Q1 2021 Canadian Bank Results
March 2021
BACK TO THE REGULARLY SCHEDULED PROGRAM
Officially on the other side of a tight credit market
Another round of quarterly financial results from Canada’s major banks just wrapped up and the Q1/2021 results confirmed our suspicion from last quarter that Canada’s main lending institutions are comfortable with their loan books. We rolled up our sleeves once again and the data supports the conclusion that we are officially through the worst of what was a short-lived tight credit market. Here are some of our key takeaways, which are analysed in more detail on the following pages:
Total Commercial Credit Flat to previous quarter – Much to our surprise, total commercial credit was flat over the previous quarter. We were anticipating a 2% contraction and were met with half the banks actually expanding their commercial credit over the previous quarter.
Loan loss provisions below pre-pandemic levels – Unsurprisingly, we saw another contraction in money set aside for loans that go south, surprisingly, Canada’s main banks loss provisions are below pre-pandemic levels.
Commercial lending to the financial sector a key growth driver – Compared to last quarter, loans to the financial services and financing products sectors saw a 9% increase making the sub sector the main driver for overall loan growth.
Impaired loans take another step down – Further reinforcing comfort levels of lending institutions, total gross impaired loans drop another 7% this quarter, which followed a 13% drop in the previous quarter.
Total Commercial Credit Extended From Canada’s Largest Banks
COMMERCIAL CREDIT INCHES HIGHER IN THREE OF THE BANKS
When the pandemic first took hold and commercial borrowing all but shut down, we anticipated 6-8 quarters of commercial credit contraction in Canada as we used the 2008/2009 financial crisis as a guiding light. Last quarter provided strong indications this wasn’t going to be as drawn out as we originally forecast but we are still surprised to see overall commercial credit from Canada’s banks flat to last quarter. RBC and National led the way by expanding their respective commercial credit exposure by over 2%.
Increase in Commercial Credit from Three of Canada’s Banks
LOAN LOSS PROVISIONS THE LOWEST IN OVER 2 YEARS
We have often said that loan loss provisions provide the strongest indication of the comfort level from Canada’s top lenders. Continuing the reduction trend we first saw in Q3/2020, loan loss provisions saw another decline this quarter to the tune of 52% (on a combined basis). What is interesting is that the aggregate level from Canada’s main lenders is now below the levels seen pre-pandemic. All of Canada’s banks loss provisions are the lowest in over 2 years, which is quite remarkable.
Loan Loss Provisions Well Below Pre-Pandemic Levels
FINANCIAL SERVICE LOANS AND FINANCING PRODUCTS DRIVING LOAN GROWTH
A big driver of the overall growth in commercial loans across Canada relates to growth in the Financial Service and Financing Products sectors. Financing products, which is a smaller portion, relates to asset-backed securities for consumer products (i.e. auto loans, student loans, etc.), mortgage-backed securities, and collateralized obligations. Financial service credit is credit extended to Brokers/Dealers, funds and trusts, hedge funds or insurance companies. This quarter the combined group saw a 9% increase over the previous quarter, adding over $14 billion in new commercial credit.
Commercial Credit to the Financial Service / Financing Products Sectors
IMPAIRED LOANS CONTINUE DOWNWARD TRAJECTORY
Similar to last quarter, the combined Gross Impaired Loans (GIL) amongst Canada’s largest banks fell 7% putting it within spitting distance of pre-pandemic levels. We did see an increase in non-performing loans in the hospitality and leisure sectors but this loan exposure is relatively minimal when compared to the broader picture.
Another Reduction in Impaired Loans across Canda’s Banking Sector
Sources: Company Reports, Diamond Willow Advisory.
