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'Broken eggshells' and 'Star Trek finance': Banks warn of COVID-19 headwinds

TORONTO — Slashed interest rates and a widespread economic shutdown ate into second-quarter profits at Canada's major banks, with financial institutions saying deep wells of cash are needed to protect themselves from the impact of the COVID-19 pandem
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TORONTO — Slashed interest rates and a widespread economic shutdown ate into second-quarter profits at Canada's major banks, with financial institutions saying deep wells of cash are needed to protect themselves from the impact of the COVID-19 pandemic.

The Big Six have collectively allocated about $10.9 billion in provisions for credit losses — money set aside to account for so-called bad loans.

When compared with prior quarters, those coffers grew fivefold to what were record-breaking levels for some, as banks raced to reserve money to counteract the effects of the pandemic and a plunge in oil prices.

"We went through tremendous headwinds...as we absorbed a substantial increase in provisions for performing loans as well as market pressure from the steep drop in interest rates," said TD Bank chief executive Bharat Masrani on a Thursday call with analysts.

"A tough quarter, no question."

Shareholders learned that TD's provisions for credit losses soared to nearly $3.22 billion from $633 million during the same period a year ago. Earlier in the day, CIBC said it had put aside $1.41 billion, up from the $255 million it reported in its previous second quarter.

Royal Bank of Canada said earlier this week that its credit-loss provisions amounted to $2.83 billion, up 564 per cent from $426 million in the same quarter last year. 

Bank of Montreal's reached $1.11 billion, up 531 per cent from $176 million, National Bank of Canada's hit $504 million, up from the $84 million, and Bank of Nova Scotia's totalled nearly $1.85 billion, more than doubling from $873 million a year earlier.

"This is not a garden-variety recession...We've never been through this before," Scotiabank chief executive Brian Porter told analysts on a call on Tuesday morning.

"We're cautious here. This is not a one-quarter or two-quarter event. The banking sector will be picking up broken eggshells for a number of quarters here."

Louis Vachon, chief executive at National, appeared to feel much the same and even went so far as to nickname the economic conditions "Star Trek finance."

"We would describe the current environment as going where no one has gone before," he said the same day as Porter made his remarks.

"The episode is not over. So we're still watching for the Klingons....We're not out of this crisis yet."

All of the banks saw their profits plummet significantly as they rushed to allow staff to work from home where possible, outfitted branches to help stop the spread of COVID-19 and offered loan deferrals and payment abatements to customers.

RBC, TD, CIBC and BMO missed analyst expectations, while Scotiabank and National beat them.

Many saw spikes in traffic at their digital subsidiaries and online offerings and boasted about how investments in technology and innovation were paying off.

For some, including TD and RBC, those investments and traffic were enough for them to vow not to reduce their workforces this year because of the crisis, but no bank has made those assurances for 2021 or beyond.

They are focused for now on trying to predict how much government relief and a slow return to work will shape a new economy and their outlooks.

Some analysts believe the brunt of the pandemic will be felt in the year's later quarters, when provisions in credit losses could climb even further.

The banks are keeping a close eye on those trends, but many are already seeing requests for loan and payment relief slow, giving them some hope.

CIBC chief executive Victor Dodig called the pandemic "our moment of truth," but like the other banks, he boasted about his company's performance and remained optimistic about the future, even if COVID-19 isn't going away any time soon.

"Economic headwinds are likely to be here for the near term," he said on CIBC's Thursday call.

"While there are many unknowns related to the pandemic, its effect on the economy and the path to recovery, what is certain is our strong capital liquidity will allow us to withstand ongoing stress."

This report by The Canadian Press was first published May 28, 2020.

Companies in this story: (TSX:CM, TSX:RY, TSX:TD, TSX:BNS, TSX:NA, TSX:BMO)

Tara Deschamps, The Canadian Press