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A Royal Bank of Canada logo on Bay Street, in Toronto, on Jan. 22, 2015.Mark Blinch/Reuters

Two of Canada’s largest banks have booked higher first-quarter profits bolstered by surging trading fees and lower provisions for loan losses, but they cautioned it is too soon to tell whether anticipated loan losses will be avoided or simply delayed.

Royal Bank of Canada’s first-quarter profit rose 10 per cent year over year, boosted by a 21-per-cent increase in earnings from trading and investment banking. Profit jumped 25 per cent in the same period at National Bank of Canada , where income from financial markets was up 37 per cent.

Each lender also benefited from declining provisions for credit losses – the funds banks set aside to cover loans that could default. At RBC, new provisions fell 74 per cent, to $110-million year over year, and the proportion of impaired loans on the bank’s books fell to its lowest level since 2005. Losses from lending have been surprisingly small, driven down by federal relief programs and deferred loan payments.

RBC chief executive officer Dave McKay said he is “becoming more confident in the trajectory” of an economic recovery, as vaccination programs pick up speed and consumer spending starts to rebound. Yet banks are still struggling to predict whether massive government interventions to sustain struggling households and businesses through the pandemic will be enough to head off a bulge in loan defaults.

“The degree that that’s deferred versus mitigated, I think, is really dependent on this bridge that the government has created – and not just whether it’s robust enough but whether it really extends to the other side and does fully mitigate losses or whether these are really just deferred,” said RBC’s chief risk officer, Graeme Hepworth, on a Wednesday conference call with analysts.

National Bank set aside $81-million in provisions in the first quarter, just a 9-per-cent decline year over year – but a steep drop from the $504-million in provisions the bank earmarked only three quarters ago, in the early months of the health crisis. Executives said actual losses have been slower to materialize than the bank expected, but warned that defaults could take longer to emerge, dragging into 2022.

“It’s unsure,” National Bank chief executive officer Louis Vachon said in an interview. “We just don’t know. We’ve never seen an economy operating out of restrictions tied to a pandemic before.”

The complex models banks use to predict future losses from defaulting loans are based on a range of economic scenarios, some of them quite pessimistic. Under current accounting standards, Canadian banks must set aside provisions for loans that are still being paid back, known as performing loans, as well as those that are already in trouble.

RBC thinks it is “adequately provisioned” for future losses, chief financial officer Rod Bolger said in an interview. In the first quarter, RBC recovered $97-million in provisions – less than 4 per cent of the reserves it built up last year – that were previously earmarked to offset potential losses from performing loans, but that the bank no longer thinks are necessary with economic forecasts improving.

Yet RBC and National Bank both expect their delinquent loans will increase throughout 2021 – and possibly into next year.

“If those pessimistic scenarios do not come to pass, then perhaps we might be overprovisioned,” Mr. Bolger said. “We would hope that we would be able to release more reserves if the economy continues to improve, because that would mean that Canadians and Canadian companies are in stronger financial positions.”

For now, credit-card spending and demand for most loans from consumers and businesses are still muted under lockdown measures. But mortgages have helped fill the gap, as balances for home loans rose 12 per cent at RBC and 8 per cent at National Bank, compared with a year ago. Both banks expect mortgages will remain in high demand for the rest of this year, as pent-up demand for housing driven by remote work, low inventory and an imminent return to normal levels of immigration fuel hot housing markets.

In its fiscal first quarter, which ended Jan. 31, RBC reported profit of $3.85-billion, or $2.66 a share, compared with $3.51-billion, or $2.40 a share, in the same period a year ago. Adjusting for special items, RBC said it earned $2.69 a share, beating analysts’ consensus estimate of $2.27 a share, according to Refinitiv.

In the same period, National Bank earned $761-million, or $2.15 a share, compared with $610-million, or $1.67 a share, a year ago. Analysts had predicted earnings of $1.73 a share.

Quarterly profit from retail banking at RBC increased 6 per cent, to $1.79-billion, and 8 per cent, to $262-million, at National Bank. But the standout results came from capital markets, where huge trading revenues and strong advisory fees from mergers and acquisitions produced quarterly profit of almost $1.1-billion for RBC and $250-million for National Bank.

Both lenders also had strong results outside Canada. RBC’s U.S. division produced its highest quarterly profit ever, US$650-million. And National Bank’s international and specialty finance division, which includes its ABA Bank subsidiary in Cambodia, booked $136-million in profit, up 60 per cent.

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