An improving credit environment bodes well for banks with footprints south of the border
The latest earnings reports of at least 14 large US banks indicate a healthy trend of lower loan losses and smaller provisions for credit losses, which will come as good news for Canadian banks that deal south of the border.
Mike Rizvanovic, a markets observer with Credit Suisse, pointed to one Canadian institution as a particular beneficiary of this trend: Bank of Montreal.
In his report on Rizvanovic’s forecast, Bloomberg analyst Paul Bagnell explained that BMO’s favourable position is the result of the bank’s accelerated lending to US-based businesses before the COVID-19 pandemic struck.
BMO is also operating a large commercial lending business in the Midwest US, thus placing it in a position to report lower provisions on expected losses from those loans, Bagnell said.
And while Canadian banks’ earliest reports on their fiscal Q1 earnings are still roughly a month away, “the improving credit outlook will be a material positive,” Bagnell noted.
Still, Canada’s Big Six are preparing for the possibility of sustained economic uncertainty, which is pushing them to step up their loan-loss provisions.
Steve Bélisle, senior portfolio manager at Manulife Investment Management, said that the main concern over the next few quarters will be the pandemic-driven drop in demand for financial products.
“Into next year, they will go back to normal in terms of credit losses,” Bélisle said. “The focus will shift to the revenue side…There’s positive outlook on credit. On revenue, not so much.”
National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank have warned about the long-term effects of mounting unemployment and possibly slower housing activity.
“We made our pessimistic scenario even more pessimistic and increased the weight of that scenario,” said William Bonnell, chief risk officer at National Bank. “We think that the pessimistic scenario account(s) for the dark potential path of the recovery.”
