Big Six banks expected to end 2020 still standing, but dogged by pandemic
Analysts forecast Q4 earnings to plunge 20% on average as health crisis rages
Canada's biggest banks may have made it through 2020 in relatively solid financial shape, but the pandemic's economic fallout is likely to remain a drag on their earnings for some time, according to analysts.
Just how significant the headwinds will be may become clearer next week, when the Big Six will report results for the three-month period ended Oct. 31.
Analysts estimate those fiscal fourth-quarter earnings will be down about 20 per cent on average from a year earlier, as the coronavirus pandemic and its associated economic effects continue to linger.
Yet there are positives that could come into play as well, such as that lenders have already taken plenty of loan-loss provisions, and that some smaller competitors have even been able to release funds from credit reserves. There are also solid capital levels, a resilient Canadian housing market and signs most people who deferred a loan payment have begun making them again.
“I see some puts and takes, and that's what you would expect at this stage of a downturn, to start to see some improvements in various spots,” Edward Jones analyst James Shanahan said in an interview. “But I think banks will continue to be cautious about the outlook and I think results will … be reflective of where we are in the economic environment.”
That economic environment is likely to loom over the banks' results for some time. For example, increased deposits and interest-rate cuts that central banks undertook in response to the pandemic could continue to squeeze the money-making margins of commercial lenders.
In addition, a regulator has restricted what Canada's banks can do with their capital, banning them from increasing their dividends or buying back shares.
Meanwhile, uncertainty around when exactly a vaccine will arrive, as well as a Joe Biden presidency and other geopolitical unknowns, could mean that business clients don't feel much like borrowing. While mortgage lending has been a “bright spot” for the banks, other parts of their business haven't been as fortunate, according to National Bank Financial analyst Gabriel Dechaine.
“Pretty much every other lending category is either in negative territory (e.g. cards down 11 per cent) or heading that way (e.g. Canadian commercial up six per cent, the slowest in approximately 7 years),” Dechaine wrote in a Nov. 17 report to clients.
Another recent report from Barclays analysts John Aiken, Joseph Ng and Aria Samarzadeh forecast profits for most of the Big Six would stay below pre-pandemic levels in 2021 and 2022.
“While we anticipate a strong bounce back for 2021 from the depressed (fiscal 2020) levels, amid the challenging environment and gradual recovery, our outlook for 2022 earnings growth remains fairly muted,” the Barclays analysts wrote. “Although data points on GDP, housing and employment continue to show signs of strength, we believe the road to recovery from COVID-19 will be a long one.”
The previous successes of the banks could be another challenge for them as well, as 2019 represented “peak earnings” for North American lenders, according to Shanahan.
“Analysts are anticipating sequential improvement in 2021, but earnings still won't be as high as they were in 2019,” Shanahan said. “And many banks won't achieve 2019-level earnings until 2022 or beyond.”
Bank of Montreal and Bank of Nova Scotia will be the first members of the Big Six to report fourth-quarter results on Tuesday. Next will be Royal Bank of Canada and National Bank of Canada on Wednesday, followed by Toronto-dominion Bank and Canadian Imperial Bank of Commerce on Thursday.
Despite Covid-19-related uncertainty that continues to dog the economy, the lenders are entering into their latest earnings season with a bit of momentum provided by investors.
Canaccord Genuity analyst Scott Chan wrote in a report Tuesday that since the Big Six began reporting third-quarter results back on Aug. 25, they had returned an average of approximately 12 per cent for shareholders, compared to around three per cent by the broader S&P/ TSX Composite Index.
“Although the near-term outlook remains challenging, we believe the market is ascribing more optimism for a rebound in F2022 (e.g. COVID-19 vaccines),” Chan said.
I think banks will continue to be cautious about the outlook and I think results will … be reflective of where we are in the economic environment.”