Lending Highlights from Q3 Canadian Bank Results
September 2020
OUR TOP 5 LENDING TAKEAWAYS FROM CANADIAN BANKS Q3 RESULTS
The dust has settled and we have combed through the data to flush out our top takeaways from Canada’s largest lending institutions’ Q3 results. More details in the following pages but from a high level, here is a summary:
Key Takeaway #1
Canadian commercial credit contracted more (on a % basis) in Q3’2020 than what we saw in the Global Financial Crisis in 2009
Key Takeaway #2
Q3 loan loss provisions contracted $4.4 Billion (down 42%) from Q2’2020 suggesting increasing comfort around loan books
Key Takeaway #3
Impaired Loans continue to escalate (up 17% Q/Q), following a big jump in Q2/2020
Key Takeaway #4
Change industry exposure highlights longer term sector-specific headwinds (ex. Retail and Energy)
Key Takeaway #5
Commercial loans utilizing bank deferral programs down 40% in Q3 (vs Q2) with many of the programs set to conclude in September and October
Key Takeaway #1: Commercial Credit Reduction Outpaces Level Seen in the Global Financial Crisis
Accessing credit from Canada’s banks became extremely difficult in Q3 (May – July) as institutions retrenched and focused on their existing client base. As a result, we saw the total commercial credit available across all of Canada’s banks decrease 8.2%, or $111 Billion when compared to the previous quarter. This was about $10 Billion more than we were anticipating and a deeper reduction in commercial credit than seen in the Global Financial Crisis (which saw a 7% Q/Q reduction in Q2 2009). Worth noting these reductions are from the peak level seen in the respective previous quarter where commercial loans outstanding jumped as businesses scrambled to attain credit heading into the downturn.
Q3 2020 vs Q2 2020 - Reduction in Commercial Credit (% change)
Key Takeaway #2 - Reduction in Loan Loss Provisions Suggest Too Much Conservatism in Q2
As Canada’s banks prepared for the economic impact of the pandemic in Q2’2020 we saw the institutions put aside $10.6 Billion in loan loss provisions. Q3 results highlighted a significant amount of retrenchment as cumulative loan loss provisions contracted by $4.4 Billion (42%). While we are still looking at a scenario where the banks have set aside 3x what they normally do, the reduction in loss provisions illustrates increased comfort with their lending book. Of the banks, only saw Scotia increase their Q/Q provisions with the largest decrease coming from RBC.
Loan Loss Provisions Down Materially in Q3
Key Takeaway #3 - Impaired Loans Continue to Escalate
Taking some of the air out of the reduction in loss provisions highlighted in our previous takeaway, impaired loans (non-performing loans) continue to see a significant uptick. From the previous quarter, impaired loans jumped 17% on a combined basis, this follows the 28% Q/Q increase we saw in Q2’2020. On an absolute basis, we have seen the combined impaired loans increase $2.25 Billion and $1.8 Billion in Q2’202 and Q3’2020 respectively.
Growth in Impaired Loans across Canada’s Banking Sector
Key Takeaway #4 - Changes in Sector Exposure Highlight Industries with the Most Headwinds
While one quarter of data leaves us at risk of over extrapolating, we have a hard time ignoring the fact that certain sectors saw larger respective reductions in commercial credit when compared to the previous quarter. Not surprisingly, energy, retail and manufacturing saw the largest quarter over quarter decrease in commercial credit outstanding implying these business sectors are likely facing a tougher road ahead when it comes to accessing traditional credit.
Q3 2020 vs Q2 2020 Change in Commercial Credit by Sector
Key Takeaway #5 - Credit Deferral Programs About to Run Out
Much has been said about the anticipated roll off of Canadian banks loan deferral programs and the impact it will have on the small business sector. Generally speaking, the majority of the programs are set to conclude in September and October. When comparing quarter over quarter credit deferrals, Scotia, BMO and CIBC have already seen a significant reduction of clients participating in the loan deferral programs. From the data available it is impossible to know if the borrowers are no longer in need of the deferrals or if the programs are simply no longer available.
Based on reported numbers, 8-10% of Canadian commercial credit borrowers continue to participate in a loan deferral program to one degree or another. In Q3’2020 the number of businesses participating declined roughly 10,000 to 60,000.
Commercial Credit Deferral Comparison Q3 vs Q2 2020
Sources: Company Reports, Diamond Willow Advisory.
