Investors brace for more earnings decline, higher provisions at Canadian banks

By Nichola Saminather and Noor Zainab Hussain

TORONTO (Reuters) - Investors and analysts are bracing for massive earnings declines at Canadian banks this fiscal year, after second-quarter profits halved as they set aside billions of dollars to cover loan losses from the coronavirus pandemic and a struggling energy sector.

Market watchers warned that the nearly four-fold increase in provisions, to nearly C$11 billion ($8 billion), in the three months through April may not be adequate to absorb potential loan losses at some of the top six banks, with further increases likely to weigh on performance this year.

"This was the most negative quarter that I can recall seeing in 25 years," said Brian Madden, a portfolio manager at Goodreid Investment Counsel. "So for the year, it's not hard to get a number that's down 35% to 40%."

Canadian Imperial Bank of Commerce <CM.TO> and Toronto-Dominion Bank <TD.TO> on Thursday closed out the banks' earnings reporting period, in which four of the six missed estimates.

TD shares fell 3.9% and CIBC dropped 2.2% by afternoon, pulling the banking sub-index down 1.9%, underperforming the Toronto stock benchmark's 0.2% gain.

CIBC's conservative provisions will help lift returns on equity in the coming quarters, but they would only bounce back materially when transaction volumes improve as the economy recovers, Chief Financial Officer Hratch Panossian told Reuters.

Bank of Montreal's <BMO.TO> and Bank of Nova Scotia's <BNS.TO> provisions may be inadequate and need topping up in coming quarters, analysts said. Even some better-provisioned lenders, like TD Bank, declined to rule out further increases if economic conditions deteriorate.

Allowances for losses are about 0.65% of loans at the five biggest banks, said Edward Jones analyst James Shanahan, who expects 16% earnings declines in fiscal 2020.

Impaired energy loans comprise 3% of total oil & gas portfolios, versus a 6% peak during the 2016 rout, and are likely to reach that level again, suggesting "reserves are not as strong as they need to be," he said.

While capital ratios will likely fall further as more performing loans included in provisions turn sour, they will remain above required levels.

This will keep dividends intact, Madden said.

(Reporting by Noor Zainab Hussain and Nichola Saminather; additional reporting by Abhishek Manikandan in Bengaluru; Editing by Maju Samuel, Alistair Bell and Dan Grebler)