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Globe and Mail
7 days ago
- Business
- Globe and Mail
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.
Reuters
21-05-2025
- Business
- Reuters
Canadian banks brace for trade uncertainty with more loan loss provisions in second quarter
TORONTO, May 21 (Reuters) - Canada's big banks are expected to have shored up loan loss reserves in the second quarter, with four of the big six banks putting aside over C$1 billion to shield against potential loan defaults in a time of trade uncertainty. Large loan loss provisions take away from earning potential, a problem the banks have faced in the past few years as a high interest rate environment made it increasingly more difficult for consumers and businesses to repay loans and borrow money. Two of the big six Canadian banks - Bank of Montreal ( opens new tab and TD Bank ( opens new tab - are expected to show a fall in profit while for the other four banks earnings are expected to grow 7.9% on average, according to Reuters calculations. A series of rate cuts by the central bank had left investors hopeful of a better lending environment, but U.S. President Donald Trump's tariff policies have shocked financial markets and sent a wave of uncertainty through the global economy. "Q2 was a particularly tumultuous quarter as changing messages, and policy, from the U.S. administration on tariffs and trade have made forecasting especially challenging," CIBC analyst Paul Holden wrote. Themes for the quarter would be higher provisions, slow loan growth and lower investment banking activity, Holden said. Bay Street analysts expect allowances on regularly repaid loans to increase dramatically at the banks, when they report from May 22 to 29, reflecting the deterioration in the economic outlook from three months ago. Provision for credit losses, a keenly watched metric that indicates the extent of souring loans, is expected to have grown between 14.5% and 79% at the big six Canadian banks in the second quarter ended April 30, according to LSEG data. To be sure, the reserve builds are still lower in magnitude than during the COVID-19 pandemic, analysts said. BMO is expected to show a 49% jump in provisions and report a 7.6% fall in earnings, according to analysts polled by LSEG. BMO is also expected to see some impact due to its large exposure to commercial lending as businesses pull back on expenses. The only other bank expected to report a fall in profit is TD Bank, which has said it is making progress on its anti-money laundering remediation. Credit loss provisions at the bank are also expected to grow 22%. Royal Bank of Canada ( opens new tab, the country's largest lender, is likely to show the biggest rise in net income of 11% as it benefits from its scale and the absorption of HSBC Canada. The capital markets business has been a boon for the banks at a time when personal and commercial banking segments faced challenges as it is largely fee-driven, keeping margins elevated. Investment banking activity is expected to remain muted as companies navigate the uncertainty. Market volatility helped drive trading volumes in both the Canadian and U.S. banks' first-quarter results and the trend is expected to continue in the second quarter. "As we saw with U.S. bank results, trading can overwhelm weaker results elsewhere," Holden said.
