Provisions for credit losses drive divergent bank results

The big Canadian banks delivered mixed results in their latest round of earnings, with the disparity largely due to different approaches to provisioning for credit losses, says Fitch Ratings.

In a new report, the rating agency said the Big Six banks reported aggregate year-over-year earnings growth of 4.3% in their latest results.

The banks’ revenues were generally strong, with core businesses performing well and capital markets delivering weaker results.

However, Fitch said the range of earnings was driven by “differences in provisioning against performing loans… even though credit quality indicators were stable or improved.”

CIBC added $303 million to provisions in the quarter, which led to a 0.8% decline in net income year over year, for example, whereas RBC reported a 5.9% increase in net income, helped by a $342-million net release of provisions.

“Banks cited a range of provision drivers, including the release of pandemic-related allowance build and mixed macroeconomic signals, including a healthy labour market and strong consumer activity in parallel with high inflation, rate hikes and geopolitical risk,” Fitch said.

Looking ahead, the rating agency said that loan-loss provisioning is generally expected to rise along with loan growth, as several of the banks have reduced loan reserves to below pre-pandemic levels.

In the second quarter, commercial loan growth accelerated, Fitch noted, with growth averaging 16.5% across the banks, up from 10.6% in the previous quarter.

Personal lending also increased, powered by residential mortgage growth, “although declining refinance and home re-sale activity due to rising rates suggests a slowdown in mortgage growth over coming quarters,” it said.

The capital markets segment was generally weaker due to reduced deal activity and lower investment banking revenue, and trading revenues were mixed.

The wealth management business saw positive revenue momentum “driven mainly by higher net sales and asset appreciation compared to a year ago, although broad market declines and volatility will likely pressure segment performance,” Fitch said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.