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Photo: The Canadian Press
A person walks by the Royal Bank of Canada building on Bay Street during the COVID-19 pandemic in Toronto on Wednesday, May 27, 2020. Three promising COVID-19 vaccine candidates may have politicians and investors full of hope for an economic rebound, but Experts say banks will continue to play it safe as they end their fiscal years in early December. THE CANADIAN PRESS / Nathan Denette
TORONTO – Three promising COVID-19 vaccine candidates could push equity markets higher and fuel hopes for an economic rebound, but experts say major Canadian banks will continue to play it safe as they report gains and end their fiscal years this week.
“You’re seeing stock prices react to potential improvements in the economy that you know are quite a way out by now, but banks live in the moment,” said James Shanahan, senior equity research analyst for Edward’s North American financials. Jones.
“The fact that the vaccine could arrive in six months or be widely available in nine months doesn’t do much to help banks with some troubled loans or to help stressed out borrowers.”
Although Pfizer, Moderna and AstraZeneca have so far advertised vaccines with efficacy rates above 90% in studies, Shanahan believes banks will not be ready to put these bright spots into their outlook. Instead, the focus will remain on long-term resilience when fourth quarter results are revealed.
The quarter marks the end of an upside-down year that no one predicted 12 months ago.
When the COVID-19 pandemic began, financial institutions had to break their plans and begin preparing for an economy where customers were losing their jobs and needed leniency with loans, with some even declaring personal bankruptcy.
Banks have set aside record amounts of money – at least $ 16.5 billion in the Big Six – to cover loan defaults.
Shanahan says the trend will start to ease.
“Due to the large reserve construction that has already taken place, big banks will not need to provide for significant credit losses unless there is some major economic change in the material environment,” he said.
CIBC analysts Paul Holden and Kevin Lai made similar predictions in a note to investors.
They believe loan loss provisions – money banks set aside to cover bad loans – will decline by 20% quarter-over-quarter.
TD Bank Group, Bank of Montreal and Bank of Nova Scotia are likely to see the biggest drop in provisions due to the amounts set aside in the previous quarter, they said.
TD set aside $ 2.19 billion, Scotiabank $ 2.18 billion and BMO $ 1.05 billion in the third quarter.
Analysts at CIBC expect adjusted earnings per share to fall an average of 2% from the previous quarter, although they noted that Scotiabank and TD will see an increase due to the change in loan loss provisions.
Highlighting the difficulty of assessing the performance of financial institutions as a whole, Barclays analysts John Aiken, Joseph Ng and Aria Samarzadeh estimated that all Canadian banks’ earnings would decline by 21% year-over-year and anticipated a mix of approaches to spending.
“In what is typically an expense for everything but the Q4 kitchen sink to end the fiscal year … we expect the expenses to be erratic and varied,” they said in a note to investors.
They expect a strong rebound in 2021, but keep the forecast for earnings growth in 2022 “quite limited” due to difficult conditions.
Travel, food, hospitality, retail and entertainment activities have likely changed forever and even if government restrictions were to be completely lifted, some people may still be reluctant to return to life as it was before the pandemic, they said. analysts.
“With the largest economic decline since the Great Depression, we believe the road to recovery remains uncertain and will take some time.”
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