TD Bank follows peers in preparing for economic downturn, hitting Q3 profit

TD Bank Group followed several of its peers in reporting a profit drop for the third quarter as banks set aside funds for a potential recession ahead, even as loans continued to grow and consumer savings rates remained elevated.

The return to climbing provisions for credit losses, which are counted against income, has been one of the dominant trends so far this earnings season with only BMO left to report next week.

Banks rode a wave of profit beats last year as they unwound portions of the provisions they had built up in the early days of the pandemic, and are now seeing the reverse as they build reserves because rising central bank interest rates increase the likelihood of a recession.

TD, which set aside $351 million in the latest quarter for potential loan losses compared with a $37 million recovery last year, noted that the move is prudent for potential risks ahead but that both loan provisions and bad loans remain low.

“While these key credit metrics are at or near cyclical low levels, economic risks remain elevated, reflective of persistent inflation and rising interest rates and the increasing risk of a recession,” said Ajai Bambawale, chief risk officer of TD on an earnings call Thursday.

His comments echo those of William Bonnell, executive vice-president of risk management at National Bank, who said Wednesday that despite rising worries, the economy is still showing strength in unemployment and GDP numbers.

“That is what’s generating really exceptional performance in credit, not just at our bank, but across, I think, the sector in impaired loans. So delinquencies remain low, savings rates remain high. It’s a strange situation where current conditions are so benign and yet, there’s so much uncertainty in the forward views.”

The uncertainty has seen banks report sharp increases in deposits as consumers look for safe places to park their money. TD reported an eight per cent increase in deposits, while RBC noted Wednesday it saw more than $10 billion flow into its GIC term deposits and that deposits are 30 per cent above pre-pandemic levels.

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