The chief executives of two major Canadian banks say they expect to have ample capital to absorb shocks from the coronavirus pandemic, and do not plan to cut dividends or lay off staff this year.
Bank of Montreal CEO Darryl White discussed the “extraordinary disruption and uncertainty" the novel coronavirus has caused at the bank’s annual meeting on Tuesday – held for the first time entirely online and by telephone. In an interview after the meeting, he added that the bank “and the system have lots of capacity" to swallow inevitable loan losses, while continuing to pump liquidity into the economy.
Hours earlier, Bank of Nova Scotia CEO Brian Porter said that while banks face “unprecedented uncertainty,” Scotiabank has “ample capital" to serve as a cushion. In a conference call discussing the crisis with the bank’s own analyst for the sector, he also said Canadian banks’ capital levels are roughly three times higher than they were in 2008.
Both CEOs contrasted the current health crisis, and the abrupt halt it has brought to large swaths of economic activity, with the 2008-09 global financial crisis, which was rooted in the financial system. One key difference has been the pace at which the current pandemic has gripped all sectors, forcing policy makers, central banks and regulators to roll out massive response plans in record time.
“The speed of the acceleration of the crisis is so profound and therefore the speed of the response from a stimulus perspective has had to be equally profound," Mr. White said. “Effectively, what it all boils down to is how do we get as much working capital flowing through the economy as quickly as possible?”
Both CEOs said they see no need to reduce their banks’ dividend payments, even though regulators have asked them not to raise dividends, noting that they maintained quarterly payouts through the 2008-09 crisis. “We passed that test then and there’s no reason to believe that we don’t pass it now," Mr. White said.
By contrast, on Tuesday the United Kingdom’s largest banks cancelled their final dividend payments for 2019 and agreed not to pay dividends in 2020 in response to a written request from the Prudential Regulatory Authority, a regulator that acts as the supervisory arm of the Bank of England. Lloyds Bank PLC, Barclays PLC, HSBC Holdings PLC, Standard Chartered PLC and the British arm of Spanish bank Banco Santander S.A. also pledged not to buy back shares.
Neither BMO nor Scotiabank intend to lay off any staff as a result of COVID-19, Mr. White and Mr. Porter said. In internal memos, Royal Bank of Canada and Toronto-Dominion Bank have also announced they will not lay off staff in 2020 due to the pandemic, and Canadian Imperial Bank of Commerce CEO Victor Dodig made the same promise in a televised interview this week.
As COVID-19 spreads, banks have scrambled to get on a “war footing,” Mr. White said, putting plans in place to care for staff, run some operations remotely and respond to floods of calls from anxious customers. Banks have also set up systems to defer hundreds of thousands of payments on mortgages and other loans, and are now hammering out details of a $25-billion interest-free loan program for small businesses guaranteed by the federal government.
Scotiabank’s call centres are fielding 80,000 calls a day, Mr. Porter said, and the bank has deferred payments on more than 60,000 mortgages for up to six months.
Although there are continued calls for further relief, Mr. White said he’s not aware of other imminent government-led initiatives involving the banks. The next phase of planning for BMO is to “effectively reset your business plan,” he said, understanding that the current situation, “as terrible as it is and as difficult as it is for so many people, businesses and communities, is temporary."
Loan losses will “unquestionably” spike, Mr. White said, but it’s too early to estimate how much higher, because no one knows how long extreme measures designed to curb the spread of the virus will last. “That bridge might be two months long, three months long, six months long – who knows?” he said.
Clients in the energy sector could be hit especially hard. Producers are reeling from a stunning plunge in oil prices as a global price war feeds a glut of supply, just as demand has fallen due to travel restrictions and orders to stay home.
But Mr. White said most energy producers that borrow from BMO have hedged their exposure to commodity prices for months in advance, which should buy them time to prepare. “The clock isn’t ticking quite as fast … for most companies as some people think,” he said.
Amid speculation that Ottawa could step in with specific relief measures for the energy sector, Mr. White said banks are not directly involved in any such program, but “as and where there is one we would work alongside that.”
Most Canadian banks trimmed their exposure to oil and gas after a shock to prices in 2015. Loans for energy exploration and production make up 1 per cent of Scotiabank’s total loan book, and 53 per cent are investment grade. “Obviously not all of those are going to be investment-grade by the time we get through this, but it shows you the quality of the portfolio," Mr. Porter said.
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