However, Scotiabank and BMO create contingencies for any Covid-19 fallout
Canada’s biggest banks have so far said the direct risk posed to them by the coronavirus is low, but the lenders may begin feeling more indirect effects if the ongoing outbreak continues to cause disruption to the global economy.
Three of the country’s Big Six banks — the Bank of Montreal, the Bank of Nova Scotia and the Royal Bank of Canada — have now announced their latest first-quarter results and all three have suggested it is too early to judge the potential impact of the recent coronavirus outbreak.
Even so, the banks have stressed the importance of their employees’ health, their limited exposure to China and planning they’ve done that could keep businesses running in the event the problem grows worse.
Our stress scenarios would indicate that we do not think it is material at this juncture, said Daniel Moore, Scotiabank’s chief risk officer, following the release of the lender’s first-quarter results on Tuesday.
BMO said in its latest results, released Tuesday as well, that “should the outbreak become more wide-spread in Canada and the United States, the bank has a Business Continuity Plan in place that includes procedures which would mitigate adverse impacts to our customers and employees.”
The virus has been weighing on the minds of investors, with major stock-market indices falling this week amid growing concerns about the outbreak. There have now been more than 80,000 confirmed cases and 2,700 deaths associated with the virus, according to the latest figures from the World Health Organization.
A considerable economic cost is possible as well, with Royal Bank of Canada CEO Dave McKay saying last week that recent uncertainty about the virus “is reigniting downside risk to the global economic outlook, given the potential for disruption to global supply chains.”
Certain supply chains could mean more to Canada’s big banks than others. Toronto-based Scotiabank is unique among domestic lenders because of its focus on so-called Pacific Alliance markets such as Peru and Chile, the latter of which counts China as one of the biggest buyers of its copper exports.
While Chile is often regarded by investors as a proxy for copper, mining’s contribution to economic output has been declining, and is now only 12.5 per cent of the country’s gross domestic product, according to Scotiabank president and CEO Brian Porter.
So my point is the Chilean economy is a very well-diversified economy, Porter said during the Tuesday conference call.
Porter’s comments came after his bank reported net income of approximately $2.3 billion for the three months ended Jan. 31, an increase in profit of four per cent from a year earlier. When adjusted for certain moves, Canada’s third-largest lender reported earnings per share of $1.83 for its first quarter, up five per cent from a year ago and above the $1.75 consensus of analyst estimates.
National Bank Financial analyst Gabriel Dechaine said they still see 2020 as a “transition year” for Scotiabank’s international business, which the bank has reshaped through a number of acquisitions and divestitures, but which still faces potential economic and political headwinds.
We note this caveat now includes the indirect impact of the Covid-19 situation (the new coronavirus), which presents risks to Pacific Alliance countries that rank China as a top-ranking export market, Dechaine wrote in a note.
BMO, meanwhile, reported net income of almost $1.6 billion for its first quarter ended Jan. 31, an increase of five per cent from a year earlier. Adjusted earnings per share were $2.41, up four per cent and better than the $2.37 analysts had been expecting.
But the first quarters for the banks covered only a relatively short period of the coronavirus outbreak, and ended before the recent rail blockades in Canada began.
DBRS Morningstar analyst Robert Colangelo called it a “good start” to the fiscal year for the banks, which has been driven in part by strong performances from trading and investment-banking operations enjoying more favourable market conditions than a year earlier. While Colangelo said it was still too early to tell, banks may still take a hit from the coronavirus and the rail blockades, albeit perhaps a small one.
You could potentially see a bit of an uptick in terms of delinquencies, and therefore, a higher uptick in provision for credit losses, Colangelo said of the blockades. But, again, I think the impact to these banks should be fairly manageable.
BMO’s chief risk officer, Patrick Cronin, said during a conference call Tuesday morning that when it came to “first-order effects” of the virus, they did not see any big exposures in sectors that would be hit hard, such as cruise ships. Second-order impacts, such as those due to disrupted supply chains, may take longer to show up.
Banks such as BMO use an expected loan-loss model that is affected by economic conditions, which could cause the lender to set money aside if coronavirus-related effects warrant it.
It probably in the short term will show up in changes in macroeconomic forecast to the extent that our economics group decides to change that, Cronin said. But longer term, you know, it’s probably too early to say.
BMO also announced some changes in its executive ranks, with Cam Fowler, the group head of personal and business banking for North America, named the bank’s incoming chief strategy and operations officer. Erminia (Ernie) Johannson, the group head for North American personal banking and U.S. business banking, will add Canadian business banking to her mandate and become BMO’s group head of North American personal and business banking.
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