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A man passes the TD Centre in Toronto's Financial District on June 24, 2020.Carlos Osorio/Reuters

Canada’s big banks have been building defences against the coronvirus pandemic at the expense of profits for much of the past fiscal year. With cases of COVID-19 back on the rise, the challenge they face in 2021 will be finding ways to start growing again amid a recovery that is expected to be slow and uneven.

All six of Canada’s major banks reported fiscal fourth-quarter profits this week that were better than analysts expected, but still depressed by the pandemic’s effects on the global economy. Financial results released on Thursday showed earnings edged higher at Toronto-Dominion Bank and fell by 2 per cent at Canadian Imperial Bank of Commerce, after adjusting for special items, returning closer to prepandemic levels.

In every case, the main factor driving better financial results was a sharp decline in the amount of money each bank earmarked to cover potential losses from the pandemic. In the quarter, which ended Oct. 31, the Big Six banks added a comparatively modest $3.3-billion to reserves against loan losses. That brought the total sum set aside over the past three quarters to cover future defaults to an unprecedented $21-billion. Banks’ capital levels also continued to rise after regulators paused dividend increases and share buybacks, adding to buffers available to absorb losses.

Yet adopting a defensive posture dented the banks’ full-year profits, which fell nearly 21 per cent at Bank of Nova Scotia, 20 per cent at TD and 18.5 per cent at CIBC on an adjusted basis, and 11 per cent at Royal Bank of Canada and Bank of Montreal. Those were the worst year-over-year declines for Canada’s banks since the global financial crisis of 2008-09.

Bank chief executive officers told investors this week that they expect the fiscal year that began in November to be better. But they are tempering their hopes for a gradual recovery with warnings that it is not clear how soon vaccines will be widely available, or how much damage renewed lockdowns in some places will cause to economic growth.

“The outlook remains uncertain. The pandemic could bring new setbacks. And we expect the recovery in earnings to be uneven,” Bharat Masrani, TD’s chief executive officer, said on a Thursday conference call. “But we emerged from fiscal 2020 with momentum in our businesses. As we move through 2021, we expect to benefit from lower [provisions for credit losses], as well as an ongoing recovery in customer activity.”

Banks also expect actual loan defaults to rise over the next few quarters as payment deferral periods on hundreds of thousands of loans run out and government relief measures shift into a new phase. Most deferrals expired in the fourth quarter, with only 1 per cent to 2 per cent of those loans falling into delinquency so far.

“Because the deferrals stopped the clock, there is some portion of the population ... that is going to ... as this clock is restarted, become impaired,” Hratch Panossian, CIBC’s chief financial officer, said in an interview.

But while most businesses and households have kept up payments on existing loans, or paid down balances, many of them have been wary of taking on new debt. Demand for new loans has been slow to rebound, even with lower interest rates making it cheaper to borrow. The total amount of money loaned out to individuals and small and medium-sized businesses in Canada increased only 3 per cent at TD and BMO, and 2 per cent at CIBC. Low interest rates have also reduced banks’ profit margins banks from lending.

Profits from Canadian retail banking rose by 5 per cent at CIBC and 3 per cent at TD in the fourth quarter, but fell anywhere from 7 per cent at RBC to 13 per cent at Scotiabank. Those are the largest sources of revenues for each bank, and will be counted on to fill the void as record and near-record profits from capital markets appear set to tail off.

Strong trading results amid volatile markets have churned out profits that helped bolster overall results. Earnings from capital markets rose by 44 per cent at RBC, 40 per cent at BMO and 200 per cent at TD, year over year. But those returns won’t be easy to repeat. Looking ahead, “it’s a question mark around trading, it’s not an exclamation mark,” Louis Vachon, National Bank of Canada’s CEO, said on a conference call with analysts on Wednesday.

At TD and CIBC, fourth-quarter earnings were affected by large one-time items. TD booked an anticipated $2.3-billion gain after selling its stake in TD Ameritrade Holding Corp. to Charles Schwab Corp. As a result, TD’s quarterly profit surged to $5.14-billion, or $2.80 per share, from $2.86-billion, or $1.54 per share, a year earlier.

Adjusting for the gain and other special items, TD earned $2.97-billion, or $1.60 per share, up from $2.95-billion, or $1.59 per share, in the same quarter last year. Analysts expected adjusted earnings per share of $1.32, according to Refinitiv.

Over the same period, CIBC earned $1-billion, or $2.20 per share, down 15 per cent from $1.2-billion, or $2.58 per share, in the same quarter last year. But an accounting change triggered a $220-million goodwill impairment charge related to a pending deal to sell a majority of the bank’s Caribbean business, which has been held up by regulatory delays. On an adjusted basis, CIBC said it earned $2.79 per share, well ahead of the $2.49 per share analysts predicted.

“We think ... we’ll see some positive momentum through next year, starting to improve substantially in the back half [of the fiscal year],” Mr. Panossian said. “Altogether, a better year on earnings.”

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