Issues cast [shadow over otherwise strong revenue growth
Canada's major banks have reported mixed results for the third quarter, with rising loan loss provisions and increased regulatory scrutiny casting a shadow over their financial performance.
While revenue growth was strong in certain areas, profits were dampened by higher provisions for potential loan losses, a trend that ratings agency Fitch said reflects the banks' cautious stance amid economic uncertainties.
“Although some banks reiterated their full-year guidance for loan losses, most expect provisions to continue to increase as they build buffers for softer macroeconomic environments both in Canada and the US,” the credit rating agency said in its report.
Scotiabank and Bank of Montreal were hit hard during the third quarter.
Scotiabank’s provisions for impaired loans jumped by 31% compared to the previous quarter, largely due to its exposure in Latin America. Bank of Montreal (BMO) also faced pressure, with its provisions nearly doubling from a year earlier to $906 million, driven by elevated losses in its wholesale lending business.
The Toronto-Dominion Bank (TD) set aside $3.57 billion related to ongoing US regulatory investigations into its anti-money laundering practices. This charge was a major factor in the bank's performance, and without it, the aggregate earnings of the major Canadian banks would have increased by 15% year over year.
Meanwhile, Royal Bank of Canada (RBC) incurred additional costs to upgrade the operational infrastructure of its US subsidiary, City National, following a special assessment by the Federal Deposit Insurance Corporation (FDIC).
Despite these challenges, the banks did report some positives. Aggregate revenue for the peer group grew by 3%, driven by increased customer activity in Canadian banking, bolstered by two Bank of Canada rate cuts, and stronger performance in wealth management and capital markets.
However, credit quality across the sector is showing signs of strain. The average gross impaired loans (GIL) ratio rose to 0.66%, up from 0.64% in the previous quarter and 0.48% a year ago. BMO’s GIL ratio was notably higher at 0.89%, reflecting difficulties in its US commercial real estate and wholesale trade loan books.
While the office commercial real estate continued to be an area of risk for all the banks, Fitch said the risks were manageable as it only represents over 1% of total loans for any bank.
“Despite the rate environment and softer economic conditions, including higher levels of unemployment, Fitch also expects to see softness in banks' consumer loan portfolios over the near term, particularly credit cards and unsecured loans,” the agency said.
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