Canadian Banks Q1 2020 earnings: good start, before coronavirus hits

The six banks reported solid year over year growth of 10.5% and 7.7% quarter over qusrter growth, however DBRS Morningstar sees headwinds from the COVID-19 outbreak

Robert Colangelo, CPA, CA 9 March, 2020 | 12:04AM

This strong start to F2020 Canadian banking was largely driven by record results in the capital markets businesses of these banks. The Canadian personal and commercial banking businesses of these banks saw more modest growth in aggregate compared to the linked quarter, while earnings in their U.S. and International businesses declined 10% in aggregate, primarily due to net interest margin compression. Operating expenses remain well managed and flat compared with the link quarter; however, expenses increased 3.5% compared with last year primarily reflecting the $339 million ($250 million after tax) restructuring charge recorded by CIBC in Q1 2020.

Exhibit 1

Aggregate loan growth was a healthy 6.3% compared with the same quarter last year and 2.8% sequentially. Commercial loan growth, while still strong, slowed to 9.0% YOY, which is below the double-digit growth rates the large Canadian banks saw through F2019. Q1 2020 also saw the return of solid growth in residential real estate-secured lending (RESL; includes mortgages and home equity lines of credit), which was up 5% on average compared with the prior year. In particular, RBC and BNS saw strong growth of 7% and 6% YOY, respectively. Several other banks indicated their desire to increase their market share in RESL through F2020. Credit quality remains sound as aggregate PCL was up a modest 3% sequentially, although we expected PCL to build in F2020 as credit trends normalize.

Despite the strong earnings growth the large Canadian banks experienced in Q1 2020, given increasing economic uncertainty, particularly due to the impact of the coronavirus, we expect earnings growth to moderate in F2020. Indeed, net interest margin (NIM) pressure and higher PCL are likely headwinds. Nonetheless, the large Canadian banks are well positioned to navigate these uncertainties, given their highly diversified core earnings power and demonstrated abilities to manage expenses. Overall, the large Canadian banks remain committed to improving efficiency during a period of constrained revenue growth. Additionally, lower mortgage rates may boost residential lending in both Canada and the U.S.

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Robert Colangelo, CPA, CA  Robert Colangelo is Senior Vice President at Morningstar DBRS

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