The big banks turned in mixed results for the third quarter as hefty provisions at some of them weighed on earnings, says Fitch Ratings.
The Big Six, along with Desjardins Group, reported an 11% drop in aggregate net income on a year-over-year basis, the rating agency found.
The decline in earnings came “despite strong revenue growth, particularly in Canadian banking, wealth management and capital markets,” Fitch noted in a report.
Aggregate revenue was up 3% overall, largely driven by stronger Canadian banking activity taking place following recent interest rate cuts from the Bank of Canada. Revenue also rose thanks to “wealth management fees, and robust trading and advisory revenues in capital markets.”
In the face of this headline strength, however, “there was the significant increase in aggregate loan-loss provisions,” Fitch noted. The largest increases were for Bank of Nova Scotia and Bank of Montreal, where provisions rose 31% and 29% quarter-over-quarter, respectively.
Additionally, Toronto-Dominion Bank took a $3.6-billion charge stemming from U.S. regulatory investigations into the bank’s anti-money laundering program.
Meanwhile, Royal Bank of Canada incurred more charges related to improving City National’s operational infrastructure.
“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 U.S.,” Fitch said.
Credit quality measures continued to normalize in the third quarter, the rating agency said, with the banks’ gross impaired loans continuing to rise.
“Office [real estate] continues to be an area of risk for all the banks, but remains manageable in Fitch’s opinion, representing no more than ~1% of total loans for any bank,” it said. Fitch also expects the banks’ consumer loan portfolios to soften in the near term, “particularly credit cards and unsecured loans.”
Fitch also expects the banks to continue generating loan growth as monetary policy eases.
“In Fitch’s opinion, the banks will likely continue to produce single-digit loan growth in the next few quarters, particularly as they focus on underwriting and portfolio optimization given continued credit normalization.”
The banks’ capital levels are likely to stay strong too, with Fitch stating that most banks’ ratios are expected to exceed regulatory minimums by 50 to 100 basis points. However, the banks “are being prudent with shareholder distributions as their outlooks incorporate further credit normalization,” it said.