How should we feel about soaring bank profits during a pandemic?
Strong banks helped Canadians during COVID-19 but people love to hate them
You can almost smell the simmering outrage against Canada's big banks in the comments at the bottom of a recent CBC Go Public story about rising bank fees.
But this week, as the banks revealed another round of stunning results, the news was a fresh reminder that despite the pandemic's disruption, the impact of COVID-19 did not lead to the economic catastrophe that so many feared at the time. Some say banks were partly responsible for that positive outcome.
And while the bank fee story was a magnet for online anger, comments beneath CBC's reports on bank profits were far more nuanced.
Love 'em and hate 'em
"You know, it's interesting. People seem to love and hate the banks at the same time," said Hilliard MacBeth, longtime Edmonton-based financial advisor and author of the gloomy book on Canadian real estate When the Bubble Bursts.
MacBeth has encountered many people dealing with Canada's financial institutions over his 42 years in the personal finance business. He says Canadians are surprisingly uncritical of banks so long as they get loans when they need them. He also thinks Canadians might be more critical if they were better informed.
WATCH | Customers speak out about about bank fee increases:
"I don't think the public is very aware of this," he said. "They just hear 'you're approved for that loan' and they're happy."
Certainly some of the people loving the Canadian banks this week include those who invest in them. And whether you know it or not, odds are you too are an investor. Canada and Quebec's pension plans have big stakes in the banks. So do mutual funds, life insurance companies and other financial groups that promise future payouts based on the money you set aside today.
Strictly from an investor's point of view, Jim Shanahan, a financial equities analyst with Edward Jones, said the banks have demonstrated their merit, bouncing off last year's lows to attain new highs. As you can see by clicking on the graph above, it was as if the pandemic never happened. He said taxpayers should be grateful.
"Patient, long-term investors have been rewarded by holding the shares and they are mostly trading at or near all-time highs," Shanahan said.
He works out of the Edward Jones headquarters in St. Louis, Mo., where Canadian banks have a reputation for conservative risk management. That paid off in the 2008 financial crisis, when they did not need U.S.-style bailouts, and also during the crisis brought on by the pandemic.
"I think that Canadian taxpayers and businesses and other stakeholders should be pleased with the performance of the banks, which provided a very solid backstop during a very weak Canadian economy and performed exceptionally well," he said in a phone interview.
Despite wall-to-wall advertising pointing out how much they love you, banks are not your mom. Like every other profit-making company, they are in it for the bottom line. That does not mean they ignore criticism on fees or other things we complain about if we complain loud enough. And certainly, as people who spoke to Go Public pointed out, raising fees at the same time as making astonishing profits does not look especially good to their valued customers.
Readers' frequent suggestions that disgruntled customers switch to credit unions or to one of the (big-bank owned) low-fee alternatives illustrate how people determined to stick it to the big banks have options. The fact that we keep using them seems to back up MacBeth's position that Canadians remain tolerant of the banks' behaviour.
"The only way that Canadians would lose their love affair with the banks right now is if the banks started to foreclose on homes and also to put people in bankruptcy over their credit cards and their HELOCS and all that stuff," MacBeth said. "That doesn't seem to be happening."
Some people complain about excessive government payouts during the pandemic, fearing they will bring tax increases. But MacBeth believes without that support, Canada was really close to that kind of meltdown.
"It was on the verge of happening a year ago, and then the government of Canada came in with massive transfers of income and dollars to the households which essentially, if you think about it, is a transfer to the banks," he said.
As the banks reported this week, their loan losses were negligible as Canadians paid off non-mortgage debt.
Taxpayers get some credit
As many banking experts will point out, Canadian banks are successful not just because they are so cautious and so wise. It's also because taxpayers have their backs and because government regulators keep them in line.
As Shanahan observed, Canadian banks had "much higher capital requirements" to help them, and borrowers, survive the downturn. He said that as those requirements lift, expect increased dividends and share buybacks. Executive bonuses will be back on the table.
But as with so much at the heart of the Canadian economy these days, the banks have been riding a wave of rising house prices as Canadians borrow and spend on real estate, even as they pay off other loans. Many Canadian don't think much beyond the bank that lent them the money to buy, but once again, the taxpayer is there for the banks with what are effectively mortgage subsidies.
"In Canada, the CMHC is the primary risk taker and the bank just gets to keep all the profits," MacBeth said. "They're taking loans away from something that might be productive and giving more loans to households who are buying real estate they can't really afford."
And as many, including our central bankers, have said in the past, if that trend continues, diverting so much of our wealth to inflating the price of unproductive real estate may not be the best thing for Canada, or for its banks, once the pandemic is over. By comparison the effects of rising fees, while evidently annoying, are of small economic consequence.
Follow Don Pittis on Twitter @don_pittis