Canada

Canada’s Big Six Banks Set Aside Over $6 Billion For Credit Losses

Canadian banks are setting aside a lot more cash for bad loans, despite a number of government programs to help households. The “Big Six” reported Q3 financial results, and a common theme was an increase in provisions for credit losses (PCLs) from last year. The amount of cash banks have set aside for bad loans is now almost triple last year’s amount.

Provisions For Credit Losses

Provisions for credit losses (PCLs) are bad loan expectations from firms, and are usually found trawling their reports. They are the dollar value deducted from their income, and set aside for anticipated losses and unrecoverable debt. When PCLs fall, firms are seeing less risk, and fewer unrecoverable debts in their future. When PCLs rise, firms are seeing more risk, and more unrecoverable debts. Incredibly easy to understand concept, but under discussed outside of the financial world.

There is one important thing to remember about loan losses – insolvency and defaults are seasonal in nature. There’s been a lot of quarter-over-quarter comparisons, which are totally awesome and fun to read, but not super useful. Comparing PCLs from the  winter to the spring is like trying to compare winter glove sales. Sure, the numbers might be higher in the winter, but it’s not helpful to compare the two. Instead, looking at the same quarter a year before gives you the best perspective on how the trend is evolving.

Canada’s Big Six Banks Set Aside Over $6 Billion In PCLs

The Big Six Canadian banks are carrying significantly higher PCLs than last year. The total for the quarter was $6.76 billion in Q3 2020, up $4.29 billion from last year. This works out to an increase of 173% compared to the same quarter. It’s down from the previous quarter’s $9.07 billion, but once again – quarter-over-quarter comparisons don’t tell us a lot. The quarterly decline is likely due to the number of payment deferral programs, helping households to delay potential defaults.

Canadian Provisions For Credit Losses (PCLs)

The PCLs at the “Big Six” banks for Q3 2020 vs 2019, in billions of Canadian dollars.

Source: Bank Filings, Better Dwelling.

Naturally, some banks have seen much larger increases over the past year than others. BMO made the biggest increase with PCLs hitting $1.05 billion in Q3 2020, up 243% from last year. TD follows with PCLs at $2.19 billion, up 234% over the same period. The smallest increase of the Big Six is actually the biggest bank – RBC. They had $675 million in PCLs, up 59% from a year before. The increase might seem small in comparison, but these are all really large increases from last year.

Canadian Provisions For Credit Losses (PCLs) Change

The percentage change for PCLs at Canada’s Big Six banks for Q3, compared to last year.

Source: Bank Filings, Better Dwelling.

The massive increases in PCLs may not be over, as lenders approach the end of a number of government programs. There’s a lot of unknowns that could see these numbers climb further, the biggest being the mortgage deferral cliff. As payment deferrals start to expire, and government support eases, it’s unclear how many people can transition to regular payments again.

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12 Comments

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  • James Wilson 1 month ago

    How much of this includes payment deferrals?

    • Ethan Wu 1 month ago

      It doesn’t. Deferrals are considered performing loans with no risk under the special COVID19 rules issued in Canada and the US.

      • RW 1 month ago

        Payment deferrals don’t impact credit scores, AND they’re not considered bad loans? Why don’t people always just go on deferrals when they can’t pay, and sell? Forgive me if this is a stupid question.

        • Mike 4 weeks ago

          Normally one could not take advantage of more than one deferral, or whatever was written in the mortgage contract. The government came to this extended deferral agreement with the banks on behalf of mortgage holders when they realized significant amounts of households were not going to be able to pay.

          • Mike 4 weeks ago

            I copied and pasted this off off ‘Better Dwellings’ second article this same day! (August 31st) your question was so close to being answered and now here it is.

            In March, OSFI began giving banks special capital treatment for deferred loans. This allowed deferral of payments without classifying the account as non-performing. Non-performing loans typically require banks to set aside extra capital, in case the loan goes bad. By avoiding the non-performing classification, banks were able to avoid setting aside extra cash. The program encouraged banks to easily grant deferrals for up to six months.

            Payment Deferral Programs Start Phase Out In September
            Starting tomorrow, OSFI is phasing out this program. Accounts granted a payment deferral from September 1 to September 30 will only receive special treatment for a max of 3 months. This is down from the previous six months from March to August. As of October 1, no new payment deferrals granted will be subject to special treatment. Basically, the program now has a final date.

  • James Wilson 1 month ago

    Pinterest is choosing to pay $89,5 million to get out of their office lease. They think employment isn’t going to be as concentrated in cities in the future.

    https://www.sfgate.com/business/article/Pinterest-terminate-SF-office-lease-88-Bluxome-15525421.php

  • alvi 1 month ago

    Bank stocks rally,looking past these numbers, I wonder what the banks’s own data models tell them about non-performing loans further in the future, beyond current guidance and how far in the future are they required to include in current guidance.

  • Kolf 1 month ago

    Keeping housing prices high is a crime against Canadians, someone needs to be held accountable.

    • Alex 1 month ago

      Well, they need to pretend that Canada has an actual economy to get elected.

  • SH 4 weeks ago

    Why bother setting anything aside? Taxpayers will simply bail them out.

  • The Truth Will Set You Free 4 weeks ago

    This is no where near enough. Unemployment is expected to remain in the mid to high teens once the fallout from what has happened is realized. Right now the government is handing money out hand over fist. This cannot go on indefinitely. When CERB and the new CERB (of 400 a week for 24 weeks) ends then people will see just how bad it is. Taxes will rise with cities like Toronto as an example raising their property taxes and pretty much any tax they have as much as possible all while laying off 10s of thousands due to the shortfall. If you want to see an example of what is coming look at the cities Toronto was compared to when real estate prices were pumped up. These cities are all seeing an exodus as many jobs won’t be around. This will be seen here as well. As I said right now everything that is happening is temporary as the Government is pumping billions in Canada to attempt to slow down what’s coming. Restaurants will close…mom and pop shops…towers will be empty…shops associated with foot traffic and requiring these people to walk by will also shut down…homes that were bought for AIRBNBs will be put up for sale or foreclosed on and anything associated with travel such as hotels will also cease to exist. This negative effects of this pandemic will take 10-15 years to get through. It’s a stark reality when you actually stop to think about it. I suspect that even a few of the Big 6 banks here will close up. Most likely merging with one another to attempt to make it through (as the Bail In provision Trudeau passed in 2018 will mean that the Government will not save them with tax payers dollars…or at least will only save them when they’ve finished taking the money from their customers.

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