Jump in credit loss provisions slashes banks’ earnings

By James Langton | June 12, 2020 | Last updated on June 12, 2020
2 min read
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The Covid-19 fallout and drop in oil prices resulted in cut revenue at the big Canadian banks, with earnings plunging by over 50% as credit provisions surged, said DBRS Morningstar in a new report.

The rating agency said that, in the second quarter of 2020, the earnings of the Big Six banks dropped 53% from the previous quarter, and were down 52% year over year, largely driven by a jump in loan loss provisions.

DBRS reported that the banks’ results “featured a staggering 269% sequential increase” in provisions for credit losses (PCL) — which jumped to $10.9 billion from $3 billion in the previous quarter — due to the effects of the pandemic and lower oil prices.

The economic challenges created by the pandemic also saw the big banks’ revenue decline by 10%, despite recording 7% growth in loans.

Earnings were down across all the banks’ major businesses, DBRS said.

For instance, it reported that earnings in their Canadian and U.S. personal and commercial banking businesses dropped by 49%, and their capital markets earnings declined by 56%, “despite benefiting from market volatility.”

The economic turmoil created by the pandemic “will negatively affect the profitability and asset quality of the six large Canadian banks” through the rest of the year, it said.

“We expect the remainder of [fiscal] 2020 to be challenging with PCLs remaining elevated for all banks,” said Robert Colangelo, senior vice president, global financial institutions group, at DBRS Morningstar.

“Nonetheless, at this point, it is uncertain whether these higher levels of provisions will translate into higher loan losses,” he added.

Additionally, the rating agency said that the banks’ credit profiles are generally secure because of their diversified earnings power, strong liquidity and funding profiles, and solid capitalization.

“The full impact of the coronavirus on the global economy and the banking sector continues to be extremely uncertain and will ultimately depend on the evolution of the outbreak, the magnitude of the economic downturn, the effectiveness of various stimulus measures and social safety nets, as well as the extent of the subsequent recovery,” DBRS said.

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James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.