Banks’ profits expected to improve from last quarter

Canada’s biggest banks are expected to see profits plunge for a second straight quarter due to economic fallout from the COVID-19 pandemic — though there are signs of improvement.

The nation’s six-largest lenders will post an average profit decline of about 30 per cent in the fiscal third quarter from a year earlier when they kick off the reporting season next week, according to the average estimates of seven analysts.

It’ll be one of the worst quarters in modern Canadian banking history, but it marks an improvement from the 50 per cent profit drop in the second quarter when the virus first gripped the North American economy.

Earnings results for the three months ended July 31 will likely provide some calm after the “stormy” second quarter, Bank of Nova Scotia analyst Meny Grauman said in an Aug. 18 note. “While we expect performance to be better on a sequential basis, largely as a result of moderating loan loss provisions after a spike in the second quarter, results may still be down relative to the same quarter last year as the current pandemic-induced recession continues to take its toll.”

Royal Bank of Canada, Toronto-dominion Bank and four other large lenders built up $10.9 billion in reserves in the second quarter to brace for bad loans emerging from the coronavirus pandemic. Analysts see fewer loan-loss provisions in the third quarter for most banks, though they are still expected to remain elevated.

Government relief efforts and loan deferrals by banks helped stave off an anticipated surge in delinquencies and impairments while keeping credit deterioration among consumers in check. Banks deferred mortgage payments for more than 760,000 Canadians as of the end of June, representing about 16 per cent of mortgages held by the lenders, according to the Canadian Bankers Association.

“We believe recent extensions and amendments of government programs (combined with deferrals and a slightly better than expected economic recovery) will impact the timing and possibly magnitude of impairments, likely pushing the peak of impairments into mid-2021,” RBC Capital Markets analyst Darko Mihelic said in an Aug. 14 note. Still, the pandemic has caused other headwinds. COVID-19 remains an “overhang” for banks, whose quarterly earnings will be tested with heightened provisions amid a languishing economic outlook, according to Barclays Plc analyst John Aiken.