The Canadian banks were off to a good start in 2020 — and then the Covid-19 outbreak happened. Banks are now facing increased pressure on their earnings as the economic fallout spreads.
In a new report, DBRS Ltd. said that the Big Six banks enjoyed strong earnings growth in their fiscal first quarter, with their aggregate earnings rising by 10.5% year over year and 7.7% quarter over quarter. DBRS also noted that the banks’ credit quality was sound too.
Despite the solid start, however, the negative impact of the Covid-19 outbreak on the global economy may curb the big banks’ earnings growth for the rest of fiscal 2020, DBRS warned.
“While the large Canadian banks have had a good start to [fiscal] 2020, increasing economic uncertainty, particularly from the impact of the coronavirus, will moderate earnings growth through the remainder of the year,” said Robert Colangelo, senior vice president, global financial institutions group, DBRS.
“Although the large banks indicated that it was too early to tell what these impacts may be, we expect that it will present a challenge to global economic growth, most immediately in China. The longer this coronavirus outbreak lasts, the deeper the impact it will have on economic activity,” Colangelo added.
Fitch Ratings reported that the Canadian banks were already facing moderate downside risks due to their exposure to the domestic oil sector, amid rail disruptions and legal challenges to pipeline construction. But the fallout from Covid-19 is now also hitting global oil prices — which could hurt the banks too.
“The overall effect of coronavirus thus far has been negligible for Canadian banks, but as the virus spreads further internationally beyond China, the potential for a more sustained and broader global economic impact has risen,” Fitch said in a new report.
“Although credit quality remains sound, energy sector impairments have begun to rise in recent quarters, signaling potential credit stress,” Fitch warned.
In particular, if key trading partners, such as the U.S. or China, suffer sustained economic weakening that reduces demand for energy and hurts the tourism industry, “it would be viewed negatively” for the credit profiles of the Canadian banks, Fitch said.
“Sustained pressure on oil prices, which declined by 17% since year-end 2019, would further weaken sector fundamentals and likely lead to higher credit losses in the near term,” Fitch said.
The ultimate effect of the outbreak on energy prices will be dependent on the authorities’ ability to control and contain the virus, Fitch concluded.