Now in the third quarter of the worldwide pandemic, Canadian banks continue to struggle as a deep recession takes it toll on earnings, loan loss provisions and net interest rate margins. Results from the Big Six banks reveal common operational threads, to wit:

• Earnings per share continue to decline as the banks prudently set aside more provisions for loan losses; this is the surest sign that the banks continue to brace for further weakness;
•  Interest rate margins have tightened considerably; 5-year fixed mortgage rates are under 2%; unlike the US banks, Canadian banks continue to dominate the mortgage market; the banks are competing mightily for mortgage business, even offering cash bonuses to lure customers to switch lenders; lending margins have tightened by as much 20bps; 
• The core business, personal and commercial banking, continue to be a drag on profits; often referred as the industry’s bread and butter, banks are tightening lending criteria at the same time as customers are looking for additional credit to deal with revenue losses from the prolonged shutdown;
• Approved payment deferrals represent a significant risk to future profits; a half of million customers at RBC, alone, have been granted deferrals; while the number of referrals has been dropping, there is the concern that deferrals may turn into non-performing loans; and
• The star performer, without exception, has been returns in the capital markets; gains in trading, especially in the fixed income markets, drove the bulk of banks’ profitability.

The Canadian banks continue to face some major headwinds. Tens of thousands of customers have been granted payment deferrals on mortgages, personal and business loans. The banks have been forthcoming in offering temporary relief with the emphasis on the temporary nature. The deferrals are now running out and the test will be how many are able to restore their credit as well as continue to service debts. In reporting on the issue, the banks note that the majority of borrowers are preparing to restore their credit facilities. However, it remains to be seen whether there is a sufficient economic recovery on its way to bring customers back onside. The Federal government programs of wage and rent subsidies, for example, are about to end in the fall. 

The capital markets have enjoyed an outsized performance since mid-March as corporations flocked to the debt markets and governments’ borrowings seem endless. Investors are climbing a wall of worry and wonder about the markets’ sustainability over the medium term. So, the banks are making hay in the capital markets while the sun shines.

Once the darling of Canadian investors, the bank stocks remain under-performers on the TSX. The TSX is still 7% off its pre-COVID high, while the banks are down 15%. Investors continue to cast a weary eye on the sector as the economic outlook remains so unclear. Bank CEOs have expressed a common refrain of uncertainty regarding the timing, duration and nature of an economic recovery. In somewhat of an understatement, Dave McKay CEO of RBC said “the real test of the recovery will come once government support programs start to wind down. We anticipate the fall will be a challenging time." Labour day is less than two weeks away.