Rising loan-loss provisions

“Not just for that, but also to allow for business disruptions in sectors like mining and manufacturing due to worker illness and the need to isolate their workmates,” Shenfeld said.

The economic pain is expected to be particularly heavy in sectors such as energy and banking where earnings are dependent on both consumers and businesses.

Meny Grauman, a bank analyst at Cormark Securities Inc., said any forecast of a “V-shaped” recovery that includes a short trough and quick rebound is “wishful thinking” at this point.

“Even after we leave our houses there is a high probability that we will be walking into a prolonged recession,” Grauman said. “We are still in the very early innings here.”

He is forecasting banks will experience both early and prolonged pain from the shutdowns — though government programs aimed at encouraging the financial institutions to keep lending, as well as regulatory relief on capital requirements and support from the Bank of Canada, should at least delay some of the impact.

“I have scenarios modelling earnings falling in the 30- to 60-per-cent range on average across the Big 6 banks this year,” Grauman said. “I have seen a number of analysts talk about 20 per cent, but that assumes a very quick recovery.”

He said the biggest factor in bank performance will be on the credit side, as paycheques and business revenue dry up, making it difficult for consumers and businesses to service their debts.

“Rising loan-loss provisions will be the key driver weighing on bank earnings through this crisis,” he said.

“Revenue will also be diminished, but that will be a much smaller impact.”

Grauman said government stimulus and directives from the Office of the Superintendent of Financial Institutions — including treating consumer and small business loans with a payment deferral of up to six months as performing loans — appear to be sufficient in size and scale at this time and will help “smooth things out.”

Nevertheless, he said he expects to see some signs of trouble for the banks as early as the second quarter.

“Credit cards and other unsecured loans will see a more immediate hit,” he said, adding that ripples into the housing sector will take longer to play out.

“The way loan-loss accounting works is that the first impact will be on expectations,” he said. “Actual loan impairments always lag.”