Canada’s Big Six Banks Set Aside Over $ 10 Billion For Bad Debt, Up Over 300%

The big six Canadian banks are preparing for a lot more bad debt. Canadian banks posted second quarter earnings this week. A common theme throughout all of the reports was a sharp increase in provisions for credit losses (PCL). These have increased over the past year as defaults begin to normalize from their lows. This trend accelerated rapidly, however, with total PCLs more than tripling.

Provisions for credit losses

Provisions for credit losses (PCL) are expectations for bad loans and can be found in financial reports. This is the dollar value deducted from income, equal to the expected amount of loan losses. In other words, they are debts considered bad. When PCLs increase, a business expects more loans that are likely to default or become bad. If PCLs fall, they see less risk and fewer loans that are likely to default or become uncollectible. Simple concept, but generally only accountants and analysts know of the existence of this indicator.

Big six banks set aside over $ 10 billion for bad debt

The Big Six Canadian Banks are setting aside a lot more money for bad debt these days. The sum of total PCLs in earnings reports reached $ 10.92 billion, up from $ 2.45 billion last year. These levels have increased slightly in recent years. Before the pandemic, insolvencies were climbing to Great Recession levels. However, an increase of 346.42% overall is somewhat surprising. Especially given the number of postponements and relief programs they have put in place.

Canadian provisions for credit losses (PCL)

Bank “Big Six” PCLs for 2020 vs. 2019, in billions of Canadian dollars.

Source: Bank documents, Better Dwelling.

All of the Big Six saw a big increase in their PCLs, but some banks increased much more than others. RBC made the biggest jump with PCLs reaching $ 2.83 billion, up 564% from a year ago. BMO follows with PCLs reaching $ 1.11 billion, up 530%. In contrast, Scotiabank reached $ 1.85 billion, but is only up 111% from last year. That’s still a lot of money set aside compared to its peers, but not such a big jump.

Change in Canadian Bad Debt Allowance (PCL)

The percentage change in PCLs in the six major banks in Canada.

Source: Bank documents, Better Dwelling.

Canadian banks have set aside more money for losses over the past two years, so this is nothing new. The speed at which PCLs have increased is the important note. Banks expect credit defaults to increase since last year, emerging from a record low. After the pandemic, companies at risk of credit are now saying that a more “severe” scenario is playing out. Credit defaults are expected to at least double in the coming months. Take out is your bank fine and prepared for an increase in delinquencies. The bad news is that your bank expects a lot of people to be unable to pay their bills.

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