Bank of Canada stress tests clear lenders even as household insolvencies surge
Canada's Big Six banks posted second-quarter profits that beat analyst expectations and cut their provisions for bad loans, even as insolvency filings among Canadian households climbed roughly 26 percent between December and March.
Five of the six lenders raised their quarterly dividend: Royal Bank of Canada, TD Bank Group, Bank of Nova Scotia, BMO Financial Group, and National Bank of Canada, BNN Bloomberg reported.
Profit for the group grew between 10 and 25 percent year over year in the quarter ended April 30, aided by capital markets and trading revenue, Reuters reported.
RBC led the group with net income of $5.51bn or $3.85 per diluted share, up from $4.39bn a year earlier, The Canadian Press reported.
Its provision for credit losses fell to $912m from $1.42bn, and it raised its quarterly dividend to $1.76 per share from $1.64.
Scotiabank analyst Mike Rizvanovic said RBC's credit performance was "much better than we, or the street had expected," according to BNN Bloomberg.
TD reported a second-quarter profit of $4.25bn and raised its dividend to $1.12 per share from $1.08.
On an adjusted basis, TD earned $2.38 per diluted share, above the consensus estimate of $2.26 per LSEG Data & Analytics, with provisions falling to $1.00bn from $1.34bn.
BMO's adjusted earnings came in at $3.67 per share against an estimate of $3.45, with provisions dropping to $739m from $1.05bn.
Scotiabank earned $2.02 per share against an estimate of $1.94, with provisions of $1.22bn down from $1.40bn.
National Bank's $3.23 per share beat estimates by 10 Canadian cents, with provisions falling sharply to $233m from $545m.
CIBC was the only lender whose provision held flat, at $605m, BNN Bloomberg reported.
"Uncertainty remains elevated," RBC chief executive Dave McKay said on a conference call, noting that unresolved Section 232 tariffs on Canadian steel and aluminium continue to weigh on parts of the economy.
He said RBC expects GDP growth of 1.5 to 1.6 percent over the next four quarters and sees "enormous opportunity" for Canada as it recalibrates its trade position.
Scotiabank CEO Scott Thomson pointed to a "significant change in tone" from foreign investors, with capital flows turning back toward Canada after years of outflows, Reuters reported.
He also called Canada's position as an "oil-exporting nation" with crude near US$90 per barrel an economic advantage.
TD chief risk officer Ajai Bambawale said the bank holds close to $500m in reserves tied to trade and tariff risk, most of it unused, and has placed additional weight on its downside scenario in response to the Middle East conflict.
"We are going to continue to reassess our reserves each quarter," he said, according to BNN Bloomberg.
The Bank of Canada's annual Financial Stability Report, released the same day, found the system resilient but flagged growing risks.
Senior deputy governor Carolyn Rogers said high equity and corporate bond valuations, rising global sovereign debt issuance, and growing hedge fund leverage are key pressure points.
"A cascading series of events could cause a sharp loss of investor confidence and lead to a spike in demand for liquidity or rapid asset sales," Rogers said, according to Reuters.
The central bank's stress test, which assumed crude oil at US$100 a barrel for three years, concluded that Canada's large banks would remain resilient, the Wall Street Journal reported.
Deputy governor Toni Gravelle said the share of borrowers behind on payments has stabilised and that the final wave of pandemic-era mortgage renewals at higher rates is expected to pass by the second half of 2027.
"Canada's large banks have become more resilient over the past year, with higher profitability and healthy capital buffers," Gravelle said.
Rogers cautioned that while trade uncertainty had caused less disruption than feared a year ago, the risk had not passed, and flagged artificial intelligence as an emerging vulnerability that could increase the speed and scale of cyberattacks, Reuters reported.
