Government programmes to support banking clients during the Covid-19 pandemic meant all of Canada’s six largest banks came through 2020 largely unscathed. Their profit margins, however, were far lower than the previous year, while return-on-equity and return-on-assets ratios shrunk too.
But profitability is not the only indicator on which to assess a bank’s performance, and The Banker analysis is based on a combination of factors that include asset quality, operational efficiency and leverage. The best overall performance score goes to Toronto Dominion Bank, which showed much higher growth than its peers, as well as better efficiency, return on risk and liquidity indicators.
Desjardins, Canada’s largest co-operative group, is second in the overall performance table thanks to its exceptionally good asset quality, soundness and leverage indicators. Of note are its particularly low total impairment charges, which are a component of the asset quality indicator. Third overall is Bank of Montreal, followed by Royal Bank of Canada (RBC), in fourth place.
RBC showed the best profitability indicator for 2020. During a testing year, Canada’s largest bank also managed to secure the highest profit margins, the highest returns on equity and on assets, and the second-best asset utilisation ratio, which measures revenues generated in relation to the bank’s assets. RBC is optimistic about its future profitability, saying earlier this year it believes the economy will accelerate by mid to high single-digits in 2021, on the hope that interest rates would begin to rise sooner than expected.
RBC is followed by Canadian Imperial Bank of Commerce and Scotiabank in fifth and sixth place, respectively, in terms of overall performance.
Corporate lending dried up in 2020, and banks focused on mortgages instead as the housing market began to heat up. As a result, total loan portfolios for Canada’s big banks barely moved last year, while total deposits saw double-digit growth in almost all cases (Scotiabank being the odd one out, with 3.6% growth in deposits). Toronto Dominion Bank was the lender with the largest such growth, of 30.1%.
Things may begin to look up for Canada’s big six as earnings for the second quarter of this year are larger than those for the same period in 2020. With the exception of Dejardins, the same is true compared with the first three months of 2021.
After the struggles of last year, earnings growth was driven by significantly lower loan loss provisions, according to rating agency Fitch. The current low interest rate environment, however, threatens net interest income despite some positive movement in mortgage portfolios. Other analysts warn that corporate clients may still hold on to the record amount of cash that they have been piling up during the pandemic.
