By Vipal Monga
TORONTO -- Canada's government has opened its fiscal spigot in an effort to prop up an economy reeling from the coronarvirus pandemic. Among the biggest beneficiaries: Canadian banks, which have avoided major loan losses and boosted deposits.
The biggest Canadian banks, Royal Bank of Canada and TD Bank Group, reported earnings growth during their fiscal fourth quarter ended Oct. 31, boosted by lower provisions for loan losses.
Canada's federal and provincial governments spent 382 billion Canadian dollars on virus-related relief this year, equal to almost $300 billion, and accounting for roughly one-fifth of Canada's total economic output in the third quarter. The money included funding for income and wage supports for people who lost jobs or worked fewer hours during the pandemic, zero-interest-rate loans for small businesses, and loan guarantees.
Bolstered by those supports, Canadians have continued making loan and credit-card payments they may have otherwise missed. The relief has been coupled with bank-led deferral programs that let homeowners delay mortgage payments, and the net effect has allowed banks to avoid writing off big chunks of their lending books.
TD Bank, which owns the 10th-largest bank in the U.S. by assets, reported on Thursday it provisioned C$149 million less in its Canadian retail unit during the fourth quarter than it had a year ago, and attributed the decline to bank and government assistance programs.
The bank's quarterly overall profits of C$5.14 billion were 80% higher than last year, although this year's number included a gain from Charles Schwab Corp.'s acquisition of TD Ameritrade Holding Corp. Excluding that gain, earnings totaled C$2.97 billion, 1% higher than last year.
"I think the programs that have been announced have been very effective, " said Riaz Ahmed, TD's chief financial officer, in an interview.
RBC, the country's largest bank by market capitalization, on Wednesday reported that it set aside C$427 million during its fiscal fourth quarter, 37% less than it did a quarter ago.
Overall, the bank posted a profit of C$3.25 billion ($2.51 billion) for the quarter, a 1% increase from a year earlier.
"It's been quite favorable from an economic standpoint and a well-being standpoint," Rod Bolger, chief financial officer for Toronto-based RBC, said in an interview. Some of the bank's borrowers maintained their income despite large-scale layoffs while also reducing their expenses, he said. That boosted overall credit quality. "It put a majority of our clients in a stronger position than they might otherwise have been."
The country's other large banks, Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce, also reported either quarterly or annual declines in their loan-loss provisions, which helped earnings.
U.S. banks are in a similar situation. Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. also set aside less to cover loan defaults as the economy rebounded from the pandemic-induced recession.
But the dim prospect for another large stimulus package from Congress is causing some consternation among some U.S. lenders. Citigroup in October predicted higher unemployment and a slower recovery than it had expected in July.
In contrast with its Canadian arm, TD set aside $210 million more than it had last year at its U.S. unit for bad loans, which pressured earnings. The unit contributed $403 million to the bank's income, 41% lower when compared with last year.
TD's Mr. Ahmed said the increase in provisions for bad loans was due mainly to weakness in sectors such as commercial real estate.
In Canada, there is no worry the government won't step in. On Monday, Chrystia Freeland, the country's deputy prime minister and finance minister, said the federal government could spend another C$100 billion over a three-year period starting next year to support the economy.
That would help soften the pain of rising defaults, said Gabriel Dechaine, an analyst with National Bank. "Eventually the rug is going to get pulled out, but it will be pulled out in a more gradual manner than expected," he said. "It's not going to be the sharp cliff everyone was worried about."
Many Canadians benefiting from income support and bank programs that allowed them to defer mortgage payments have used the cushion to either pay down their credit cards, or they have parked the extra money in bank deposits.
Deposits at RBC totaled C$1.011 trillion at the end of October, a 14% increase from a year earlier.
TD's deposits totaled C$1.135 trillion, a 27% increase from last year.
The increased liquidity also crimped fee revenue, as customers borrowed less. Credit-card balances in RBC's Canadian banking unit fell 11.7% from a year ago, while Bank of Montreal, which owns Chicago's Harris Bank, reported an 11% decline in total credit-card balances.
The banks have also been building up capital because Canadian regulators won't allow them to increase dividends or buy back shares. RBC's Tier 1 ratio now sits at 12.5%, roughly 3.5 percentage points, or C$19 billion, more than the regulatory minimum, RBC CEO David McKay said.
Still, uncertainty remains as questions linger about how Covid-19 vaccines will be distributed, the impact of a difficult winter of economic lockdowns and the strength of any post-pandemic rebound. That's keeping banks from deploying that excess capital or releasing loan loss reserves, National Bank's Mr. Dechaine said.
"There's no shortage of red flags out there," he said.
(END) Dow Jones Newswires
December 03, 2020 09:20 ET (14:20 GMT)Copyright (c) 2020 Dow Jones & Company, Inc.