Canadian banks were optimistic this quarter about the prospects of an economic rebound from the effects of the COVID-19 pandemic, but conceded much uncertainty lies ahead – particularly as loan deferrals and government relief efforts launched in the early days of the pandemic draw to a close.
The Big Six banks, which revealed their third-quarter earnings this week, said they were encouraged by consumer spending patterns creeping towards pre-pandemic levels and fewer Canadians seeking loan relief, but they continued to set aside hefty cash reserves to protect themselves from potential credit losses.
"The last thing we want to signal is hubris or arrogance in this kind of environment," Louis Vachon, National Bank of Canada's chief executive, told analysts on Wednesday.
"We called it a very good quarter, but it's tough to be ecstatic in an environment where you have a pandemic that affects an important segment of the population in a very negative way."
Bank executives, including Vachon, said they’re on high alert for their fourth quarters because of the risk of a second wave of the virus, which could wipe away the economic gains of the past few months.
"We are not out of this yet. We have the fall to get through," Royal Bank of Canada chief executive Dave McKay warned on Wednesday.
If COVID-19 cases grow higher, it may erase some of the rehiring and consumer confidence Canada saw in its third quarter, forcing banks to dig deeper into their coffers to further help consumers and guard against the danger of loan defaults.
"We're going to remain somewhat defensive and careful through what I think will be a fairly challenging year," McKay said.
The banks have already collectively dedicated $16.5 billion towards provisions for bad loans since COVID-19 spread widely in Canada in March.
The bulk of those funds – $10.9 billion – were allocated in the second quarter, with this latest quarter seeing $5.6 billion added to the total.
TD Bank Group set aside the most money – $2.19 billion – in the quarter, trailed closely by Bank of Nova Scotia with $2.18 billion.
Both figures overshadowed Bank of Montreal's $1.05 billion, RBC's $675 million and the Canadian Imperial Bank of Commerce's $525 million.
National put aside the lowest amount, at $143 million.
Even with the Canada Emergency Response Benefit wrapping up and the country transitioning to a new Employment Insurance program in September, the banks agreed with what Scotiabank's Daniel Moore characterized as "seeing the tide go out from here."
"We know that structural damage has been done to the economy. It's going to require a lot of quarters of cleanup from here, but we do view this quarter's PCL as our high-water mark," said Moore, the bank's chief risk officer, on a Tuesday conference call with financial analysts.
Many of the banks had good performance in their capital markets divisions and high trade activity helped offset their exposure to low oil prices and interest rates.
Despite signs of renewed strength in some business lines as businesses re-open and Canadians are hired back into their jobs, TD chief executive Bharat Masrani warned that struggles could still be on their way.
"The route to recovery won't always be smooth," he said on a conference call Thursday.
"The longer-term outlook is still uncertain and a measure of caution is warranted."