Canada's banking giants are charting a cautious path forward in a stormy economy
The biggest banks in Canada are continuing to stash away rainy-day funds amid a darkening economic environment, with rising loan-loss provisions unsurprisingly a huge factor in each of the Big Six’s second-quarter earnings announcements.
High allowances for credit losses on both performing loans – those currently being paid according to their terms – and impaired loans, those which have already shown evidence of credit deterioration, cut into reported net income among Canada’s banking giants in Q2.
TD set aside $1.34 billion in provisions for credit losses (PCLs) in the second quarter, while Scotiabank’s $1.4 billion allocation, RBC’s $1.42 billion provisions, and BMO’s $1.05 billion were higher than analysts had anticipated.
The other two members of the Big Six put aside less for souring loans than expected: $545 million for National Bank, and $605 million for CIBC.
That cautious approach might see major banking institutions tighten their lending criteria further, even if economic storm clouds and ongoing trade tensions with the US are unlikely to result in a major overhaul of lending policies.
“The banks are generally through-the-cycle lenders. They don’t like to flipflop all over the place,” Carl De Souza (pictured top), senior vice president and sector lead, North American financial institution ratings at Morningstar DBRS, told Canadian Mortgage Professional. “However, when there’s a lot of uncertainty in the market and things like that, they’ll tighten certain things.
“They’re not necessarily transforming their lending criteria, but what they’re doing is they’re tightening their lending box. And it varies between the lenders as to how they’re doing it.”
Some are lowering their total debt service and gross debt service ratios on mortgages to borrowers employed in certain sectors, such as Bank of Montreal (BMO) which in March revised policies for mortgagors working in the steel and aluminum industries.
Bank of Montreal (BMO) posted better second-quarter earnings than markets had expected, with a solid uptick in net interest income helping offset a ramping-up of reserves for potential credit losses in a turbulent economic climate. https://t.co/Y0MsJCy1g7
— Canadian Mortgage Professional Magazine (@CMPmagazine) May 28, 2025
Others are adjusting credit card policies and moving things to watchlist – heightened surveillance on accounts – earlier on the commercial corporate side.
“There’s many different types of actions that they’re taking, some proactive and then obviously some tweaking their lending criteria,” De Souza said, “not necessarily changing their lending criteria.”
Will major banks’ loan loss provisions continue to rise?
The current economic environment is fraught, with TD chief economist Beata Caranci forecasting that Canada could shed another 100,000 jobs this year if the trade war rumbles on. But it’s also highly unpredictable, marked by an ever-changing approach to tariffs by the Trump administration and little clarity on when or whether meaningful progress on Canada-US trade talks will emerge.
That also makes it hard to gauge whether the major banks will keep credit loss provisions at their current level for the quarters ahead, De Souza said, or see fit to free up some of those funds if sentiment on the economy brightens.
Canadian Imperial Bank of Commerce delivered a better-than-expected performance in the second quarter, propelled by strength in its capital markets arm and a smaller cushion set aside for potential credit losses than analysts had anticipated.https://t.co/msxr83xA4a
— Canadian Mortgage Professional Magazine (@CMPmagazine) May 29, 2025
Those lenders will carefully evaluate every quarter how the situation on tariffs evolves, although there’s certainly a chance of provisions falling by the next quarter.
“[RBC chief executive officer] Dave McKay even pointed to the fact that they’ve taken a lot of performing provisions,” De Souza said. “If they’re wrong on those judgement calls, they’ll release those provisions at the appropriate time and then that’ll be a boost to net income.
“At this point in time, I think it’s a prudent thing for them to take those performing provisions. They do take hits to their net income now, but these are not losses. They’re provisions in anticipation of future losses. Those may not materialize, they may materialize. But it’s a little hard to predict because nobody really knows what Trump is thinking, and so it’s hard to forecast what will happen on the trade front.”
Banks show encouraging signs on impaired side – but ‘not out of the woods yet’
On the impaired side, banks are – encouragingly – showing a degree of confidence in their borrowers’ resilience. Impaired provisions remain high but fell on a quarterly basis at each of the Big Six excluding CIBC, which posted a minor uptick.
Lower interest rates over the past year have undoubtedly helped on that front, De Souza said, although a degree of stress remains in Canadian portfolios on unsecured and commercial loans.
“I wouldn’t say that we’re out of the woods on the impaired side, and it’d be nice to see stability going forward,” he said. “But considering unemployment is still uncertain and there’s potential for that to trend higher, that could also impact impaired provisions.
“There are a lot of variables that play into these things. I’d say for the balance of the year, it’s dependent on what happens with the tariffs and the global trade situation because that will impact a lot of critical things that typically translate into credit quality such as unemployment and GDP.
“And as those play out we get more certainty, then we’ll get more clarity. But I think it’s a good sign of the magnitude – the banks ramped up the performing PCLs in Q2 in anticipation of this deterioration going forward.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
