Canada's largest banks had anticipated reducing the amount set aside for potentially bad loans in the second half of 2026, but analysts now consider this increasingly improbable given the deteriorating economic outlook.
Delayed Improvement in Credit Provisions
Most analysts covering the Big Six banks expect them to postpone their guidance on provisions for credit losses (PCLs) when they report second-quarter earnings next week. Matthew Lee, an analyst at Canaccord Genuity Corp., noted in a Wednesday report that PCL improvements now appear to be a story for fiscal year 2027. He stated that a more challenging macroeconomic environment suggests fiscal year 2026 will remain a period of elevated credit levels, with little evidence of improving consumer health.
However, Jefferies Inc. analyst John Aiken indicated that this does not necessarily imply a material deterioration in PCLs, expecting them to remain similar to the first quarter. He emphasized that market participants will closely monitor management commentary during earnings calls. Any shift toward a more conservative tone, after previously signaling a better second half, would likely be viewed negatively.
Broader Economic Impact
The Big Six banks dominate Canada's financial market, making their results a key indicator of the broader economy. This reporting period marks the first since the onset of the war on Iran, which has driven up energy prices and further dampened the economic and credit outlook.
CIBC Capital Markets analyst Paul Holden had previously anticipated PCLs peaking in the second quarter and gradually improving. However, he has revised his view due to higher inflation, rising unemployment, increasing mortgage delinquency rates, higher borrowing costs, and stalled trade negotiations with the United States. In a May 13 note, he stated that higher energy prices, knock-on inflationary effects, and elevated borrowing costs will place incremental pressure on consumer credit.
Rising Insolvencies
The number of Canadians filing for insolvency continues to climb. In the first three months of this year, approximately 37,000 individuals filed for insolvency, the highest level since 2009, when North America was recovering from a recession. TD Securities Inc. analyst Mario Mendonca acknowledged this trend in a May 12 note but pointed out that the banks' current high valuations are supported by strong fundamentals. However, he cautioned that if investors shift their focus to credit risks, bank valuations could become vulnerable.
Despite these challenges, analysts still expect the Big Six banks to report strong results, primarily driven by capital markets and wealth management operations.
