Canadian banks diverge on FY2021 views after better-than-expected quarter

(Reuters) – Toronto-Dominion Bank and Canadian Imperial Bank of Commerce wrapped up a forecast-beating fourth quarter by Canadian lenders on Thursday, but diverged on their expectations for next year amid uncertainty about the economic outlook.

Canadian banks have set aside nearly C$20 billion ($16 billion) over the past three quarters to cover a rise in soured loans resulting from the coronavirus crisis and below pre-pandemic level oil prices. That has lifted total reserves to a record surpassing those during the global financial crisis.

Analysts had expected Canada’s six biggest banks to continue with the conservative approach, but loan impairments that remained close to levels seen before the COVID-19 pandemic – thanks to payment deferrals and government assistance measures – helped them take fewer provisions than estimated in the three months through October.

That helped most banks beat profit estimates and improve from the prior quarter. Strength in capital markets businesses, the theme through this year, continued into the fourth quarter.

But even as banks including Bank of Montreal, Bank of Nova Scotia and CIBC said they have built up adequate reserves to cover an expected increase in bad loans, others including Royal Bank of Canada, National Bank of Canada and TD, warned a tough economic environment could require further pandemic-related increases.

“We think (2021) will be a better year for us than this year was,” CIBC’s Chief Financial Officer Hratch Panossian said in an interview, citing positive developments, such as the impending availability of a coronavirus vaccine.

TD, Canada’s second-biggest lender, expects the economic recovery to be “gradual and uneven,” TD Chief Financial Officer Riaz Ahmed told Reuters.

While TD feels it is adequately provisioned for loan losses, “much depends on the path of the pandemic,” and it may need to replenish reserves further, Ahmed added.

TD took loan-loss provisions of C$917 million ($710 million) in the quarter through October, less than half the third-quarter level, and lower than the expected C$1.58 billion.

Meanwhile, CIBC, the No. 5 bank, set aside C$291 million ($225 million), down 45% from the third quarter. Analysts had expected little change.

TD’s adjusted net income marginally rose to C$1.60 a share, from C$1.59 a year ago. Analysts had expected C$1.28, according to Refinitiv.

CIBC reported adjusted profit of C$2.79 per share, up from C$2.84 a year earlier, beating analysts’ estimates of C$2.52.

The adjusted earnings excluded charges of C$220 million from a delay in closing the sale of the bank’s First Caribbean subsidiary, and C$84 million due to early office lease terminations ahead of a move to its new headquarters.

CIBC shares rose 0.3% to C$110.39 in morning trading in Toronto, while TD shares were flat at C$70.799. The Toronto stock benchmark rose 0.4%.

($1 = 1.2874 Canadian dollars)