Well-armed banks for an uncertain economy: DBRS

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Total provisioning for credit losses increased sharply to $ 23.7 billion in 2020, from $ 8.9 billion in the previous year. Yet most of this has come from performing loans, he reported.

Gross impaired loans also increased in 2020, mainly due to credit write-downs in the sectors most directly affected by the pandemic, DBRS said, in particular the oil and gas, retail and oil sectors. ‘hotel.

Nonetheless, banks also generated still strong loan growth of 5% year-over-year, he said.

Lending growth was largely driven by residential mortgages, amid low mortgage rates and strong housing markets.

“Conversely, the growth of other personal loans was moderate [fiscal 2020], with overall credit card balances dropping 13% year over year, consumers remained cautious and economic activity muted, ”DBRS said.

In addition, commercial loan growth slowed to 5% from double-digit growth in previous years.

Going forward, gross impaired loans are expected to increase in 2021, as loan deferrals implemented in the face of the pandemic have since expired.

DBRS said the outlook for future loan loss provision “will depend in large part on loan growth and credit migration.”

The underlying economic outlook also remains uncertain, particularly in the near term.

Under its moderate scenario, DBRS forecasts that Canadian GDP will contract 5.5% in 2020. GDP is expected to grow 5.0% in 2021, followed by 2.5% growth in 2022.

“The short-term economic outlook remains troubling and the prospects for recovery will likely depend on the severity and duration of the current coronavirus resurgence; however, we expect the outlook to improve by mid-year as vaccines become more widely available, ”said Robert Colangelo, senior vice president of the global financial institutions group at DBRS Morningstar.

Given the uncertain economic outlook, DBRS said it expects “the bank’s profitability power will continue to be limited; however, their wide variety of franchises and demonstrated ability to manage expenses should provide some compensation. “

In addition, banks’ capital and liquidity levels will remain high and well above regulatory minimums, he said.

Banks’ overall level one capital ratio increased 80 basis points in fiscal 2020 to 12.3% “largely due to internal capital generation,” DBRS said. “This high level of capital provides these banks with a significant capital cushion to absorb higher credit losses.”

“Restrictions on dividend increases and share buybacks could be lifted once the path to economic recovery becomes clearer,” he said.

For now, DBRS has a stable outlook on bank credit ratings. Upgrades remain unlikely due to the operating environment, as negative rating pressure could materialize if banks “experience a sustained deterioration in asset quality or a significant weakening in profitability,” he said. -he declares.

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