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

By on May 28, 2021 0

Some banks have other plans for these funds, in addition to paying shareholders after a year when they have not been able to raise dividends, for example by making acquisitions.

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Five of Canada’s six big banks announced quarters beating expectations this week as they envision a rebound in the country’s pandemic-ravaged economy.

The profit beats were fueled in large part by falling bad debt provisions, which are funds banks must set aside to cover potential losses from defaults. Now analysts are examining how banks will deploy their additional cash reserves and when weak loan growth will rebound.

Lenders set aside billions of dollars last spring to guard against potential sour loans amid major business closures and job losses. But with government grants for businesses and workers and bank loan deferral programs that have helped prevent defaults, the loans haven’t worsened as much as lenders and analysts expected.

As vaccine roll-out accelerates in North America and the economy south of the border reopens, banks have reduced their provisions or, in some cases, released funds from reserves.


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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 that had previously been set aside for loan losses. RBC also clawed back some of the funds it had previously set aside, releasing $ 96 million, up from the $ 2.8 billion it 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 percent year-over-year to $ 3.3 billion.

    Big Six profits bolstered by loan loss recoveries amid improving economy

  2. The Big Six Canadian banks indicated in their most recent quarterly reports 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 issues. related to dividends.

    $ 6 billion and more: major tax battle between CRA and Canada’s big 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 a good line of sight to be able to withdraw these reservations.

The pandemic has also brought opportunities to some divisions. Mortgages have skyrocketed as buyers eager to lock in low rates flooded Canada’s heated housing market. RBC balances jumped 12.6% year over year and 10% at BMO.


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

But a slow recovery in credit demand weighed on earnings. While mortgages boosted personal lending, commercial 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 concealed additional cash, would cause loan demand to lag, especially from business customers.

RBC CFO Rod Bolger said if people can 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 certain segments, with an increase in the number of clients investing in its wealth management division and companies seeking to meet their M&A goals in its financial markets division.

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

“Clients have more funds to invest in the market, and that has certainly benefited our wealth management business in the United States and Canada, and it has also benefited the capital markets business, as we see our portfolio of mergers and acquisitions is pretty solid right now.


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But banks are also using high levels of capital 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 rising to 14.2% and RBC to 12.8%.

Overall, the bank’s executives 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 of not being able to raise dividends.

“They’ll all see some nice health dividend increases, but there are differences in preferences or opinions 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 most articulate” about using its capital to potentially make acquisitions in order 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 make 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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