Canada’s ‘Big Five’ see loan-loss provisions halve in Q4

Canadian lenders had reason for cheer at the end of a financial year marred by the Covid-19 pandemic, as the amount of income they had to set aside to cover loan losses fell 52% in the three months to end-October.

Provisions for credit losses (PCL) across the country’s ‘Big Five’ banks – BMO, RBC, Scotiabank, TD and CIBC – totalled C$3.2 billion ($2.5 billion) for the quarter, compared with C$6.6 billion during Q3 and C$10.1 billion in Q2.

While the figure marks a 13% increase on the Q4 2019 amount, it’s some 31% lower than that set aside in the quarter to end-April, when the pandemic first stormed across North America.


BMO recorded the biggest decrease quarter on quarter, taking C$432 million in provisions, a 59% reduction. TD followed close behind with a 58% drop to C$917 million.

Scotiabank’s Q4 provisions were 48% lower than three months prior, though at over C$1.1 billion they were the highest of the group overall. CIBC posted provisions of C$291 million, down 45%, while RBC’s $398 million represented a drop of 41%.

The slower accrual of impaired loans over the quarter meant the proportion of provisions to total loans returned closer to pre-pandemic levels. PCL averaged 0.46% of total net loans and advances across the banks, bar CIBC, down from 0.96% in Q3 and 0.43% in Q1. CIBC does not disclose PCL as a share of total net loans.

TD’s ratio dropped 68 basis points from Q3 to 0.49%. Scotiabank and BMO posted improvements of 63bp and 51bp, to 0.73% and 0.38%. RBC’s ratio fell 17bp to 0.23%, the lowest of the group.

Who said what

“We're confident, when we look at these numbers, in saying that, while it's been a pretty dramatic credit story in 2020, that story has been written, and we're now done with the [credit loss allowance] build” – Daniel Moore, chief risk officer at Scotiabank.

What is it?

Provisions for credit losses represent a bank’s estimate of potential losses due to credit risk. The amount is deducted from total revenue in the income statement.  

Following the introduction of IFRS 9 accounting standards, the ‘Big Five’ Canadian banks break out PCLs attributable to performing loans – also known as stage one and two assets – and to impaired loans, known as stage three assets. As part of the new accounting standards, banks had to adapt their provisioning for impaired loans to include total losses over the lifetime of the assets, calculated using forward-looking scenarios.

Why it matters

Is the worst over for Canada’s banks? The provision data gives some reason to hope – but the future isn’t all rosy.

BMO and CIBC, for instance, told investors they’re pretty much done with pandemic-related provisions for performing exposures. That’s because stage 1 and 2 provisions are mostly informed by macroeconomic scenarios – and at this point in the pandemic, modellers are confident they’ve baked in all the potential downside.

But these banks also warned that they expect bad loans to keep piling up in the months to come. BMO said its impaired loan-loss ratio for fiscal 2021 could reach as high as 0.45% – up than 2020’s 0.33%. CIBC, meanwhile, expects net credit losses to peak in mid-2021.

Part of the reason for the lag is because struggling borrowers are currently being propped up by government relief measures and emergency loans. Uncertainty persists over how the withdrawal of these measures will affect Canada’s banks and influence their provisions, but it’s likely the financial hangover of the coronavirus crisis extends far beyond the end of the public health emergency.

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View all bank stories

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