banks

CANADA’S big five big commercial banks set aside close to C$11 billion in their last quarter in provisions for loans that are not being repaid according to schedule, which is called provisions for credit losses (PCL).

But none of Canada’s five biggest lenders— Royal Bank of Canada, Bank of Montreal, Scotiabank, CIBC and TD — cut their quarterly dividends to accommodate the huge provisions, according to an analysis on CBC.ca website last Sunday.

Three of Canada’s top five largest commercial banks—Royal Bank of Canada, Scotiabank and CIBC—have operations in T&T.

And the link between commercial banks making provisions for credit losses and what action they take on their dividends has become a T&T issue. That follows the decision of the board of Republic Financial Holdings Ltd (RFHL) to cut its first half dividend by 52 per cent, from $1.25 per share in 2019 to $0.60 in 2020.

Increased operating expenses

In comments accompanying RFHL’s first half report, RFHL’s president, Nigel Baptiste, explained that the banking group recorded profit attributable to its shareholders of $543 million for the six months ending March 31, 2020. That was a decline of $240 million or 30.6 per cent below the same period in 2019.

“These preliminary results reflect preliminary estimates of the financial impact of the novel coronavirus (Covid-19) pandemic on the group as a results of increased operating expenses during the the latter half of March 2020 and the setting aside of additional provisions of $367.7 million for the first half of fiscal 2020 (2019 - $134.7 million) to cover potential future losses,” according to Baptiste.

Shareholder value

The $367.7 million provision for credit losses taken by RFHL in its first half represents 0.71 per cent of its $51.49 billion in advances for the six months to March 31, 2020.

In a letter to Express Business, responding to a commentary by Express Business editor, Anthony Wilson, former CEO of the Bermudez Group, Noble Phillip, wrote: “It is proven that, in difficult situations, companies which cut their dividends to prioritise liquidity and solvency often recover faster than those who struggle to maintain their dividends. The latter can ultimately destroy shareholder value. The impact on the intrinsic value of a business from a temporary dividend cut is marginal.” (See Page 6).

The first chart from CBC.ca indicates the extent to which the provisions for credit losses at Canada’s top banks have increased:

The chart below, which is from the Seeking Alpha website, shows four of the top five commercial banks in Canada experienced declines in their adjusted earnings per share of more than 50 per cent, but all five maintained their dividend payouts:

The third chart, also from Seeking Alpha, indicates the sharp increase in the provisions for credit losses that Canadian banks have experienced in their most recent quarterly results. In explaining the impact of provisions for credit losses, the author writes: “Banks love to lend money to consumers and businesses as they make interest revenues from this activity.

“Since we don’t want banks to stop operating in our economy (it’s like having your heart stop pumping blood), we ask them to review their loan portfolio quarterly.

“They then assess the likelihood of getting paid back on all their loans. When a loan is late or they think it will eventually go into default, they move that amount of money into their provision for credit losses (PCL). The PCL has a direct impact on earnings.”

In his analysis for CBC.ca, Pete Evans wrote: “One of the best ways of gauging how optimistic the banks are about their future is to look at their dividend payments.

Canada’s big banks are known as reliable dividend-paying machines, slowly and methodically nudging up their payments to shareholders every few quarters for more than a century. Those big bank dividends are so rock-solid that TD and Scotiabank somehow managed to hike theirs even in the middle of the financial crisis in 2009.

“The banks love to hike their dividends because investors love that extra income. But banks won’t do it unless they are confident they’ll be able to sustain the higher level in perpetuity —a harsh lesson that Quebec-focused bank Laurentian learned last week when it cut its payout, the first dividend slash by a Canadian lender that big in almost 30 years.

“If dividend payouts are the best barometer of the financial health of Canada’s big banks—and, by extension, the economy—then the fact that none of them saw the need to cut this time around is an encouraging sign. If Canada’s big banks are the canary in the coal mine for the economy as a whole, then there was some good news last week, and some less good news.”

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