Canadian banks to see second-quarter earnings drop 36% on COVID-19 hit

By Nichola Saminather

TORONTO (Reuters) - Canada's biggest banks are expected to see second-quarter profit slide by more than a third from a year ago, hit by a jump in loan-loss provisions due to the COVID-19 outbreak and margin pressure from decade-low interest rates.

Analysts on average forecast earnings per share will decline 36% at Canada's six major lenders for the three months ended April 30, the first period to experience the impact of the pandemic, Refinitiv data shows.

Earnings expectations have undergone "a monumental, paramount change," said Kash Pashootan, chief executive of First Avenue Investment Counsel. Pashootan also saw credit-loss provision ratios four to five times above pre-pandemic levels and warned of "lagged, yet material, insolvencies and defaults that will carry forward for several quarters."

Bank of Nova Scotia and National Bank of Canada will kick off lenders' results reporting on May 26. Toronto-Dominion Bank, which will announce on May 28, has flagged U.S. retail banking provisions of C$1.1 billion ($790 million).

Still, with capital levels above required amounts, banks can handle the elevated risk, analysts said.

Volatility-driven increases in trading volumes in March should offset weak deals activity to lift revenues in capital markets businesses, National Bank of Canada analysts, who estimate EPS declines of 42% for the quarter, wrote in a note.

Bank of America Securities analyst Ebrahim Poonawala anticipates low-single-digit loan growth, with increased drawdowns of credit lines in March offset by slower borrowing in April.

Dividends are still safe, but continued earnings deterioration, which is not out of the quesiton, could weigh on future payout increases, said Sprung Investment Management President Michael Sprung.

"Banks are likely to be quite conservative" with provisions, he said. "But the degree of damage to the economy won't be known for some time. What might appear to be conservative now may not be so in six months or so."

($1 = 1.3925 Canadian dollars)

(Reporting By Nichola Saminather; Editing by Steve Orlofsky)