Canada's Big Six Banks Brace for Increased Loan Loss Provisions Amid Rising Insolvencies

Canada's major banks are expected to allocate C$4.5 billion in loan loss provisions in the third quarter, a 27% rise from last year, due to increasing insolvencies and delinquencies. Analysts predict sluggish loan growth, rising credit costs, and a potential recession, with TD Bank and Bank of Montreal facing specific challenges.

Canada's big six banks are anticipated to set aside C$4.5 billion in loan loss provisions for the third quarter, analysts forecasted, marking a rise of nearly 27% from the previous year. This surge comes as insolvencies increase and lenders prepare for rising credit card and other delinquencies in a challenging economic landscape.

These banks, which dominate a substantial portion of Canada's banking market, could be impacted by higher borrowing costs, slowing employment, and the potential threat of a recession. BofA Securities analyst Ebrahim Poonawala noted that the third-quarter results are likely to mirror the struggles of the Canadian economy, with sluggish loan growth and creeping credit costs expected.

While the TSX banking index has seen an 8.3% growth this year, it trails behind the broader TSX index's 10% gain. The benefits of two Bank of Canada rate cuts may not fully materialize in the third quarter, but upcoming mortgage renewals and further rate cuts could alleviate some credit pressures later in the year. Jefferies analyst John Aiken expressed concerns about the near-term outlook, emphasizing the need for stronger-than-expected earnings to support the banks.

TD Bank will be closely watched as it reports its third-quarter results, especially regarding the U.S. Department of Justice's investigation into its anti-money laundering practices. With the halted acquisition of First Horizon, TD plans to focus on organic growth in the U.S. despite the probe.

Bank of Montreal is also likely to show increased loan loss provisions due to a potential loss linked to a loan to U.S. solar company SunPower. National Bank analyst Gabriel Dechaine indicated that the shadow over its credit performance might persist until post-November U.S. elections and a potential Fed rate cut cycle begins, advising patience in the meantime.

According to LSEG data, five of the six banks are expected to see loan loss provisions rise between 28.4% and 45%, with CIBC as the exception due to a forecasted reversal in its loan loss provision.

(With inputs from agencies.)