Financials

Report by Veritas Investment Research

Shalabh Garg attempts to quantify the performing loan provisions that Canadian banks might build over the coming quarters. He uses the banks' response to macroeconomic uncertainty in the early days of the pandemic as a reference point for provisioning built through the reclassification of some Stage 1 loans to Stage 2 under IFRS 9 and an increase in the allowances for credit losses ratio for both Stage 1 and 2 loans. Shalabh believes RBC and TD, followed by Scotiabank and CIBC, will likely undertake substantial performing provisions for credit losses over the coming quarters if trade policy uncertainty persists. He does not expect impaired PCLs to spike in the near term, unless economic conditions deteriorate materially and drive the unemployment rate higher. He believes valuations will come under further pressure only when impaired PCLs ramp up.

Financials

Report by Veritas Investment Research

The actions by the OCC reinforce Veritas’ preference for RBC to remain focused on Canadian banking and for the divestiture of its US subsidiary, City National Bank. However, this seems increasingly unlikely as it will take several years for the bank to resolve issues outlined by the OCC. Additionally, further monetary penalties may be levied if sufficient progress is not made. These actions will likely also weigh on CNB's profitability as costs associated with resolving these issues place upward pressure on CNB's efficiency ratio. These actions by the OCC may serve as prelude for potential actions against TD Bank with a substantial monetary penalty and a cease-and-desist order likely in play.