Big Six expected to raise loan loss reserves amid economic slowdown and rising defaults
Canada’s largest banks are heading into second-quarter earnings season facing continued economic headwinds, as analysts forecast higher loan loss provisions and weaker borrowing demand amid ongoing trade tensions with the US.
The Big Six — RBC, TD Bank, CIBC, BMO, Scotiabank, and National Bank — are expected to report modest growth, but rising credit stress could put a damper on both profits and investor sentiment.
“It should not be a surprise that credit losses are expected to rise due to the tariff risks and modest economic deterioration, but the key question is the extent of the potential increase on performing loan reserves,” Bank of Nova Scotia analyst Mike Rizvanovic wrote in a note to clients. “Based on our conversations with management, we do not expect to see a substantial build.”
The trade war has prompted banks to prepare for an uptick in loan defaults. Provisions for credit losses, funds set aside for loans that could go bad, have already been a drag on bank earnings in recent quarters. Analysts say the second quarter is likely to continue that trend.
“Although we anticipate that all the banks will bolster their credit allowances, we do not believe that the allocation will be uniform, and it will be telling how the market reacts to those that are at the high and low end of the spectrum,” said John Aiken, analyst at Jefferies. “The banks need to balance prudence… while not spooking investors by undercutting confidence in their loan portfolios.”
The slowdown in lending has been underway for months. Data from Canada’s banking regulator showed a deceleration in loan growth as early as February. Since then, some bank economists have revised down their GDP growth expectations, suggesting consumers and businesses are delaying major financial decisions in anticipation of further economic deterioration.
Toronto-Dominion Bank will be the first of the six major banks to report second-quarter earnings on Thursday. The rest will follow next week, with Scotiabank on Tuesday, National Bank and BMO on Wednesday, and RBC and CIBC closing out the week on Thursday.
Investors will be watching closely for management commentary on forward-looking expectations, particularly regarding loan performance, consumer stress, and the broader economic outlook.
Canaccord analyst Matthew Lee noted that market volatility has helped banks’ capital markets divisions, boosting trading revenue and offering some cushion against muted lending activity
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“The quarter will likely be a continuation of many of the trends experienced earlier in the year with trading revenues demonstrating year-over-year strength (albeit less so than Q1), muted growth in the loan book, and large performing provisions booked to account for geopolitical volatility,” Lee wrote.
“Overall, we believe Q2 will be more about what the banks say than do given that we are likely too early to feel the full impact of US tariffs at this juncture.”
Despite modest year-to-date gains, Canadian bank stocks have underperformed broader equity markets. The S&P/TSX Composite Index has risen 5% so far this year, compared to a 3.4% increase for the Big Six banks. The KBW Bank Index, which tracks US financials, has lagged further behind, up just 2.4%.
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