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Canada’s banks exit pandemic year with profit growth in reach

Canada’s largest banks are within striking distance of resuming profit growth — with the help of government programs that prevented major loan losses.

The country’s six biggest banks are expected to post an 11 per cent average decline in adjusted earnings per share when they report fiscal first-quarter results next week, according to analysts’ estimates compiled by Bloomberg. The comparable quarter a year earlier was the last one before COVID-19 hit. But if actual results beat projections at the same rate they did in the fourth quarter, the banks would eke out a 3.4 per cent profit gain.

Whether or not Canada’s banks manage a surprise return to growth, they’re emerging from the first year of the pandemic having avoided a severe financial crisis largely because of stimulus programs that kept consumers and businesses afloat. With the economy stabilizing, banks may be able to set aside less money to absorb souring loans, which would lift profit.

“Now that we’ve got credit put to bed for now, the focus will return to who’s growing earnings the fastest and who has the ability to continue to do so,” John Aiken, an analyst at Barclays Plc, said in an interview.

The S&P/TSX Commercial Banks Index, which tracks the performance of Canada’s eight biggest publicly traded banks, has fallen 0.3 per cent over the past 12 months, compared with a 2.3 per cent gain for the broader S&P/TSX Composite Index. Canadian Imperial Bank of Commerce has been the best performer among the country’s lenders, rising 4.7 per cent in the past year, and Laurentian Bank of Canada the worst, slumping 27 per cent.

Canada’s six largest banks are expected to set aside a combined CUS$3.68 billion (US$2.89 billion) in provisions for credit losses in the quarter ended Jan. 31, according to analysts’ estimates. That would be up 24 per cent from a year earlier, before the pandemic took hold in North America, and 11 per cent from the fourth quarter. In that quarter, however, analysts had projected the group would report a combined CUS$5.32 billion in provisions, overshooting the actual results by almost 61 per cent.

Because of continued government support and potential economic improvements, Aiken is forecasting that total first-quarter provisions will drop 9 per cent from the fourth quarter. There’s a good chance banks will report even lower provisions than estimated and possibly reverse earlier allowances, he said.

“The next step is how comfortable are investors going to be with that, and will the banks receive full valuation credit for an earnings beat that’s predicated just on better provisions or a reversal of allowances?” Aiken said. “A headline beat on that basis may not necessarily warrant a strong share-price reaction.”

Consumer Lending

Possibly more important to investors will be the performance of the banks’ core lending businesses. Growth in residential mortgages may continue to be relatively strong, while other types of…

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