Anticipated bankruptcies and defaults caused by the coronavirus pandemic will mean lenders have to record potential losses from their loan portfolios sooner, rather than waiting for borrowers to default. Canada’s big banks are planning for the worst anyway.
Royal Bank and Bank of Montreal, Canada’s biggest and fourth-largest banks, respectively, have set aside an additional C$4 billion during the first quarter to cushion against loans that go bust, according to their recent financial reports.
Having missed analysts’ estimates for earnings, both Toronto-based firms said the unprecedented sum underscores the magnitude of the economic shock, vast uncertainty over the shape of a recovery. It also reflects new accounting standards that require banks to project losses over the life of loans.
“A conservatism, a strength, a diversification and an earnings capability position us well to withstand the uncertainty and turn around and exit this a stronger bank and a bank that can take advantage of the opportunity that will present itself in the future,” Royal Bank Chief Executive Officer Dave McKay told analysts Wednesday.
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HSBC earnings took a hit
Other global banks have also strengthened their provisions against losses from borrowers hit by the coronavirus. Europe’s largest bank by assets, HSBC, expects credit losses to top $3 billion in the first quarter, and could rise to as high as $11 billion throughout 2020, the lender said on Tuesday.
HSBC’s profit also missed estimates after it has taken a $200 million floating loss in March after the price of gold in New York and London has diverged by the most in four decades.
HSBC further explains that in a rare occurrence, the one-day loss breached its value-at-risk limits 12 times in March due to “unprecedented widening of the gold exchange-for-physical basis, reflecting Covid-19-related challenges in gold refining and transportation, which affected HSBC’s gold leasing and financing business and other gold hedging activity.”
The new accounting standards that took effect two years ago resulted in banks setting aside much larger provisions to protect against potential losses. Since then, they were required to look ahead and consider losses that could arise from potential defaults over the next twelve months. This is compared to the previous regime where banks were waiting until borrowers in trouble actually default on a loan to record a loss in their accounts.