Earnings were solid across Canada’s banking giants – but a rising number of impaired loans is a trend to watch
Canada’s top six banks all beat estimates in their fourth-quarter earnings reports, posting positive results even amid continuing uncertainty on the Canada-US trade front.
Toronto-Dominion Bank (TD), Royal Bank of Canada (RBC), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), and National Bank delivered combined profits to the tune of over $16 billion in Q4 – higher than the same period last year.
That marked a solid quarter and year for the Big Six, Carl De Souza (pictured top), senior vice president and sector lead, North American financial institution ratings at Morningstar DBRS, told Canadian Mortgage Professional.
Still, overall performance on the Canadian banking side was “somewhat modest,” he said, with the Q4 results driven largely by strong earnings in capital markets.
“All in all, a good year for them – and I think that’s attributable to the diversification of their business models and their geographic diversification as well,” he said. “Specifically in the quarter, it was capital markets and wealth that drove the results.
Tepid loan growth on the Canadian side wasn’t exactly unexpected, given the economic volatility and stagnant national housing market seen in 2025.
A jump in impaired loans was another noteworthy trend to emerge in the banking giants’ quarterly financials, although De Souza said that was neither surprising nor alarming.
“We’ve communicated that we do expect to see impairments go up in the coming quarters – maybe a bit lumpy here and there,” he said.
The great unknown is what’s in store on the performing side: loans that haven’t soured yet but could potentially decline in the months ahead.
Rise in impaired loans ‘not exactly a shocker’
There’s been no indication between Q3 and Q4 that a Canada-US trade deal is ahead, but there’s also been no notable tariff escalation by the US – leaving the outlook largely unchanged from the banks’ last quarterly earnings.
And while impaired loans rose, they didn’t spike alarmingly, increasing by about $230 million across the Big Six. That jump was largely expected because of the continuing credit quality deterioration in Canadian banking, especially with mortgages coming off extremely low rates now renewing at higher prices.
Unemployment has also been on the rise in 2025, although it ticked down unexpectedly to 6.5% in November – its lowest level since the middle of 2024, StatCan said on Friday.
However, impaired loans are still expected to post a slight increase next year. “It’s not exactly a shocker that impairments are going up in Canada,” De Souza said. “And I think it’s reasonable, the quarter-over-quarter increase. It wasn’t something where you did a double take.
“But I would say we expect further deterioration, at least in the short- to medium-term heading in fiscal 2026. And that’s what the provisions showed this quarter: an uptick, but nothing alarming or anything like that.”
Aled ab Iorwerth of CMHC and TD economist Maria Solovieva say Canada’s mortgage renewal wave will bring challenges but not a crisis. https://t.co/42inN8TFhS
— Canadian Mortgage Professional Magazine (@CMPmagazine) December 3, 2025
Tariff turmoil still in the spotlight in 2026
The outlook for both performing and impaired loans, though, could worsen significantly if a macroeconomic trend emerges to trigger a spike in unemployment – such as a big negative development in trade relations between Canada and the US.
That might be a tariff escalation or complications with CUSMA (Canada-US-Mexico Agreement) negotiations such as a decision by the US to walk away from talks.
But that remains a big “if” for now. “All those things are a little presumptuous,” De Souza said. “We don’t know where any of those things are going to go. So all else being equal, we expect this trend to continue at least for the next couple of quarters where you’ll continue to see upticks in those impaired provisions.
“And as long as nothing happens to the negative side on the tariff-related macroeconomic uncertainty and the Canada-US tensions, performing [losses] will stay roughly in line. Then hopefully these things settle down and we get some certainty in the market, and what we expect to see is a moderation in some of the provisions in the second half of next year.”
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