Canadian banking is demonstrating itself to be resilient during ongoing pandemic conditions in the release of third-quarter results. In Q2, the ‘Big 6’ banks reported massive earnings reductions. In Q3, we are starting to see indications of a turnaround. Below we provide a snapshot of the key facts and what these banks should do next.
- Canadian Banks were expected to post an average 30 percent decline in earnings versus last year. Actual Q3 performance was much stronger, with an average decline of 19 percent year over year with RBC and National Bank almost flat quarter over quarter. Provisions for credit losses continued to hinder earnings and totaled $8.6 billion in Q3, down over 40 percent from Q2, only Scotiabank increased PCl this quarter. The better news was that revenue growth continues to $44 billion or 8 percent over Q2 in aggregate, led by RBC with a 25 percent increase.
- Net interest margin was under continued pressure from low-interest rates and lower volumes, winners relatively based on expense control and growth in selected segments, especially capital markets. Mortgage volumes have increased substantially on average by six percent (range: one to nine percent) from a year ago, with RBC having the highest growth rate. There was limited growth compared to Q2, but outstanding credit card debt is down 13 percent (range: 10-15 percent) from a year ago, which is probably a good thing for Canadian consumers who amongst the most indebted individuals in developed economies.
- Looking forward, banks have updated their economic scenarios and emphasized the downturn severe scenarios, with banks optimistic that delinquency rates from customers exiting deferral programs will be low based on current experience. The vast majority of deferrals in North America will end in the current quarter. There are expectations that impairments will grow in 2021 as insolvencies rise as a result.
- Government programs to support business and individuals, combined with deferrals, have largely staved off large scale defaults. It will be interesting to see how this evolves in Q4.
- Unlike other countries, the Canadian banks are not subject to dividend caps by regulation – Australia has limited dividends to no more than 50 percent of current earnings. This is conspicuous as Canadian financial services are largely protected from international competition.
- RBC reported earnings close to pre-pandemic levels, and significant revenue increases in capital markets and wealth management businesses with domestic retail/commercial revenue declines. Peers had similar changes in revenue with National Bank in the opposite position, as they are focused on Quebec and Canada.
- All banks reported increased capital (average 12 percent, regulatory minimum nine percent) and liquidity levels (average 151 percent, regulatory minimum 100 percent) and have active programs in place to assist deferred payment customers as deferrals end. Volatility is expected well into 2021. An interesting comparison is the amount of total allowances versus at-risk sectors, which across the banks ranges from 14-44 percent, on average 25 percent.
Here’s what banks should do:
- Think like the customer – invest in advice-based services, across direct to consumer digital platforms and assisted channels.
- Educate customers on how to build a real emergency fund, and examine what you could do better next time. Also, strategically shift marketing and front-office incentives to ensure the focus is on being genuinely customer-centric versus product-centric.
Think about your workforce, how to cross-train, what physical space is needed, actively ramp up work from anywhere programs, enhance benefits to address mental and physical health challenges arising from these events and invest in the smart digitization of processes, figure out the right process to use as much self serve as possible, and digitize front to back.
Did banks just miss a big opportunity?
Canadian banks are overdue for major investments in technology and operations efficiency and resilience. Delivering a growing dividend and meeting investor expectations has constrained the banks from executing on scale modernization programs. In the current climate, the optics of incremental investment in these areas would be palatable to investors. The financial impact would also have been less pronounced in the context of already weakened performance.
Instead, Banks chose to prop up financial performance with cost-cutting when the economy and their longer-term interests would have been served by expanded investment. These programs will continue to be challenging to fund when conditions return to normal, and banks will have missed a major opportunity.
Capco Canada is proud to be the largest Canadian consulting firm focused only on financial services. Our clients trust us to help them solve difficult challenges, and we have been helping banks in Canada adapt to these changing circumstances. We can help!