Large Canadian Banks Q4 2021 Earnings Round-Up: PCL Reversals on Performing Loans Continue to Boost Performance

Earnings in Q4 2021 were in line with DBRS Morningstar's expectations. Quarterly earnings for the Big Six Canadian banks were boosted by reversals of provisions for credit losses (PCL) on performing loans, continuing a trend seen throughout F2021. Aggregate quarterly unadjusted earnings decreased 4.1% quarter over quarter (QOQ), but increased 9.2% year over year. The QOQ results reflected lower revenues as an 8% decrease in non-interest income driven by continued moderation in capital markets activity from record levels was partially offset by volume driven growth in net interest income. This, combined with a 4% increase in expenses primarily from higher employee-related and variable compensation costs, resulted in negative operating leverage.

Key highlights include the following:

-- Overall, Q4 2021 results for the Big Six Canadian banks were in line with our expectations as PCL reversals on performing loans boosted performance.

-- As expected, dividend increases and planned share buybacks were announced after the Office of the Superintendent of Financial Institutions lifted restrictions on capital management activities.

-- Looking forward to F2022, rising interest rates and growth in higher margin non-real estate secured lending (RESL) loan volumes should bolster profitability and help offset a potential increase in PCL from the current unsustainably low levels.

“The persistent low interest rate environment and changes in business mix contributed to continued net interest margin compression in Q4 2021. In F2022, we expect an increasing interest rate environment and an improving growth rate in higher margin non-RESL loans (i.e.; credit cards and auto loans) as an improving economy and robust consumer spending take hold. Higher interest rates should help offset some expected pressure to earnings in F2022, as reversals of PCLs on performing loans are expected to decrease from F2021 levels and capital markets activity is expected to remain more subdued compared with the elevated levels in the first half of F2021. The Big Six Canadian banks remain well positioned going into F2022. The balance sheets of these banks remain strong with robust capital and liquidity metrics, although capital metrics will likely decline from current levels with the resumption of capital management activities,” said Carl De Souza, Senior Vice President, North American FIG.