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Canadian banks' provisions-led earnings beats mask operational challenges

By Nichola Saminather
    TORONTO, Feb 26 (Reuters) - Canadian banks are likely to see
slower growth from their core retail and business banking
divisions in the next few quarters due to an uncertain economic
recovery, but overall earnings could get a boost as lenders claw
back some of the C$20 billion  ($15.9 billion) of provisions
they took last year.
    Thanks to government pandemic aid, Canadian banks' have kept
a lid on bad debts, which allows them to gradually release some
of the money set aside to cover loan losses.
    Canada's top six banks wrapped up their first-quarter
earnings on Thursday, beating street estimates and lifting
profits to pre-pandemic levels helped by lower-than-expected bad
debt provisions and strong capital markets and wealth management
    But that has masked challenges in their personal and
business banking units, which saw earnings decline or post
sluggish growth excluding the impact of provisions.
    "It's easy to make the headline numbers look better than the
underlying numbers ... but under the surface it's much more of a
mixed bag," said Avenue Investment Management Portfolio Manager
Bryden Teich.
    Royal Bank of Canada  RY.TO , Toronto-Dominion Bank  TD.TO ,
Bank of Nova Scotia  BNS.TO , Bank of Montreal  BMO.TO , and
Canadian Imperial Bank of Commerce  CM.TO  set aside about C$1.6
billion to cover potential bad loans in the three months through
January, less than half the amount expected.
    The banks have flagged higher loan losses in the next few
quarters, but said that their current allowances are sufficient
to cover them.*:nL4N2KV3HK*:nL4N2KU3YY*:nL4N2KT2HP
    Investors and analysts warned the sluggish performance in
the banks' core operations could continue for longer than
expected if risks linger, such as another wave of coronavirus
infections or delays in vaccination rollouts.
    "Until the vaccination programme in Canada accelerates,
there is still that overhang," said Robert Colangelo, senior
vice president for credit ratings at DBRS Morningstar. "Things
could get delayed by a quarter or two and the recovery could be
later this year and into early next year."
    The Canadian banks index  .GSPTSBA  has risen 2.1% since
Monday's close before they began reporting first-quarter
    If business closures continue, higher-margin areas like
credit cards and commercial lending will stay constrained, with
lower-margin mortgages remaining the biggest source of loan
growth, investors said. 
    But rising long-term bond yields indicate markets are
optimistic about a recovery. If this continues, it could help
offset some of the margin challenges posed by increased mortgage
exposure, Colangelo said.*:nL1N2KI2DH
    "The big question across the board is what the real number
(of bad loans) is, because there's so much government stimulus
in the system," said Greg Taylor, chief investment officer of
Purpose Investments. "The government is in no rush to take that
    ($1 = 1.2598 Canadian dollars)

 (Reporting by Nichola Saminather; Editing by Stephen Coates)
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