Rising consumer spending and corporate borrowing are giving two of Canada’s large banks confidence that they can sustain robust profits amid a new wave of COVID-19 cases.
Royal Bank of Canada and National Bank of Canada both reported rising profits and recovered large sums of money from reserves against loan losses in the fiscal third quarter as they grow more assured that the current economic recovery will be durable.
Although dwindling provisions for credit losses were the primary force driving profits higher, there were also signs that loan balances are starting to rise more quickly. On average, lending increased 8 per cent at RBC and 11 per cent at National Bank in the quarter that ended July 31, compared with a year earlier.
Executives at RBC acknowledged concerns about the spread of the highly contagious Delta variant of COVID-19, which could complicate efforts to relax public-health measures and reopen economies. But Dave McKay, the bank’s chief executive officer, said he is “equally” positive about prospects for economic growth as he was three months ago, before the new variant was prevalent.
“It may pause things for a month or two,” Mr. McKay said on a conference call on Wednesday. “But that will not, I think, upend the majority of the momentum we have.”
As vaccination rates rise, banks are not expecting governments to reimpose the kind of sweeping lockdowns used to control earlier waves of COVID-19. At the same time, consumers and businesses have amassed huge deposits in bank accounts that could help absorb the financial impact of a public-health setback.
“For our clients, most of them have incremental cash versus what they had, and they have learned how to operate even with certain restrictions in place,” Rod Bolger, RBC’s chief financial officer, said in an interview.
Similarly, National Bank chief executive Louis Vachon said the bank’s “constructive view on the economy remains intact,” though the path to recovery is “complex.” He expects vaccination rates will ensure the impact from the Delta variant “should be less” when compared with earlier waves of COVID-19. But the course of the pandemic is still uncertain. “I could quote you the rest of the Greek alphabet: There’s always the chance of another variant,” Mr. Vachon said.
It will be up to Mr. Vachon’s successor as National Bank’s CEO, current chief operating officer Laurent Ferreira, to navigate the next phase of the pandemic after Mr. Vachon announced earlier this month that he will retire at the end of October. Since the end of the third quarter, the bank has made aggressive moves to position itself for a world in which banking is increasingly done digitally. On Monday, the bank slashed online trading commissions to zero. On Wednesday, National Bank announced it had struck an agreement last month to invest $103-million to increase its stake in financial data aggregator Flinks Technology Inc. to 80 per cent from 28 per cent.
In the fiscal third quarter, RBC earned $4.3-billion, or $2.97 a share, compared with $3.2-billion, or $2.20, in the same quarter last year. Adjusted for certain items, RBC said it earned $3 a share, while analysts expected earnings per share of $2.71, according to Refinitiv.
In the same quarter, National Bank earned $839-million, or $2.36 a share, compared with $602-million, or $1.66, a year earlier. On average, analysts predicted earnings per share of $2.13.
The largest contributor to banks’ rising profits came from reversals of provisions for credit losses, which are the funds that banks set aside to cover loans that could default. As economic forecasts improved and actual losses on loans plunged to unusually low levels, RBC recovered $540-million of provisions in the quarter, and National Bank reported a $43-million recovery. RBC set aside an extra $2.6-billion in reserves last year to guard against potential losses stemming from the COVID-19 pandemic, but has now recovered about 40 per cent of those funds.
Although banking clients are starting to borrow more, mortgages account for a disproportionate part of the increase as housing markets have stayed hot through the spring and summer. In the third quarter, mortgage balances increased 12.9 per cent at RBC and 11 per cent at National Bank year over year. Home loans have been a steady stream of income for banks, and a competitive battleground: RBC’s Mr. McKay said one-third of the bank’s mortgage volumes are from new clients.
But he also sounded an alarm about rapid price increases and a persistent imbalance between demand and inadequate supply, urging governments to “look at policy initiatives” to keep the housing market balanced. “Where I do worry … is the more cash flow that consumers are putting in to housing stock, the less is available to drive the economy,” Mr. McKay said.
Growing commercial loan books show business activity is picking up, even though companies have plenty of cash while global supply chain issues are disrupting the flow of goods. Commercial lending increased 14 per cent at National Bank and business loans rose 2.5 per cent at RBC.
Credit card spending has rebounded to 2019 levels at both banks, though travel expenditures have yet to fully recover. Balances carried on credit cards that generate interest income for banks are still lower than they were prior to the pandemic.
“Some of the spending has shifted, but the spending is back up,” Mr. Vachon said. “But the first thing that people do when they have excess savings is pay down their credit cards. Try to find another investment that pays 15 per cent.”
Editor’s note: A previous version of this article incorrectly said National Bank announced on Thursday it had struck an agreement last month to increase its stake in Flinks Technology. The announcement was on Wednesday.
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