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Preparing for recession, Canada's biggest banks put aside $2.5 billion for loan defaults
Expecting more Canadians will be unable to pay off loans and credit card debt as the country heads into a potential recession, Canada's six largest banks have put aside a combined total of more than $2.4 billion to cover possible losses.
"Unfortunately some people can not repay loans that they have taken out," Laurence Booth, a professor of finance at the University of Toronto's Rotman School of Management, told CTVNews.ca. "This happens regularly but it tends to spike when we go into recession and people lose their major source of income, such as their employment or small business income. "
Known as provisions for credit losses, or PCLs, the $2.49 billion in reserves were outlined in recent first quarter results posted by Canada's six largest banks: the Royal Bank of Canada, TD Bank, Scotiabank, BMO, CIBC and National Bank.
This marks a significant increase from the $373 million the six banks allocated for PCLs a year ago, during the first quarter of 2022. Around the same time in March 2022, the Bank of Canada began its attempt to tame inflation by hiking the interest rates, which climbed from a historic low of 0.25 per cent to 4.5 per cent today 鈥 the highest it's been since 2007.
"Currently with the Bank of Canada pushing up short-term interest rates to slow down the economy, and bring inflation down, the expectation is for a recession in Q2 or Q3 this year," Booth explained. "Consequently, the banks are making provisions for potential losses should a recession occur."
In recent Q1 earnings conference calls, bank executives said high employment and savings should help avert a large increase in payment defaults, which fell during the pandemic. Rather, they widely expected a "normalization" driven by interest rate hikes and inflation, with loans and credit card debt expected to be the most impacted.
"Current underlying conditions, particularly the strong level of employment and consumer savings, are supporting a slower rate of normalization of impaired PCLs than we had expected," National Bank executive vice-president of risk management William Bonnell said during a March 1 earnings call. "The same factors we discussed last year 鈥 inflationary pressures, geopolitical risks, and the direction and timing of interest rate changes 鈥 are still present and all contribute to a less certain outlook."
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