Big banks emerge from pandemic year with profits growing

In less than a year, Canada's largest banks have managed to reignite earnings growth — even when compared with pre-pandemic times.

All of the country's six biggest lenders this week reported higher net income in the three months through January than in last year's fiscal first quarter, before the coronavirus had spread widely across North America. Results at the six banks also exceeded analysts' expectations.

Much of the credit goes to government stimulus programs that allowed consumers to continue making mortgage payments and prevented many businesses from shutting their doors for good. The Bank of Canada's interest-rate cuts kept an already-strong housing market humming, and the Office of the Superintendent of Financial Institutions halted share buybacks and dividend increases, helping the banks shore up their capital bases without the temptation of returning more cash to shareholders.

“In Canada, there was very good coordination from the beginning between the financial system, the central bank, the regulators and the government more broadly,” Canadian Imperial Bank of Commerce chief financial officer Hratch Panossian said in an interview Thursday. “We've managed to mitigate some of the impact of the ongoing pandemic and the challenging time that we're going through.”

The banks also did their part by helping customers avoid default through loan-deferral programs and by setting aside record amounts of capital early in the crisis, protecting themselves in case of widespread loan losses and bolstering investor confidence.

That early caution drove much of the profit gains and beats in the first quarter as the banks reported dramatically smaller provisions for credit losses than in the fourth quarter. At all six banks, set-asides were even smaller than a year earlier, before COVID-19 spread.

Strong capital markets lifted earnings at Royal Bank of Canada and National Bank of Canada, which have both spent years bulking up their investment-banking and trading operations.

Canada's robust housing market helped consumer-focused Toronto-Dominion Bank and CIBC, which has placed a particular emphasis recently on reigniting its mortgage-lending business. Bank of Nova Scotia showed progress in improving the performance of its Latin America-focused international division.

Bank of Montreal's results were driven by strong cost controls and results in its U.S. operations, which could continue to benefit the business throughout the year because of the faster pace of vaccination in the country.

“The expectation is that the economy is going to come back not necessarily stronger but sooner in the U.S. than in Canada,” James Shanahan, an analyst at Edward Jones in St. Louis, said in an interview. “Given that BMO and TD have more exposure there, that's going to be a net positive for those two in particular.”

Looking ahead to the rest of the year, the trends that will determine the banks' performance include not just which geographies recover first, but which banks do the best job controlling costs, and which classes of borrowers resume taking out loans, said Gabriel Dechaine, an analyst at National Bank. Early signs are indicating that business lending may recover faster than consumer lending, a reversal of normal trends in an economic recovery, he said.