There is little that happens in Canada’s economy that the country’s six largest banks don’t know about — having assets greater than the country’s gross domestic product helps — but the Big Six’s latest earnings season suggests that even they have been wrong-footed by the coronavirus pandemic.
“We would describe the current environment … as going where no one has gone before,” said Louis Vachon, chief executive of Montreal-based National Bank of Canada, during a conference call Tuesday evening. “So this is Star Trek finance.”
Vachon stuck with his sci-fi allusion after an analyst said it looked like National had done all right for itself in the current environment.
“The episode is not over,” he said, adding that National Bank was “still watching for the Klingons.”
Comparisons to Star Trek are unusual on big-bank analyst calls, but uncertainty has become a common theme in recent years, given the U.S.-China tariff battles and the North American free-trade talks.
But COVID-19 is different. The disease, which has killed more than 340,000 people worldwide and over 6,400 in Canada, revolves around public health, generating a sense of fear that has touched every part of the economy in some way. Most economists have concluded it will take a vaccine to get things truly back to normal, and that discovery remains a ways off.
Vachon’s comments came after National Bank reported $379 million in net income for the three months ended April 30, a 32-per-cent decrease from the same quarter last year. National’s peers have reported similar drops in profit this week, as COVID-19 has forced the big banks to set aside bigger piles of cash to cover possible loan losses.
There is a chance that lenders will have to keep adding to reserves in coming quarters given the uncertainty around future economic growth and employment. Bank of Nova Scotia chief executive Brian Porter on Tuesday said he anticipates higher-than-usual loan-loss provisions for the rest of the year.
Still, with the latest earnings season for Canada’s biggest banks now past the halfway point, one common message from lenders is that none of them, just like many of us, know for certain what COVID-19 means for the future.
“More recently, we’ve started to see a cautious reopening of certain economies, including those in Canada,” said Dave McKay, Royal Bank of Canada’s chief executive. “However, significant uncertainty remains on the severity and duration of the global economic downturn as a result of elevated unemployment, low oil prices and disrupted supply chains.”
RBC and the Bank of Montreal, the largest and fourth-largest members of the Big Six, respectively, were the latest to report second-quarter results, and both banks on Wednesday revealed that profit in the three months ended April 30 was half of what it was in the same period a year earlier.
RBC’s net income was $1.48 billion, down 54 per cent from a year earlier. BMO said net income also fell approximately 54 per cent to $689 million.
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The driving force behind the drop in profit was a surge in the amount of money the two banks reserved in case loans turn sour. As RBC noted, “the unprecedented challenges brought on by the COVID-19 pandemic led to increased provision for credit losses.”
Total provisions for credit losses at RBC were $2.83 billion for the second quarter, an increase of $2.4 billion from last year, while BMO set aside around $1.1 billion, compared with only $176 million a year earlier, when the bank said it realized a large recovery on a U.S. commercial loan.
Graeme Hepworth, RBC’s chief risk officer, said the bank’s provisions for performing loans (loans still being paid back) hit a “high-water mark” in the second quarter.
Still, “there is great uncertainty with respect to the speed at which the economy recovers, the efficacy of government support, future potential waves of the virus, and the availability of a treatment or vaccine, all of which may impact provisions in the future,” Hepworth said during a conference call Wednesday morning.
The earnings at the two banks were below what analysts had been expecting on a per-share basis and adjusted for certain items, such as acquisition-related costs at BMO.
RBC’s adjusted diluted earnings per share were $1.03, down by 54 per cent year over year, and below the $1.54 consensus of analysts. BMO reported adjusted earnings per share of $1.04, down 55 per cent and below the $1.14 analyst consensus.
Canadian Imperial Bank of Commerce and Toronto-Dominion Bank will report results on Thursday, wrapping up perhaps one of the most unique earnings seasons in the history of Canadian banking. But even with a rocky quarter in their rear-view mirror, there may still be a few bumps in the road for the banks and the broader economy
“The economic recovery is likely to be uneven, with some sectors able to rebound quickly and even outperform as they take advantage of accelerating trends that were already emerging,” BMO chief executive Darryl White said during a conference call on Wednesday.