U.S. results suggest rough patch for earnings of Canadian lenders
Canada’s biggest banks are right in the thick of a tough quarter, judging by the rocky results their American cousins are posting this week.
JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. all reported big drops in earnings for the three months ended March 31, as the lenders were forced to set aside piles of cash in case consumers and businesses are forced to default on their loans because of the coronavirus crisis.
The parallel isn’t perfect, but the biggest U.S. lenders can herald what’s to come for Canada’s Big Six. All of the largest Canadian banks have operations south of the border, and the trends in the results from JPMorgan, the biggest bank in the U.S., are “also very relevant to the Canadian marketplace,” National Bank Financial analyst Gabriel Dechaine wrote Tuesday.
“We expect to see similar outcomes in terms of credit performance, margin compression, trading revenue generation and loan growth” in Canada, Dechaine wrote in a report. “On the latter item, we are hearing of the same trend in Canada.”
Like their counterparts in the U.S., Canadian banks are facing interest rates that have been lowered to essentially zero, squeezing what they can charge for loans. Customers are also losing their jobs, threatening their ability to keep up with debt payments.
Still, loans have been growing, with JPMorgan’s corporate clients borrowing more than US$50 billion from existing lines of credit as the crisis ramped up and companies scrambled to get cash. Growing loan balances could mean growing revenue from interest payments on those loans, but during the current crisis, the ability of some borrowers to repay has suddenly come under threat because of the closure of non-essential businesses and a drop in consumer demand.
Banks must also hold a certain amount of capital relative to the size of their loans, and set money aside for possible losses.
JPMorgan reported provisions for credit losses of almost US$8.3 billion for its first quarter, which included US$6.8 billion it put into reserves. For the same quarter of 2019, the bank’s credit costs had been about US$1.5 billion, with the additional money socked away this quarter reflecting “deterioration in the macro-economic environment as a result of the impact of
COVID -19 and continued pressure on oil prices,” the lender said.
If the biggest bank in the U.S. feels the need to set aside a massive amount of money to cushion the blow of the COVID-19 recession, then Canada’s banks likely will too, as their accounting requires earmarking funds for expected loan losses.
“So you can take a look at the U.S. banks and say, ‘this is a roadmap for what the Canadian banks are going to have to put up in similar fashion,’” Barclays analyst John Aiken said in an interview.
Exactly how much Canada’s banks will have to set aside could vary given the uncertainty about the duration of the pandemic and the recession.
Big Canadian banks will report results in May for the quarter covering February, March and April, meaning there is likely to be a heavier COVID-19 influence on the results than those of the U.S. banks, which still booked profits. Canadian households and businesses were also carrying a relatively higher level of debt going into the crisis.
Still, large Canadian lenders are expected to weather the storm.
The Bank of Canada said in the monetary policy report it released on Wednesday that the stress-testing it does on the big lenders shows they are “well positioned” to ride out a sharp economic and financial downturn.
Financial Post