Skyline of the financial district

Canadian bank earnings took a huge hit in the second quarter and full-year profits are expected to drop in 2020, but most of the provisioning pain is likely now baked in, suggests a new report from Fitch Ratings.

The big banks took massive provisions for credit losses (PCLs) in the second quarter of 2020, which pushed earnings down by about 50%, even as revenues dipped just 4.9% year over year, Fitch reported.

In total, the seven big banks took $11.26 billion in loan loss provisions, exceeding the $11.0 billion they took in the previous 12 months.

The large jump in provisions and the big drop in earnings came amid a “rapid deterioration in banks’ economic outlooks due to the coronavirus pandemic, disrupting 2020 operating plans,” Fitch said.

The huge Q2 provisions were primarily taken against credit cards and personal loans in retail banking, Fitch said, and against commercial loans in the energy, retail and services sectors.

“Credit quality will continue to deteriorate into fiscal 2021 for Canadian banks primarily in sectors most impacted by social distancing including energy, transportation, hospitality and retail,” said Mark Narron, senior director for Fitch.

“The extent of credit quality deterioration will become more evident as government relief and payment deferral programs expire (likely during 4Q20 and 1Q21),” Narron added.

That said, Fitch also indicated that it “does not expect significant further incremental reserve accumulation against performing loans” as long as the economic outlook doesn’t deteriorate further.

“However, given some variation among bank forecasts, volatility in oil markets, and persistent downside credit risk related to the pandemic, continued elevated provisions against both performing and non-performing loans cannot be ruled out,” Fitch allowed.

The combination of higher credit costs, lower fee income and tighter margins “will meaningfully reduce full year profitability relative to 2019,” Fitch said.

On the upside, Fitch reported that the banks’ capital levels remain healthy.

“Over the longer term, banks’ company profiles may benefit from the seamless transition of non-branch staff to working from home, their efficient intermediation of government relief and deferred loan payment programs, as well as growth in customers’ use of digital channels.”