Impaired loans surpass pandemic peaks at CIBC, Scotiabank

At five Canadian banks, troubled loans up 40% year-on-year

Two Canadian banks held more impaired loans at the end of July than they have done at any point since the onset of the pandemic, Risk Quantum analysis shows.

Canadian Imperial Bank of Commerce saw its gross impaired loans climb 12.4% to C$2.62 billion ($1.97 billion), overtaking the C$2.58 billion held in Q3 2020.

Scotiabank had the most impaired loans of the five banks analysed, at C$5.49 billion in Q3, up 3.4% from three months prior, and like CIBC its largest since at least 2019.

 

Scotiabank’s amount of impaired loans after allowance for credit losses (ACLs) was C$3.67 billion, the highest since the pandemic. CIBC had C$1.62 billion in impaired loans net of ACLs, its most since Q3 2020.

On aggregate, the five Canadian lenders reported C$17.2 billion in gross impaired loans, up 8.6% quarter-on-quarter and the highest since Q4 2020.

Royal Bank of Canada saw a 13.5% rise to C$3.28 billion, TD Bank a 12.1% rise to C$2.98 billion and Bank of Montreal a 7% rise to C$2.84 billion.

 

What is it?

Gross impaired loans are loans for which it is likely the loanee will not make all the payments they owe. If impaired loans are deemed unrecoverable, they are written off, though part of the value can be recovered in later quarters.

Allowance for credit losses is money set aside to cover potential bad debt.

The latest figures presented in this analysis come from financial results for the three months to July 31, 2023. Due to Canada’s reporting regulation, the three months to end-July correspond to Q3 in the financial year, as opposed to Q2 in the calendar year.

Why it matters

The rise in Scotiabank’s impaired loans was mainly evident in its retail portfolios, the bank noted. More specifically, impaired loans in the residential mortgages segment at the Canadian bank drove the quarterly increase most, rising from C$1.66 billion at end-April to C$1.77 billion at end-July.

CIBC’s latest rise in impairments came primarily from loans to the real estate and construction sector, as well as the financial institutions sector.

With interest rates climbing rapidly in recent quarters, some borrowers will naturally begin to struggle with repayments. The exact impact on each portfolio will depend on how strict the original underwriting policies were at each bank.

One comfort for lenders is that the proportion of impaired loans is still below pandemic-era highs due to growth in overall loan portfolios – at Scotiabank for example the proportion of loans that were impaired in Q3 was 0.7%, 14 basis points less than the 0.84% recorded in Q1 2021.

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Currently, the available data covers more than 120 banks and over 100 risk and capital metrics, but we’ll be adding more throughout the year. The Risk Quantum database can be found here. The full list of data points currently available can be found here.

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