'It's gonna get worse': Banks are bracing for bad loans, but the trouble is only getting started
Loan-loss provisions piled up at Canada’s big banks in their most recent quarter. Now the question is, ‘How high can they go?’
While the Big Six recorded a total of $3.54 billion in provisions for credit losses (PCLs) for the three-month period ended July 31 — more than double the $1.54 billion registered in the same quarter in 2022 — analysts expect the figure to continue to climb as the weight of higher borrowing costs settles in.
“We’re gonna see higher PCLs on impaired loans only because we’re just at the starting line of pressure on companies and households. Right now, we wait and see how the economy unfolds,” Barclays senior analyst John Aiken said.
PCLs are funds set aside by banks to cover potential losses on loans. The reserve protects them should negative economic events, such as a potential recession arise, leading to more defaults.
PCLs are a key credit metric for measuring the health of a bank’s loan book, and by extension the ability of households and businesses to pay their debts. Each quarter, the banks must assess not only the potential losses stemming from borrowers who have fallen behind on payments, but also take into account any changes to their economic forecasts, and whether those changes are more likely to push borrowers into default in the future. If the economic picture becomes brighter, banks can release the reserves.
Aiken said that with households and commercial balance sheets flush with cash, PCLs had been running at “historically low levels.” But as interest rates have risen amid persistent inflation, borrowers have started to burn through those reserves.
“We’re starting to see some stress on the system and ergo … we’re seeing the uptick in provision for credit losses,” he said.
The average
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