TORONTO (CU)_With nearly $9 billion set aside to cover loan losses, which failed to materialise amid the COVID-19 pandemic, Canada’s Big Six banks blew past earnings expectations earlier this year. Suggesting the worst of the pandemic may be in the rear-view mirror, the biggest banks in the North American nation reported a sharp rise in profits, with the Royal Bank of Canada reporting a $2.5 billion increase in profits for the three-month period which ended in April, from the same time last year when the pandemic was just beginning. Meanwhile, TD Bank posted a 144 per cent rise in profits during this period, while CIBC reported an even bigger leap of more than four times to $1.6 billion in quarterly profits. The Bank of Montreal’s profits for the quarter stood at just over $1.3 billion, which was nearly two times of what was reported during the same period last year.
However, now with the rapid spread of the COVID-19 Delta variant prompting border closures and lockdown measures in several countries across the globe, experts are of the view that this upward trend reported by Canada’s biggest banks may record a slowdown in the fiscal third-quarter results that are to be published next week.
Meny Grauman, a banking analyst at Bank of Nova Scotia wrote in a recent report: “When we exited Canadian bank earnings season in early June we thought that by the time Q3 reporting rolled around, COVID would be a fading memory.” Instead, now “the key topic of interest this quarter will be the pace of the economic recovery and the ability of the Delta variant to derail it,” he added.
Considering how the situation would impact the banking industry, firstly, banks would be more cautious when releasing funds that were set aside to cover potential loan losses, which means this could be the end of the huge earnings-per-share beats. Secondly, loan demand may also be severely affected, as the Delta variant will not help the recent slowdown in demand for loans from Canadian consumers.
Amid the global health crisis last year, the Office of the Superintendent of Financial Institutions (OSFI) imposed a prohibition on increasing dividends or buying back shares until further notice. Although, these restrictions have not yet been lifted, in June this year, the OSFI raised the capital buffer which banks are required to build during periods of economic strength, a move which suggested a possible lifting of the ban on dividend hikes and share buybacks.
Now, with the Delta variant creating an unstable situation in the financial markets once again, Grauman is of the view that there are “high odds” the restrictions will be lifted early in the new fiscal year, which begins in November.
