Canada’s Big Six Banks Set Aside Over $10 Billion For Bad Loans, Up Over 300%

Canada’s Big Six banks are preparing for a lot more bad loans. Canadian banks reported Q2 earnings this week. A common theme in all reports was a sharp increase in provisions for credit losses (PCLs). These have been rising over the past year, as delinquencies begin normalizing from lows. This trend has accelerated quickly however, with total PCLs more than tripling.

Provisions for Credit Losses

Provisions for credit losses (PCL) are bad loan expectations, and found in financial reports. It’s the dollar value deducted from income, equal to the amount anticipated in loan losses. In other words, they are debts considered unrecoverable. When PCLs rise, a firm is expecting more loans likely to default or become unrecoverable. If PCLs fall, they’re seeing lower risk, and fewer loans likely to default or become unrecoverable. Simple concept, but usually only accounting folks and analysts know this indicator exists.

Big Six Banks Set Aside Over $10 Billion For Bad Loans

Canada’s Big Six banks are setting aside a lot more cash for bad loans these days. The sum of total PCLs in earnings reports reached $10.92 billion, up from $2.45 billion last year. These levels have inched higher over the past few years. Prior to the pandemic, insolvencies were climbing to Great Recession levels. However, a 346.42% increase across the board is somewhat surprising. Especially considering how many deferrals and relief programs they’ve been rolling out.

Canadian Provisions For Credit Losses (PCLs)

The PCLs at the “Big Six” banks for 2020 vs 2019, in billions of Canadian dollars.

Source: Bank Filings, Better Dwelling.

All of the Big Six saw a big increase to their PCLs, but some banks increased much more than others. RBC made the biggest jump with PCLs reaching $2.83 billion, up 564% from last year. BMO follows with PCLs hitting $1.11 billion, up 530%. To contrast, Scotiabank reached $1.85 billion, but it’s only up 111% from last year. It’s still a lot of cash set aside relative to peers, but not as big of a jump.

Canadian Provisions For Credit Losses (PCLs) Change

The percentage change for PCLs at Canada’s Big Six banks.

Source: Bank Filings, Better Dwelling.

Canadian banks have been setting aside more cash for losses over the past couple of years, so that’s not new. The speed at which PCLs have been growing is the important note. Banks have been expecting credit delinquencies to rise since last year, coming off of record lows. Post pandemic, credit risk firms are now saying a more “severe” scenario is playing out. Credit delinquencies are predicted to at least double over the next few months. The takeaway is your bank’s fine, and prepared for increased delinquencies. The bad news is your bank is expecting a lot of people won’t be able to pay their bills.

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  • LT 2 years ago

    Banks will never fail. It’s just an issue of how much tax dollars they’ll get from Canadians.

    • Joseph 2 years ago

      Isn’t this what our neighbours to the south were saying before things imploded in 2007?

      I agree that it’s tough to comprehend a big 5/6 bank failing, but never is a significant statement.

      I can see a couple of them joining together after all this to make it a big 3/4 bank situation if things really go south.

    • straw walker 2 years ago

      Historically CDN banks were the strongest in the world, but that has changed with the number of regional smaller schedule “1” banks opening..
      I grew up with 6 /or7 Schedule ” 1″ banks , now there is 25, most of which I’ve never heard of.
      A number of them will not make Christmas.

      These smaller banks have taken on sub prime mortgages that many are now in deferral , which means NO income.
      To make maters worse these banks have promoted high rate saving accounts to attract savings accounts.
      These accounts have to be pd. while their mortgages are yielding NO income..
      Not a good outcome..
      As the situation gets more difficult to manage…they will have a run on their bank..

      • Manoj 2 years ago

        “Historically CDN banks were the strongest in the world”

        This belief is somewhat an illusion, this was being preached by the Harper Government during the 2008-2009 crash.

        The fact of the matter is that the Canadian housing market also too a hit but the US Fed gave in excess of $100M in credit swaps to BoC and this money was funnelled thru the banking system to continue lending for real estate purchasing (it was a hidden bailout). So that saved the housing market from falling further.

        The entire G7 and G20 banking system is at risk of collaspe and it is being kept on life support system by non other than the US Fed which has the power to print new $$ to infinity and provide liquidity. They call it the “Fed has their back” It is all about “Too big to fail” mantra we keep hearing. The badly run conglomerates are being kept alive while the good busineses are being let to fail. The receipe of massive unemployment and serfdom.

    • zalzon 2 years ago

      When the OSFI designated 7 Canadian banks as “systemically important” back in 2017, I asked the obvious question ;

      Why are these banks being given too-big-to-fail status on the backs of taxpayers and why are they not being BROKEN UP if they are too-big to-fail.

      They are deliberately being kept in a too-big-to-fail state so they can lean on the taxpayer and socialize the debt in a down turn even while privatizing the profits during the bubble years.

  • Laurel 2 years ago

    Let’s not forget Home Capital Group. From the earnings call, “We’re moving underwriting staff to assist our collections group.”

    If that’s not a warning, I don’t know what is.

    • Trader Jim 2 years ago

      AMEX is doing a similar thing, sales to collections. Interesting issue with them, because their average user credit score is probably on the opposite side of HCG.

  • PB 2 years ago

    It is just not people who wont be able to pay their bills. In my opinion, the big chunk of the PCL is for corporations who wont be able to pay their bills..

  • zalzon 2 years ago

    Correction : Banks set aside 10 billion of taxpayer money.

    The money originated from the Bank of Canada’s purchase of $150 billion of sub prime mortgage junk from the banks at 100 cents on the dollar at the start of the lockdown.

    Essentially a transfer of losses from banks to taxpayers.

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