Big Six Canada banks: How concerning are climbing credit loss provisions?

Banks continue to stash away funds for potential loan losses

Big Six Canada banks: How concerning are climbing credit loss provisions?

The first-quarter financial results of Canada’s banking giants reflected their resilience in the face of ongoing economic turbulence – but provisions for potentially souring loans continued to climb at each of the Big Six financial institutions.

Higher provisions for credit losses were the main takeaway from the top banks’ earnings statements for Q1, with each adopting a cautious and pragmatic outlook amid high interest rates, headwinds in the commercial space and uncertainty over how sharp an economic downturn might be.

Royal Bank of Canada (RBC) stashed away $813 million for credit losses in Q1, up 53% from the same time last year, while Scotiabank’s provisions for credit losses neared the billion-dollar mark ($962 million), an increase from $638 million in 2023’s first quarter.

BMO’s loan loss provisions jumped from $217 million in Q1 last year to $627 million this time around, and TD set aside $1 billion – compared with $690 million on a year-over-year basis. At CIBC, credit loss provisions were $585 million (up from $295 million a year before) and National Bank put away $120 million, over $86 million the prior year.

Credit loss provisions a prominent theme of earnings calls

Shilpa Mishra (pictured top), partner, leader capital advisory at BDO Canada, told Canadian Mortgage Professional that those ongoing increases in credit loss provisions remained the key element of the Big Six results, impacting net income even despite the lenders meeting “subdued” expectations on revenue.

Plenty of attention has also focused on when those provisions might start to tick downwards – a question that’s closely tied to the overall economic outlook for Canada.

“I had a chance to listen to all of the analyst calls and really the questions that were asked over and over again [in] all the calls across the banks: ‘When are we going to see rate cuts, and when will the provisions level off?’” Mishra said.

“And that’s a tough one to answer. I predict in [BDO Canada’s latest debt market report] that it’s going to be around Q3 that we’re going to see rate cuts.”

Another noted trend to emerge in the banking space is so-called “deposit hunting” among the nation’s leading lenders, marking a shift from their approach of recent years.

“During the COVID-19 pandemic with historic low rates, you had soaring personal and business savings. So as a result, all the financial institutions had a more passive attitude to cash,” Mishra said.

“But with all the savings being spent, the banks really now look at cash as queen. So there’s really a focus on gathering.”

Consumer debt soars as commercial market uncertainty also rises

Canada’s top lenders have now set aside around $4 billion in loan loss provisions, with their caution over the national economic outlook rising alongside soaring interest rates and spiky inflation – factors which could increase the risk of Canadian borrowers struggling to make loan payments and meet other financial obligations.

Canadians’ total consumer debt surged to an eye-watering $2.4 trillion in the fourth quarter of 2023, up 2.9% year over year and a new record, according to a TransUnion report – and concerns have also continued around the country’s commercial real estate market, particularly in an office sector that’s been riven by change since the beginning of the pandemic.  

Still, many financial institutions are also striking an optimistic tone on the question of how long those credit loss provisions will remain high. RBC’s chief risk officer Graeme Hepworth told a conference call in the wake of the bank’s Q1 earnings announcement that the outlook for Canada’s economy appeared to be a largely positive one.

“The market continues to gain confidence that interest rates have peaked to the current cycle, and the probability of a hard landing of the economy is decreasing,” he said.

Meanwhile, Lightwater Partners portfolio manager Jerome Hass told BNN Bloomberg that higher credit loss provisions were to be expected in a rocky economic environment – and suggested the current figures were reasonable for the current landscape.

“Everyone signalled that this was going to take place and it has happened, but that’s been relatively modest, too,” he said. “I know $4 billion seems like a large amount, but in the context of the banks’ portfolios, it’s still relatively benign.”

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