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Bank earnings - Exporters should diversify with alternative sources of capital

For what will be an early indication of Canadian bank earnings next month, here is what happened in the US earnings posted this week.

The results unfolded in two parts, those who benefited from their investment banking and those that took larger provisions for their retail banking.

We can somewhat all agree that there is a disconnect between wall street and main street and this was highlighted this week. Investment banks did well as they raised capital for companies, who were keen to raise as much debt as possible. Spreads also widened with the volatility index rising. This resulted in record profits for some banks, e.g., Morgan Stanley posted record profits for the second quarter, with $13.4bn, exceeding their best quarter ever by 21%.

In contrast, retail banks (large and small) made large provisions for future loan losses. This tells us that the pain has not yet hit because government support has enabled companies and individuals to continue paying their loans. In total, banks made $35bn of loan loss provisions in 2nd quarter, in addition to $25bn in 1stquarter.

Much will depend on the shape and speed of the recovery and with the US still struggling to get the virus under control in parts of the country, it may be slower than we would have all hoped. What is clear is bank earnings will be unlikely follow the same path next quarter in the US – less earnings in the investment banking business and we hope, less provisions for bad loans in the retail business. Expect similar trends in Canadian earnings next month.

Overall, we expect bank credit risk appetite to maintain its risk off position for the rest of the year, leaving exporters to seek alternative channels. Governments are stepping in and exporters should seek out these government backed programs. Examples in Canada include, Elevate finance and Export Development Canada (EDC).

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