All of Canada’s top lenders managed to surpass earnings in the quarter
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The biggest banks in Canada are starting to claw back some of the loan-loss reserves they built up in the early days of the COVID-19 pandemic, a shift fuelled by an improving economic outlook and resilience among borrowers.
Canadian Imperial Bank of Commerce and Toronto-Dominion Bank on Thursday became the latest members of the Big Six to report such recoveries, announcing releases or reversals of $89 million and $153 million, respectively, on money set aside for performing loans for the quarter ended Jan. 31.
While performing loans are still technically being paid back, banks may have to record provisions for them if the overall economic picture darkens, and can then release those reserves later if the forecast brightens. The lenders still added to loan-loss reserves for impaired loans during their first quarter, but provisions for credit losses overall were down.
“Provisions for credit losses declined significantly, reflecting an improving economic outlook, as well as the impact of ongoing fiscal and monetary support for the economy and the sizable addition to our allowance for credit losses last year,” said Bharat Masrani, TD’s president and chief executive, during a conference call for analysts and investors.
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While lower provisions gave a lift to the latest results of the Big Six banks — and all of the lenders reported earnings that topped analysts’ expectations — they could also be a good sign for the broader economy.
Canaccord Genuity analyst Scott Chan said in a note on Royal Bank of Canada that the lender had a small reserve release on its performing loans, similar to that of Bank of Montreal, which amounted to less than four per cent of reserves built up in the previous fiscal year.
“Like peers,” Chan added, “the bank referenced an improving economic environment from approved vaccines and rollouts (e.g. GDP, employment, housing prices); albeit challenges near term with the pandemic.”
TD’s total PCLs for the first quarter were $313 million, down 66 per cent from a year earlier. One reason for this was a recovery of $153 million on provisions for performing loans, which was partly due to a better economic outlook that allowed for reserve releases in the bank’s U.S. consumer lending portfolios.
TD also said Thursday that first-quarter earnings were up 10 per cent year over year, to $3.3 billion. Adjusted earnings per share were likewise up 10 per cent, to $1.83, and better than the $1.50 expected by analysts.
The bank’s Canadian retail unit reported net income of about $2.04 billion for the three-month period ended Jan. 31, an increase of 14 per cent compared to a year earlier, which TD said reflected lower provisions for credit losses (PCLs) and higher revenue.
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CIBC, meanwhile, reported a profit of $1.625 billion for the quarter ended Jan. 31, an increase of 34 per cent from a year earlier. When adjusted for some acquisition-related costs, the bank said its earnings per share for the three-month period were $3.58, up 10 per cent year-over-year and better than the $2.81 consensus of analyst estimates.
CIBC’s capital-markets business reported net income of $493 million for its first quarter, 30 per cent greater than the previous year, which was helped by higher trading activity. The lender’s personal and business banking division for Canada also saw profit climb 13 per cent year-over-year, to $652 million, as the amount of money set aside for potential loan losses fell.
“We remain well-capitalized, we remain well-provisioned and we’re going to continue to sensibly adapt to the changing macroeconomic environment,” said Victor Dodig, CIBC’s president and chief executive officer, during a conference call Thursday morning.
CIBC said provisions for credit losses for the first quarter were $147 million, down 44 per cent from a year earlier. The amount of money that the bank had to set aside for performing loans cratered during the quarter allowing for a recovery of $89 million.
“The reversal included transfers to impaired and changes to forward-looking indicators to reflect an improved economic outlook,” RBC analyst Darko Mihelic wrote in a note to clients.
However, CIBC’s chief risk officer, Shawn Beber, did note during the bank’s conference call that they expect losses on impaired loans — such as those on which borrowers are 90 days or more behind on their payments — to increase and peak in the middle of 2021. After that, though, the lender sees impaired losses coming down again as the economy continues to improve.
There could be additional reserve releases ahead, too, barring any setbacks in the economic recovery from the pandemic.
“We’re more confident than we have been, more confident than ever, about the adequacy of our reserves, and the potential for future allowance releases going forward,” said Daniel Moore, Bank of Nova Scotia’s chief risk officer, during the lender’s conference call on Tuesday.
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