Banks starting to ‘put COVID behind them’
LOAN-LOSS PROVISIONS DECLINE
• Royal Bank of Canada’s net income surged in the second quarter as Canada’s largest lender released provisions for loan losses and rode a frenzy of activity in capital markets to beat expectations.
RBC earned $4 billion for the three months ended April 30, or $2.76 a share, up from $1.5 billion, or $1 a share, in the same period a year earlier. Adjusting for one-time items RBC earned $2.80 per share. Analysts expected adjusted earnings of $2.51 a share, according to Bloomberg. Four major Canadian banks have reported expectation-beating quarters fuelled by drops in provisions for credit losses, which are funds that banks must hold in reserve to cover potential losses from loan defaults.
When the pandemic caused the first wave of closures last spring, profits tumbled as the banks set aside billions of dollars as a buffer against the sour loans anticipated.
But as vaccines roll out and economic duress eases, lenders are earmarking fewer funds for credit-loss provisions. RBC also recovered some of the provisions it had previously set aside, releasing $96 million in the second quarter, as compared with the $2.8 billion it booked in the same period a year earlier, when the pandemic first caused shutdowns in Canada. Analysts expected RBC to set aside $275.6 million.
Toronto-dominion Bank also reversed its provisions in its quarterly report on Thursday, releasing $377 million that was previously set aside for loan losses. Bank of Montreal, which reported on Wednesday, and Canadian Imperial Bank of Commerce reduced their loan loss provisions.
“We’re seeing the banks start to put COVID behind them. It’s not like we’re at the finish line yet, but credit continues to improve,” said Scotiabank analyst Meny Grauman. “We’re seeing allowance for loan losses come back down after being built up last year and we saw a little bit of that in the first quarter, but it became that much more significant in this quarter.”
While the banks are pointing to a faster recovery from the pandemic than expected, RBC chief risk officer Graeme Hepworth said further provision releases depend on the pace of vaccine rollout, how the economy reopens and when clients transition off of government subsidy programs.
Activity in capital markets also boosted earnings. Mergers and acquisitions plummeted at the outset of the pandemic when restrictions put a damper on deals.
Activity picked up again at the end of last year as low interest rates and balance sheets flush with cash propelled M&A to a record-setting pace in 2021. RBC reported $1.1 billion in profit, up from $105 million in the same period a year earlier. And that pace is expected to continue over the next year.
“With GDP growth strong and ample liquidity in the marketplace, the environment is positive for continued strength and investment banking into 2022,” chief financial officer Rod Bolger said in an interview.
TD Bank and CIBC also reported expectation-beating second-quarter earnings on Thursday. TD’S net income more than doubled to $3.7 billion, earning $2.04 a share, beating analyst estimates of $1.76, according to Bloomberg data. CIBC’S net income quadrupled to $1.65 billion, with adjusted earnings climbing to $3.59 a share, more than average analyst estimate of $3 per share.