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Canada’s big banks are well positioned to withstand the economic downturn resulting from the Covid-19 pandemic, including increased credit losses, as deferral programs wind down, a report from DBRS Morningstar says.

Canada’s six largest banks reported improved earnings in the third quarter, with provisions for loan losses lower than in Q2, and profits rising in capital markets and wealth management businesses.

Aggregate earnings for the big banks rose 69% from the previous quarter, the report said, though earnings were down 19% year over year. Quarter-over-quarter net income gained 183% in capital markets and 31% in wealth management, the report said.

“Higher trading revenue and increased underwriting activities, as well as higher client fee-based assets reflecting market appreciation, drove the strong results in these businesses,” the rating agency said.

The big banks’ aggregate provisions for loan losses declined by 38% from Q2. However, the report warned that those provisions — at $6.8 billion — remain elevated despite the quarter-over-quarter improvement.

The number of retail and commercial clients on payment deferral programs declined by 28% from the second quarter, the report said. As of July 31, deferrals covered 3.5 million clients across the big banks, or $264 billion in outstanding loans, representing approximately 8.5% of the banks’ aggregate gross loans.

“While the number of borrowers covered by forbearance measures trended lower this quarter, the majority of these deferrals will expire in Q4 2020, which may result in a spike in impaired loans and charge-offs and will test if the banks have set aside enough provisions to cover these loans,” the report said.

Loan loss provisions are likely to remain high into next year given the challenges from the pandemic, the rating agency said.

Overall, though, DBRS said Canada’s six largest banks are “well positioned to weather the impact from the pandemic.”

“[T]hese banks entered this downturn with strong balance sheets and earnings capacity to absorb a significantly higher level of credit losses,” the report said.