By Vipal Monga
TORONTO -- Canada's government has opened its fiscal spigot in
an effort to prop up an economy reeling from the coronarvirus
pandemic. Among the biggest beneficiaries: Canadian banks, which
have avoided major loan losses and boosted deposits.
The biggest Canadian banks, Royal Bank of Canada and TD Bank
Group, reported earnings growth during their fiscal fourth quarter
ended Oct. 31, boosted by lower provisions for loan losses.
Canada's federal and provincial governments spent 382 billion
Canadian dollars on virus-related relief this year, equal to almost
$300 billion, and accounting for roughly one-fifth of Canada's
total economic output in the third quarter. The money included
funding for income and wage supports for people who lost jobs or
worked fewer hours during the pandemic, zero-interest-rate loans
for small businesses, and loan guarantees.
Bolstered by those supports, Canadians have continued making
loan and credit-card payments they may have otherwise missed. The
relief has been coupled with bank-led deferral programs that let
homeowners delay mortgage payments, and the net effect has allowed
banks to avoid writing off big chunks of their lending books.
TD Bank, which owns the 10th-largest bank in the U.S. by assets,
reported on Thursday it provisioned C$149 million less in its
Canadian retail unit during the fourth quarter than it had a year
ago, and attributed the decline to bank and government assistance
programs.
The bank's quarterly overall profits of C$5.14 billion were 80%
higher than last year, although this year's number included a gain
from Charles Schwab Corp.'s acquisition of TD Ameritrade Holding
Corp. Excluding that gain, earnings totaled C$2.97 billion, 1%
higher than last year.
"I think the programs that have been announced have been very
effective, " said Riaz Ahmed, TD's chief financial officer, in an
interview.
RBC, the country's largest bank by market capitalization, on
Wednesday reported that it set aside C$427 million during its
fiscal fourth quarter, 37% less than it did a quarter ago.
Overall, the bank posted a profit of C$3.25 billion ($2.51
billion) for the quarter, a 1% increase from a year earlier.
"It's been quite favorable from an economic standpoint and a
well-being standpoint," Rod Bolger, chief financial officer for
Toronto-based RBC, said in an interview. Some of the bank's
borrowers maintained their income despite large-scale layoffs while
also reducing their expenses, he said. That boosted overall credit
quality. "It put a majority of our clients in a stronger position
than they might otherwise have been."
The country's other large banks, Bank of Montreal, Bank of Nova
Scotia and Canadian Imperial Bank of Commerce, also reported either
quarterly or annual declines in their loan-loss provisions, which
helped earnings.
U.S. banks are in a similar situation. Bank of America Corp.,
Citigroup Inc. and JPMorgan Chase & Co. also set aside less to
cover loan defaults as the economy rebounded from the
pandemic-induced recession.
But the dim prospect for another large stimulus package from
Congress is causing some consternation among some U.S. lenders.
Citigroup in October predicted higher unemployment and a slower
recovery than it had expected in July.
In contrast with its Canadian arm, TD set aside $210 million
more than it had last year at its U.S. unit for bad loans, which
pressured earnings. The unit contributed $403 million to the bank's
income, 41% lower when compared with last year.
TD's Mr. Ahmed said the increase in provisions for bad loans was
due mainly to weakness in sectors such as commercial real
estate.
In Canada, there is no worry the government won't step in. On
Monday, Chrystia Freeland, the country's deputy prime minister and
finance minister, said the federal government could spend another
C$100 billion over a three-year period starting next year to
support the economy.
That would help soften the pain of rising defaults, said Gabriel
Dechaine, an analyst with National Bank. "Eventually the rug is
going to get pulled out, but it will be pulled out in a more
gradual manner than expected," he said. "It's not going to be the
sharp cliff everyone was worried about."
Many Canadians benefiting from income support and bank programs
that allowed them to defer mortgage payments have used the cushion
to either pay down their credit cards, or they have parked the
extra money in bank deposits.
Deposits at RBC totaled C$1.011 trillion at the end of October,
a 14% increase from a year earlier.
TD's deposits totaled C$1.135 trillion, a 27% increase from last
year.
The increased liquidity also crimped fee revenue, as customers
borrowed less. Credit-card balances in RBC's Canadian banking unit
fell 11.7% from a year ago, while Bank of Montreal, which owns
Chicago's Harris Bank, reported an 11% decline in total credit-card
balances.
The banks have also been building up capital because Canadian
regulators won't allow them to increase dividends or buy back
shares. RBC's Tier 1 ratio now sits at 12.5%, roughly 3.5
percentage points, or C$19 billion, more than the regulatory
minimum, RBC CEO David McKay said.
Still, uncertainty remains as questions linger about how
Covid-19 vaccines will be distributed, the impact of a difficult
winter of economic lockdowns and the strength of any post-pandemic
rebound. That's keeping banks from deploying that excess capital or
releasing loan loss reserves, National Bank's Mr. Dechaine
said.
"There's no shortage of red flags out there," he said.
(END) Dow Jones Newswires
December 03, 2020 09:20 ET (14:20 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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