RBC and CIBC are the final major Canadian banks to report earnings for the fiscal second quarter.Nathan Denette/The Canadian Press
Royal Bank of Canada RY-T and Canadian Imperial Bank of Commerce CM-T have earmarked more money for loan losses as trade and policy uncertainty in the United States increases risks among consumers and businesses.
Canada’s largest lenders are setting aside more provisions for credit losses – the funds banks set aside to cover loans that may default – as a buffer against deteriorating debt conditions and a slowing economy.
“Changes to long-standing U.S. and international trade policies have resulted in a volatile and uncertain operating environment, given the potential for structural disruptions to the global supply chains and capital flows,” RBC chief executive officer Dave McKay said during a conference call.
“But we can’t say for certain where global trade policies will settle. We are cautiously optimistic about the path forward.”
RBC to require employees to work in the office four days a week
In its fiscal second quarter, RBC set aside $1.42-billion in provisions. That was higher than analysts anticipated, and included $568-million against loans that are still being repaid – up from $68-million in the previous quarter.
In the same quarter last year, RBC reserved $920-million in provisions.
Banks assess provisions based on models that use economic forecasting to predict future losses. RBC chief risk officer Graeme Hepworth said the bank created a new trade disruption scenario, which assesses the potential for a recession because of escalations in the global trade war and geopolitical risks that could cause severe unemployment, inflation, supply chain disruptions and asset price decreases.
“As we persisted through [the second quarter] and things really amped up – really at the beginning of April with Liberation Day – this went to a whole different level of concern and uncertainty,” Mr. Hepworth said during the call, referring to U.S. President Donald Trump’s announcement of so-called “reciprocal” tariffs on April 2.
“We wanted to invoke something that addressed the current concerns and what that might look like and the risks we’re facing here now. It didn’t by itself change the overall numbers – it certainly does change where we’re allocating reserves and highlights the pockets of risk that we’d be more concerned about.”
CIBC set aside $605-million in provisions, falling below analyst expectations. But that included $142-million against loans that are still being repaid, up from $127-million in the previous quarter.
In the same quarter last year, CIBC set aside $67-million in provisions.
The bank said the loans in its portfolio with exposure to tariff risks amount to 4 per cent of the total book. The loans span sectors most affected by trade, including agriculture, manufacturing and transportation. Less than 1 per cent were assessed as high-risk.
“We looked at over 2,000 of our individual client relationships to see the likelihood they’re going to see revenue pressure, the likelihood they could see some cost pressure,” CIBC chief financial officer Robert Sedran said of the risk assessment in an interview.
“A lot of these companies have an ability to adjust. To be able to get confidence in our book and to be able to help our clients most, it was to get into their individual situations and understand them better.”
RBC and CIBC are the final major Canadian banks to report earnings for the fiscal second quarter. Over the past week, Toronto-Dominion Bank, Bank of Montreal and National Bank of Canada posted results that beat analyst estimates, while Bank of Nova Scotia’s profit missed expectations.
RBC – Canada’s largest bank – is telling its employees to return to their offices four days a week, The Globe and Mail previously reported. The new rules take effect in the fall.
The bank raised its quarterly dividend by six cents to $1.54 a share. RBC also said it plans to buy back 35 million of its shares.
RBC reported higher second-quarter profit that missed analysts’ estimates as it reserved more provisions than anticipated and posted lower capital-markets earnings. The bank earned $4.39-billion, or $3.02 a share, up 11 per cent from the same quarter last year.
Adjusted to exclude certain items, including integration costs related to the purchase of HSBC Bank Canada, RBC said it earned $3.12 a share. That fell below the $3.20 a share analysts expected, according to S&P Capital IQ.
CIBC posted an increase in second-quarter profit that beat analysts’ estimates as the lender set aside lower-than-expected loan-loss provisions and booked stronger activity in capital markets.
CIBC earned $2-billion, or $2.04 a share, up 15 per cent from the same quarter last year.
Adjusted to exclude certain items, the bank said it earned $2.05 a share. That edged out the $1.90 a share analysts expected, according to S&P Capital IQ.
“CIBC continued the trend of its peers, coming in ahead of expectations,” Jefferies analyst John Aiken said in a note.