5 days ago
What is Bay Street signalling about the economy?
Canada's Big Six banks have all released their second-quarter earnings, and the results point to mounting concern about a potential economic downturn.
The combined provisions for credit losses (PCL) – as a percentage of total loans – have reached their highest level since the first quarter of 2010, excluding the temporary spikes seen during the height of the pandemic in the second and third quarters of 2020.
It's worth noting that the presented data prior to 2014 included only the Big Five banks, not National Bank NA-T. Now, with all six major lenders accounted for, the data paint a clear picture: Canadian banks are preparing for a deteriorating credit environment, as economic headwinds threaten borrowers' ability to meet their loan obligations.
While most earnings metrics reflect past performance – specifically the quarter ended April 30, 2025 – the provision for credit losses is forward-looking. It represents the funds banks set aside during the quarter to guard against potential defaults in the near future.
Banks manage credit risk through a reserve called the allowance for credit losses (ACL), a buffer designed to absorb losses from unpaid loans. This reserve decreases when loans are written off and increases when new provisions are added or previously written-off loans are recovered.
In the second quarter of 2025, net write-offs – or realized credit losses – climbed 8.3 per cent year-over-year, to $3.7-billion. The total ACL rose to $36.6-billion, up 16.7 per cent from the same period last year. Most strikingly, total PCL jumped to $6.4-billion, a 46.2-per-cent annual increase and up 21 per cent from the previous quarter.
The ACL has now reached 0.86 per cent of total loans, surpassing the 17.5-year average of 0.74 per cent and marking its highest level in the past 14 years, excluding the period from the second quarter of 2020 to the second quarter of 2021.
However, the sharp rise in PCL is the clearest indication yet of banks' growing concern about Canadians' ability to repay their debts.
As shown in the chart, PCL at 0.15 per cent of total loans is at its highest level in the past 15 years, excluding the two quarters during the peak of the pandemic in 2020. Even accounting for the more forward-looking and conservative IFRS 9 standards, which replaced IAS 39 in 2018, the second-quarter results would still likely represent the highest levels in at least 14 years – even under the previous accounting framework.
PCL also stands well above its 17.5-year average of 0.09 per cent. This uptick may be an early indicator of growing financial stress among Canadian households and businesses.
In short, Bay Street is bracing for economic turbulence. The outlook is clouded by persistent trade tensions with the United States, stagnant productivity and sluggish GDP growth, factors that are prompting cautious forecasts for the Canadian job market.
However, the current trajectory does not yet mirror the severity of the global financial crisis, when, from the fourth quarter of 2008 through the first quarter of 2010, the total PCL of the big banks remained higher than current levels.
Hanif Bayat, PhD, is the CEO and founder of a Canadian personal finance platform.
