When loan loss provisions decline, the question for banks is what to do with excess capital.


Some banks have other plans for these funds, in addition to paying shareholders after a year of not being able to raise dividends, such as: B. Potential Acquisitions

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Five of Canada’s Big Six banks reported expected quarters this week as they headed for a rebound in the country’s pandemic-stricken economy.

The fluctuations in earnings were fueled in large part by falling provisions for loan losses. These are funds that banks must reserve to cover potential losses from loan defaults. Now analysts are examining how banks are using their extra cash reserves and when slow credit growth will rebound.

Lenders set aside billions of dollars last spring as a buffer against potential acidic loans in the event of widespread business closings and job losses. However, with government subsidies to businesses and employees, as well as bank deferral programs to help prevent defaults, loans did not sour as much as lenders and analysts expected.

As the vaccine rollout in North America picks up and the economy reopens south of the border, banks have cut their provisions or, in some cases, released funds from reserves.


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Bank of Montreal provisions declined to $ 60 million in the second quarter, compared to $ 1.1 billion for the same period last year and well below analysts’ expectations of $ 219 million. CIBC and National Bank are also making fewer than expected provisions, posting provisions of $ 32 million and $ 5 million, respectively.

Toronto-Dominion Bank posted the largest provision in provisions, releasing $ 377 million previously earmarked for loan losses. RBC has also reclaimed some of the funds previously set aside, releasing $ 96 million, compared to the $ 2.8 billion reported in the same period last year. Analysts expected TD and RBC to set aside $ 457.8 million and $ 275.6 million, respectively.

  1. TD announced on Thursday that first-quarter earnings were up 10 percent year over year to $ 3.3 billion.

    Big Six’s profits were supported by clawbacks on loan losses as the economic picture improved

  2. The six major Canadian banks reported in their most recent quarterly filings that tax authorities requested or proposed approximately $ 6.3 billion in additional taxes and interest on dividend issues in late October.

    Six billion dollars and more: The major tax battle between the CRA and the major Canadian banks shows no signs of easing

The trend signals that banks are beginning to “leave the pandemic behind,” according to Scotiabank analyst Meny Grauman.

“The economy weathered this pandemic better, so it turned out that credit losses are only a fraction of what we were concerned about last year,” Grauman said in an interview. “Even if the pandemic in Canada is not over yet – we stand behind the US and are still locked here in Canada – we still have a good view to be able to reduce these reserves.”

The pandemic also brought opportunities for certain departments. Mortgages soared as homebuyers seeking low interest rates flooded Canada’s heated housing market. The balances at RBC increased 12.6 percent year-over-year and BMO increased 10 percent.


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The capital markets also spiked profits from a variety of corporate mergers and trading activities as companies jumped on high stock valuations and excess liquidity. RBC was a leader, raising $ 1.07 billion in the capital markets space, of which $ 563 million was at BMO, $ 495 million was at CIBC and $ 383 million was at TD.

A sluggish recovery in credit demand, however, weighed on the result. While mortgages boosted personal lending, business lending was largely unchanged. Credit card spending increased slightly, but recovered only slowly.

Analysts questioned whether excess deposits, as consumers and businesses tucked away extra cash, would delay credit demand, especially among commercial customers.

Rod Bolger, RBC’s chief financial officer, said that while people could initially spend their extra money instead of borrowing, that should change when the economy reopens and spending on large goods resumes.

The trend towards savings has since benefited several segments, with the number of clients investing in wealth management and companies seeking to meet their merger and acquisition goals in capital markets increasing.

“From a commercial perspective, we don’t think this is a long-term impact on credit growth and that it should take hold in the next few quarters,” Bolger said in an interview.

“Clients have more resources to invest in the market and that has certainly benefited our wealth management businesses in both the US and Canada, and it has also benefited the capital markets business as we see our M&A pipeline is currently quite robust.


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The banks are also relying on a high level of capital and are likely to release further loan loss provisions when the economy opens up again. Analysts watch how the lenders allocate this money.

At the start of the pandemic, Canadian banking regulators temporarily prevented banks from raising dividends and buying back shares. Lenders reported an increase in their core capital ratios (CET1), with TD increasing to 14.2 percent and RBC increasing to 12.8 percent.

Across the board, bank executives said they plan to send some of those funds to investors once the restriction is lifted. Some banks have other plans for these funds as well, in addition to paying shareholders after a year of being unable to raise dividends.

“They will all go through some pretty dividend increases for health, but there are some differences in preferences or thoughts between allocating capital towards organic growth, M&A and buybacks,” said CIBC analyst Paul Holden in an interview, adding, that “TD was the loudest” about using his capital to potentially make acquisitions to grow his business.

Bharat Masrani, TD’s chief executive officer, said the bank would certainly consider returning capital to shareholders, but Canada’s second largest bank has enough capital to consider acquisitions as well.

“We won’t be shy about signing a bank contract,” Masrani said in a conference call with analysts. “Should a compelling opportunity arise, we have the flexibility to take it very seriously.”


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