Analyst: Provisions for credit losses likely to continue rising

Two of the Big Six banks posted lower-than-anticipated earnings during the second quarter

Analyst: Provisions for credit losses likely to continue rising

Provisions for credit losses in Canadian banks are likely to continue growing for the foreseeable future, according to Carl De Souza of DBRS Morningstar.

The analyst’s comments came in the wake of the May 24 Q2 results releases by Scotiabank and Bank of Montreal (BMO), which posted lower-than-anticipated earnings during the quarter.

Scotiabank’s revenue dropped from $7.94 billion in Q2 2022 to $7.93 billion in Q2 2023, having set aside $709 million for loss provisions (up by 224% annually).

BMO posted a more significant year-over-year decline in revenue, from $9.32 billion to $8.44 billion in the second quarter. Provisions for credit losses swelled from $50 million to $1.02 billion, a figure that included $517 million on the financial performance of the US-based Bank of the West.

De Souza said that per the latest results, a major factor in the banks missing their earnings estimates is the ever-higher provisions for loan losses amid sustained economic volatility.

“[Bank] earnings are expected to be challenged in fiscal 2023,” De Souza told BNN Bloomberg. “We’ve seen that with this morning’s earnings calls from BMO and the Bank of Nova Scotia – and one of the primary drivers of that is increased provisions for credit losses which are expected to continue increasing.”

On the other hand, these larger provisions will be of significant benefit to the Canadian financial system in the event of a downturn.

“The Canadian banks are positioned well going into this environment to navigate the challenges and they are coming from strength,” De Souza said. “They have very strong credit quality entering this period; they have ample liquidity and solid capital levels.”