Paul Bagnell

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Canada’s big banks are due to report their fiscal second-quarter results in the final week of May, and those quarterly reports may be the most keenly awaited corporate numbers in Canada since the financial crisis of 2008-2009.

One Bay Street analyst says it’s never been as difficult as it is right now to confidently predict what the banks are going to report. The Canadian economy has been substantially locked down for two months. The banks responded early by promising borrowers they could delay loan payments by up to six months. The federal government has rolled out daily announcements on massive spending programs designed to prop up consumers and businesses until the COVID-19 pandemic subsides. New accounting rules mean the banks will make changes to the way they report expected loan losses, by placing more emphasis on loans that are not yet defined as “impaired.” It’s an unprecedented mix of conditions.

That analyst, Steve Theriault of Eight Capital, told clients recently “it’s not an understatement to say that this is the most uncertain we’ve ever felt into a Canadian bank earnings quarter.”

One of his peers, Gabriel Dechaine at National Bank of Canada, predicts “the most interesting quarter we’ve seen in years.”

At Barclays Capital, analyst John Aiken says predicting loan losses right now is like “throwing darts at a board” – and he says that applies as much to the banks themselves as it does to outsiders.

The big question is a simple one: How much money will the banks set aside for loan losses? This is crucial for investors, who want some level of clarity on how big the hit to profitability will be, and how long it will loom over bank stocks.

Several other important questions follow: Will banks “front load” their provisions for credit losses (PCLs) by taking large provisions in the second quarter, with those numbers tapering down as the fiscal year proceeds? What forecasts will they make on loan losses for the rest of the year? What will they say about those deferred payments they have offered clients? Do they expect to get almost all of that money back? What’s their view of Ottawa’s aid packages? And, what is their assessment of when this economic crisis will end?

It’s important to remember that the fiscal second quarter for the banks ran from February 1 to April 30. So, it includes the months of March and April – when the Canadian economy was largely shut down. Most quarterly results we’ve seen from Canadian corporations lately have been for the calendar first quarter of 2020 – and so have not included the carnage of April.

Here are some key developments we have seen so far:

Most significantly, Toronto-Dominion Bank has warned of a big provision for credit losses in its U.S. retail banking operation. It said it expected to set aside $1.1 billion for U.S. loans that may not be repaid. TD gave no preview of PCLs in Canada and, at this writing, neither have any of the other Big Six banks.

As a reminder, provisions for credit losses reduce profit dollar-for-dollar. They are also based on estimates by a bank of its loan book at a moment in time, and can be revised up or down in the future. And it’s important to measure them as a percentage of all loans.

Two small Canadian banks have reported big loan-loss provisions for the first calendar quarter of the year. HSBC Canada reported a $140 million hit to profits from expected loan losses. That sum was equal to 25.6 per cent of HSBC Canada’s total revenue for the quarter, and fully 0.83 per cent of all its loans outstanding.

More recently, Equitable Group Inc. – the company behind alternative mortgage lender Equitable Bank – reported a near quadrupling of provisions for loan losses to $35.7 million.

Most analysts have by now reduced their earnings forecasts for the big banks in the second quarter and for the remainder of the fiscal year and beyond. Some expect at least four consecutive quarters of higher-than-usual provisioning weighing on profit.

At Eight Capital, Theriault has cut his fiscal year earnings per share expectations for the banks by 17 per cent, with larger credit losses being the dominant factor. He calls for a combined $8.5 billion in PCLs in the quarter – a number that is triple what the banks reported in the same quarter of the earlier fiscal year. As a percentage of all loans outstanding, this would equate to 0.93 per cent. 

For context, TD Bank reported a PCL ratio of 0.25 per cent in the second quarter of fiscal 2019. At Bank of Montreal, the figure was 0.16 per cent. 

Theriault also expects the heaviest consumer loan losses in 30 years.

John Aiken at Barclays says provisions for credit losses arising from the pandemic will ultimately total $14 billion. But they could reach a staggering $60 billion, he says. He expects that $14 billion to be “staged over several quarters.”

Here’s the reporting schedule for the banks’ second quarter 2020 results:

- May 26:  Bank of Nova Scotia; National Bank of Canada

- May 27:  Bank of Montreal; Royal Bank of Canada

- May 28:  Canadian Imperial Bank of Commerce; Toronto-Dominion Bank