust probes into Facebook

“We will not be shy to do a bank deal,” Masrani said in a conference call with analysts. “Should a compelling opportunity present itself, we do have that flexibility to look at it very seriously.”


This advertisement has not loaded yet, but your article continues below.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.


Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

Source link


Ways for Increasing the Footfall to Your Trade Show Booth

Numerous things are involved while crafting the simplest trade show booth for the exhibition. While captivating the assistance of exhibition stand fabricator Paris which...

Steps to restore PDF Files

Portable Document Format(PDF) a file format by Adobe in 1992 to deliver documents, including text formatting and graphics, in a way that is independent of application software, hardware, and operating systems.

How to Optimize the UAT Testing

Launching a new application into the market involves huge risk, overwhelming stress, and a dilemma about a product’s fulfilling customer expectations. The solution to...

The Best Calendars for Time Management and Organization

A calendar might be the answer if you're looking for a way to organize your life and improve your time management skills. But unfortunately,...

With React Components, Recognizing Constructors

The React Constructor is a technique that is called when an item from a class is being created. In essence, the function Object, as...