Impact of COVID-19 Pandemic on Canadian Banks’ Performance: Non-Performing Loans, Capital Adequacy, and Profitability

COVID-19 pandemic has impacted many financial institutions due to nonpayment of debt by borrowers and unavailability of funds for further lending. Canadian banks have performed well during COVID-19 pandemic by managing non-performing loans (NPLs) and maintaining capital to risk weighted assets ratio higher than 8%. NPLs of Canadian banks was expected to be high due to high interest rates set by Bank of Canada and soft economic growth during and after COVID-19 pandemic. NPLs are associated with different financial indicators of the bank. As per the guidance issued by OSFI, Government of Canada in October 2023, banks/financial institutions are required to maintain minimum capital to risk weighted assets ratio of 8%. The purpose of this study to check the Canadian banks performance by considering the impact of COVID-19 pandemic based on three financial soundness indicators; regulatory capital to risk weighted assets ratio and earnings, profitability, return on assets ratio and non-performing loans to gross loans ratio. Analysis is done by using multivariate regression model based on last 10 years (Q1 2013 to Q3 2023) quarterly data. Based on the analysis results, it is found that Canadian banks have performed well during and after COVID-19 with little effect of pandemic. Canadian banks have maintained regulatory capital to risk weighted assets ratio above 12% over the study period which is higher than 8% required ratio. Canadian banks’ non-performing loan to gross loan ratio is less than 0.5% and return on assets ratio is above 1% during the study period except COVID-19 quarters.

Keywords: Non-Performing Loan, Capital Adequacy, Banks’ Profitability, Canadian Banks Performance, Financial Soundness Indicators.