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Royal Bank, BMO set aside record provisions for soured loans

Royal Bank of Canada and Bank of Montreal joined their Canadian peers in setting aside record provisions for loan losses as they brace for the economic fallout from the coronavirus pandemic.

Royal Bank, Canada’s largest lender by assets, earmarked CN$2.83 billion ($2.06 billion) in the fiscal second quarter for souring debt, the highest among the Canadian banks that have reported so far, while Bank of Montreal put aside CN$1.12 billion. Both Toronto-based firms reported earnings Wednesday that missed analysts’ estimates.

The two lenders follow Bank of Nova Scotia and National Bank of Canada in posting higher provisions for credit losses to brace for the aftershocks from plunging oil prices and a pandemic that has caused a near economic standstill, with the set-asides cutting into earnings across the banks in the three months through April 30.

Royal Bank’s provisions contributed to a 54 per cent decline in net income and hurt earnings throughout its key operations. Canadian personal and commercial banking, the lender’s largest division and biggest profit generator, saw earnings plunge 56 per cent as set-asides more than tripled to CN$1.51 billion. Earnings in the company’s capital-markets division, the largest among Canada’s big banks, plunged 86 per cent after the firm earmarked more than CN$1 billion for bad loans.

Royal Bank “appears to be the most conservative in its reserving for Covid-19 related credit losses and the market will need to decide if it is willing to reward this relative caution or focus solely on the near-term earnings impact,” Barclays Plc analyst John Aiken said in a note to clients Wednesday.

Bank of Montreal (BMO) signage is displayed on a building in the financial district of Toronto, Ontario, Canada, on Thursday, July 25, 2019. Canadian stocks fell as tech heavyweight Shopify Inc. weighed on the benchmark and investors continued to flee pot companies. (Photo: Bloomberg)

Bank Shares

Shares of Royal Bank rose 2.9 per cent at 9:48 am in Toronto, while Bank of Montreal was up 2.3 per cent. Royal Bank has dropped 12 per cent this year, compared with a 29 per cent decline for Bank of Montreal and a 17 per cent slump for Canada’s eight-company S&P/TSX Commercial Banks Index.

“A conservatism, a strength, a diversification, and an earnings capability position us well to withstand the uncertainty and turn around and exit this a stronger bank and a bank that can take advantage of the opportunity that will present itself in the future,” Royal Bank Chief Executive Officer Dave McKay told analysts Wednesday.

President and CEO of Royal Bank of Canada (Photo: On Wall Street)

At Bank of Montreal, Canada’s fourth-largest lender, higher provisions also contributed to 54 per cent decline in net income, with the set-asides weighing on results across its operations. Canadian banking, the largest division, saw a 41 per cent earnings decline as provisions more than tripled to C$497 million.

Set-asides of CN$199 million in the lender’s US banking division, which includes Chicago-based BMO Harris Bank, contributed to an earnings decline, while BMO Capital Markets’ provisions jumped to CN$408 million, leading to a net loss in the division.

‘Performing Well’

“The strength and resilience of our overall diversified business model has been tested, and we are performing well through these challenges,” CEO Darryl White said Wednesday on a conference call with analysts. “As a result, I’m confident that our bank has never been positioned better to face the environment ahead.”

Chief Executive Officer of the Bank of Montreal Darryl White (Photo: Twitter @ BMO)

Other takeaways from the earnings reports:

  • Royal Bank’s second-quarter net income fell to CN$1.48 billion, with adjusted earnings of CN$1.03 a share missing the CN$1.65 estimate of 13 analysts in a Bloomberg survey.
  • At Bank of Montreal, quarterly earnings slumped to CN$689 million, with adjusted per-share earnings of CN$1.04 lower than the CN$1.27 average estimate of 12 analysts.

— Bloomberg