Canada’s banks brace for possible wave of loan defaults. Why that matters

Canada's big six banks all reported this week that they're putting more money aside for possible loan defaults. Here's what to know about the outlook for Canadian credit.

Earnings week for Canada’s biggest banks saw the country’s major lenders move in lockstep ahead of a projected economic downturn, with each putting more money away for a possible rise in credit losses.

Experts say the more expensive cost of borrowing in Canada and the possibility of job losses could catch up to households and push a growing number into default, though some believe the worst of the debt pain is likely at least a year away.

Canada’s big six banks — TD Bank, RBC, BMO, Scotiabank, CIBC and National Bank — all reported earnings for their first fiscal quarters this week, with similar-sounding results. All reported a dip in profits as they put more money aside to handle credit losses.

Digging into the banks’ financial filings finds a worrying economic picture at the heart of these moves.

BMO’s filings show that the jump in credit loss provisions for last quarter “reflected a deteriorating economic outlook,” though it noted continuing improvements in the business environment after the peak of the pandemic offset some of these concerns.

The Montreal-based lender also pointed to a rapid rise in interest rates — the Bank of Canada hiked rates by a cumulative 425 basis points over the past year, with its next decision coming on Wednesday — as putting strain on its customers.

“The high-rate environment could have a direct impact on our customers through higher borrowing (e.g., mortgage rates) and debt servicing costs,” BMO wrote in filings Tuesday.

But just because the banks are preparing for higher credit losses doesn’t mean they’ll come to pass, says Angelo Melino, economics professor at the University of Toronto.