RBC, BMO set aside record provisions for soured loans

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Royal Bank of Canada and Bank of Montreal joined their Canadian peers in setting aside record provisions for loan losses as they brace for the economic fallout from the coronavirus pandemic.

Royal Bank, Canada's largest lender by assets, earmarked C$2.83 billion ($2.06 billion) in the fiscal second quarter for souring debt, the highest among the Canadian banks that have reported so far, while Bank of Montreal put aside C$1.12 billion. Both Toronto-based firms reported earnings Wednesday that missed analysts' estimates.

The two lenders follow Bank of Nova Scotia and National Bank of Canada in posting higher provisions for credit losses to brace for the aftershocks from plunging oil prices and a pandemic that has caused a near economic standstill, with the set-asides cutting into earnings across the banks in the three months through April 30.

Royal Bank's provisions contributed to a 54% decline in net income and hurt earnings throughout its key operations. Canadian personal and commercial banking, the lender's largest division and biggest profit generator, saw earnings plunge 56% as set-asides more than tripled to C$1.51 billion. Earnings in the company's capital-markets division, the largest among Canada's big banks, plunged 86% after the firm earmarked more than C$1 billion for bad loans.

Royal Bank "appears to be the most conservative in its reserving for COVID-19 related credit losses and the market will need to decide if it is willing to reward this relative caution or focus solely on the near-term earnings impact," Barclays analyst John Aiken said in a note to clients Wednesday.

BMO provisions

At Bank of Montreal, Canada's fourth-largest lender, higher provisions also contributed to 54% decline in net income, with the set-asides weighing on results across its operations. Canadian banking, the largest division, saw a 41% earnings decline as provisions more than tripled to C$497 million.

Set-asides of C$199 million in the lender's U.S. banking division, which includes Chicago-based BMO Harris Bank, contributed to an earnings decline, while BMO Capital Markets' provisions jumped to C$408 million, leading to a net loss in the division.

"The strength and resilience of our overall diversified business model has been tested, and we are performing well through these challenges," CEO Darryl White said Wednesday on a conference call with analysts. "As a result, I'm confident that our bank has never been positioned better to face the environment ahead."

Other takeaways from the earnings reports:

  • Royal Bank's second-quarter net income fell to C$1.48 billion, with adjusted earnings of C$1.03 a share missing the C$1.65 estimate of 13 analysts in a Bloomberg survey.
  • At Bank of Montreal, quarterly earnings slumped to C$689 million, with adjusted per-share earnings of C$1.04 lower than the C$1.27 average estimate of 12 analysts.
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