Canadian banks show that a COVID-19 crisis is over earlier than we’ve anticipated

It looks like Canada’s largest banks are making it clear that financial troubles caused by the COVID-19 crisis are mostly over in North America even earlier than analysts had predicted.

Following a year of increasing record amounts of capital for protection against a possible wave of loan defaults, RBC and TD Banks changed their direction drastically last quarter. Toronto-Dominion reported an unexpected $377 million (US$312 million) release of provisions for credit losses for its fiscal second quarter. Royal Bank of Canada released $96 million. Meanwhile, analysts had expected both banks to keep setting aside capital to offset the potential losses.

Due to massive vaccination drawing economic reopening nearer in Canada and the U.S., due to strong real estate markets supporting mortgage lending, and growing equity markets supporting wealth-management businesses, RBC and TD Bank are sure they have more than enough capital to cope with any challenges along the road to economic recovery.

It was an unexpected decision, as even after reporting smaller set-asides than analysts predicted in the first quarter, bank executives still showed cautiousness in terms of preparations for potential credit losses. As a result, many analysts expected no reserve releases until the second half of 2021.

“They certainly are much more optimistic now, than they were three months ago,” – noted Paul Gulberg, an analyst at Bloomberg Intelligence. “The reason is the combination of vaccines and a stronger economy – not only in the U.S. and Canada, but globally, as well.”

The return from the pandemic has affected the banks’ main figures. RBC’s net income was up by 171% to $4.02 billion in the second quarter. With the exception of some items, profit was $2.79 a share, exceeding analysts’ $2.51 forecasts. TD Bank saw its net income more than doubling to $3.7 billion, and adjusted earnings reaching $2.04 a share, which is more than analysts’ $1.76 forecasts.

Although the high level of deposits seen over the previous year could bring certain difficulties for growth in credit-card balances and commercial loans, some factors may help overcome those issues, RBC’s Chief Financial Officer Rod Bolger says.

CIBC also provided its second-quarter numbers, with its net income having quadrupled to $1.65 billion, and adjusted profit reaching $3.59 a share and exceeding the $3 average forecast.