Canadian banks took massive provisions in 2Q20, and earnings plummeted 50.1% year-over-year given rapid deterioration in banks' economic outlooks due to the coronavirus pandemic, disrupting 2020 operating plans, according to a new report from Fitch Ratings. Despite the huge decline in earnings, revenues were moderately down (4.9% yoy on average). In 2Q20, cumulative provisions totalled CAD 11.26 billion during the quarter for the seven largest banks, exceeding the CAD 11.0 billion in provisions taken during the prior 12 months. Provisions were predominantly taken against credit cards and personal loans in retail banking and against commercial loan exposures to the energy, retail and services sectors.
Barring further deterioration in their economic outlooks, Fitch does not expect significant further incremental reserve accumulation against performing loans for banks whose reporting periods ended April 2020. However, given some variation among bank forecasts, volatility in oil markets, and persistent downside credit risk related to the pandemic, continued elevated provisions against both performing and non-performing loans cannot be ruled out.
"Credit quality will continue to deteriorate into fiscal 2021 for Canadian banks primarily in sectors most impacted by social distancing including energy, transportation, hospitality and retail," said Mark Narron, Senior Director, Fitch Ratings.
Overall, higher credit costs, lower fee income and compressed margins will meaningfully reduce full year profitability relative to 2019. Positively, central bank facilities and strong deposit growth support healthy surplus liquidity but create longer-term risks around the pace and timing of regulatory and monetary normalization. In addition, while risk-weighted asset growth and lower earnings power has moderately pressured banks' capitalization, capital levels remain healthy relative to recently lowered minimum capital requirements, supported by a suspension of share repurchases and dividend increases. Over the longer term, banks' company profiles may benefit from the seamless transition of non-branch staff to working from home, their efficient intermediation of government relief and deferred loan payment programs, as well as growth in customers' use of digital channels.
On April 3, Fitch assigned Negative Rating Outlooks to the seven largest Canadian banks based on downside risks to asset quality, earnings and capitalization. Mitigating these risks are the unprecedented fiscal, monetary and regulatory policy actions taken by Canadian authorities. As of June 2020, direct and indirect fiscal stimulus totalled approximately 14% of GDP.
"The extent of credit quality deterioration will become more evident as government relief and payment deferral programs expire (likely during 4Q20 and 1Q21)," added Narron.
The report "Canadian Banks 2Q20 Results" is available at www.fitchratings.com.