Will Canadian banks be forced to boost loan-loss provisions in 2021?

The Big Six are bracing for the prolonged impact of an uneven economic recovery

Will Canadian banks be forced to boost loan-loss provisions in 2021?

Canada’s top banks are bracing for a challenging year ahead, with the possibility of sustained economic uncertainty compelling the institutions to further boost their loan-loss provisions.

Over the past three quarters, the Big Six have together allocated an estimated $20 billion to cover likely spikes in loan impairments brought about by the end of mortgage payment deferral programs. Much of this amount was set aside during the first half of the year ($10.1 billion in Q2 alone), as loan-loss provisions fell by 52% in the three months ending October.

While the banking industry is still sufficiently buffered against a deferral cliff, the main problem over the next few months will be subdued demand for financial products amid the long-term economic impact of the COVID-19 pandemic.

“Into next year, they will go back to normal in terms of credit losses,” said Steve Bélisle, senior portfolio manager at Manulife Investment Management. “The focus will shift to the revenue side … There’s positive outlook on credit. On revenue, not so much.”

This is despite the Canadian housing market’s surprisingly robust performance for most of the second half of 2020. In October alone, home sales shot up by 32% year-over-year, with the average sale price over the same period increasing by 15.2%.

National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank are increasingly sounding the alarm against mounting unemployment and possibly slower housing activity.

“We made our pessimistic scenario even more pessimistic and increased the weight of that scenario,” said William Bonnell, chief risk officer at National Bank. “We think that the pessimistic scenario account(s) for the dark potential path of the recovery.”

Going against the grain, however, was Canadian Imperial Bank of Commerce.

“We think [2021] will be a better year for us than this year was,” said Hratch Panossian, chief financial officer of CIBC, who cited strong growth in CIBCs loan book and positive net interest income as the factors behind the bank’s momentum in the coming year.