Big Six earnings: What do credit loss provisions say about the economy?

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Carl De Souza (pictured top), senior vice president and head of Canadian banking at DBRS Morningstar, told Canadian Mortgage Professional the higher credit loss provisions, which are expected to continue throughout the year, reflected both macroeconomic uncertainty and the current high-interest-rate environment.

“Interest rates have rapidly increased, so highly leveraged Canadian consumers are more susceptible in general to interest rate increases in Canada, and we’re starting to see continued credit normalization from unsustainably low levels throughout the pandemic – particularly in the unsecured portfolios such as credit cards,” he said.

“So when you take a look at that – the higher interest rates, higher debt servicing costs in combination with the uncertainty in the macro environment, what you saw was the impact of inflation, adding in the higher interest rates [and] increasing likelihood of a downturn or recession. The provisions for credit losses are ramping up, and there was a big jump in the Q2 results.”

Is that a worrisome trend? While banks setting aside additional funds for possible losses might indicate turbulence down the line, De Souza said it also showed prudence on their part – and noted that these were forward projections, rather than concrete losses.

“The fact that they’re ramping up isn’t that unexpected. They ramped them up quite a bit in Q2, and their first-half numbers are quite a bit higher than prior year [when] there were very low provisions for credit losses,” he said.

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