As loan loss provisions decline, the question for banks becomes what to do with excess capital?


Some banks have other plans for these funds, in addition to paying shareholders after a year without being able to increase dividends, for example by possibly making acquisitions.

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Five of Canada’s six major banks reported better-than-expected quarters this week as they forecast a rebound in the pandemic-ravaged economy.

The rise in profits was fueled in large part by falling provisions for credit losses, which are funds that banks must set aside to cover potential losses from defaults. Now analysts are looking at how banks will deploy their additional cash reserves and when weak lending growth will rebound.

Lenders set aside billions of dollars last spring as a buffer against potentially bitter loans amidst massive business closings and job losses. But with government grants for businesses and workers and bank loan deferral programs that have helped prevent defaults, loans haven’t declined as much as lenders and analysts expected.

As vaccine rollout accelerates in North America and the economy south of the border reopens, banks have reduced their provisions or, in some cases, freed up reserve funds.


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The Bank of Montreal’s provisions fell to $ 60 million in the second quarter, down from $ 1.1 billion in the same period a year earlier and far below analysts’ expectations of $ 219 million. CIBC and National Bank also made fewer provisions than expected, recording $ 32 million and $ 5 million in provisions, respectively.

The Toronto-Dominion Bank recorded the largest write-back of provisions, freeing up $ 377 million previously reserved for loan losses. RBC also clawed back some of the funds it had previously set aside, freeing up $ 96 million, up from $ 2.8 billion reported in the same period a year earlier. Analysts expected TD and RBC to set aside $ 457.8 million and $ 275.6 million, respectively.

  1. TD said Thursday that first-quarter profits were up 10% year-on-year to $ 3.3 billion.

    Big Six profits supported by recovery of loan losses amid improving economic situation

  2. The Big Six Canadian banks indicated in their most recent quarterly statements that at the end of October, tax authorities were seeking or proposing to charge them about $ 6.3 billion in combined additional taxes and interest on matters relating to dividends.

    $ 6 billion and more: major tax battle between CRA and big Canadian banks shows no signs of abating

The trend indicates that banks are starting to “put the pandemic behind them,” according to Scotiabank analyst Meny Grauman.

“The economy has weathered this pandemic on a better footing, so credit losses turned out to be a fraction of what we were worried about last year,” Grauman said in an interview. “Even though the pandemic is not over in Canada – we are behind the United States and we are still stranded here in Canada – we still have good visibility to be able to withdraw these reservations. “

The pandemic has also brought opportunities to some divisions. Mortgages surged as buyers eager for low rates flooded the overheated Canadian housing market. RBC balances jumped 12.6% year-over-year and 10% at BMO.


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Capital markets also boosted earnings amid a frenzy of company mergers and trading activities, as companies surged on high stock valuations and excess liquidity. RBC led the pack, posting $ 1.07 billion in its capital markets division, including $ 563 million at BMO, $ 495 million at CIBC and $ 383 million at TD.

But a slow recovery in loan demand weighed on earnings. While mortgage lending has boosted personal lending, business lending has remained largely stable. And credit card spending, while increasing slightly, has been slow to rebound.

Analysts questioned whether excess deposits as consumers and businesses hid extra cash would delay loan demand, especially from business customers.

RBC CFO Rod Bolger said that while people may spend their extra money first rather than going into debt, that should change as the economy reopens and spending on big items picks up. .

At the same time, the savings trend has benefited some segments, with a slight increase in clients investing with its wealth management division and companies seeking to meet their M&A goals in its capital markets division.

“From a business perspective, we don’t think this is a long-term impact on loan growth, that it should be felt over the next two quarters,” Bolger said in an interview.

“Clients have more funds to invest in the market, and this has certainly benefited our wealth management business in the United States and Canada, and it has also benefited the capital markets business, as we find that our M&A pipeline is pretty solid right now.


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But banks are also benefiting from high capital levels and are expected to continue releasing new loan loss provisions as the economy reopens. Analysts are watching how lenders will allocate this money.

At the start of the pandemic, the Canadian banking regulator temporarily banned banks from raising dividends and buying back shares. Lenders reported increases in their Class 1 (CET1) common stock ratios, with TD increasing to 14.2% and RBC to 12.8%.

Overall, bank executives have said they plan to send some of these funds to investors once the limitation is lifted. Some banks also have other plans for these funds, in addition to paying shareholders after a year without being able to increase dividends.

“They’ll all see some nice increases in healthcare dividends, but there are differences in preferences or thoughts between allocating capital to organic growth, mergers and acquisitions, and buyouts,” the analyst said. CIBC Paul Holden in an interview, adding that “TD has been the loudest” about using its capital to potentially make acquisitions to grow its business.

TD CEO Bharat Masrani said the bank would certainly consider returning capital to shareholders, but Canada’s second-largest bank also has enough capital to consider acquisitions.

“We will not hesitate to make a banking deal,” Masrani said on a conference call with analysts. “If a compelling opportunity presents itself, we have this flexibility to look at it very seriously.


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