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Canadian banks are setting aside around $ 4 billion in loan provisions, a trend that has been accelerating and one that should alarm the Bank of Canada that its monetary policy is choking the economy. Loan loss provisions have been growing steadily over the past year and with each passing quarter, the Canadian banks have generally increased their reserves for future losses. The most recent spade of reports has confirmed that this trend is fully intact. Earnings for 2024Q1 reflect a very cautious outlook and considerable uncertainty about just how deep and long current interest rates will prevail and, hence, how sharp will be the downturn. Scotiabank, for example, one of the largest Canadian banks, has increased its credit loss provisions to C$ 1.01 billion, an increase of some C$378 million from a year ago.

There is an important distinction to be made when considering these provisions. At one level, the banks, automatically, exercise a certain degree of caution. Usually, the caution is somewhat overstated and some of the provisions are then re-instated in future profits in subsequent quarters. However, observers are now looking at these provisions differently, as the provisions for impaired loans continue to rise. This impairment reflects a deterioration in credit quality and, more importantly, that the banks can no longer anticipate full repayment of the outstanding debt. The provisions will not be available to be reinstated in future profits. Estimates put those impaired losses about 25% above analysts’ expectations. The impaired losses are spread out within the personal and commercial banking divisions. Bankers are now receiving more notices of bankruptcy proceedings, of which the banks are one of many creditors seeking satisfaction.

Analysts’ calls stress the need for rate cuts to stem the losses and restore credit growth. The analysts are really talking to the Bank of Canada, pleading that without rate cuts, starting immediately, more of the loan losses provisions will move into the category of impaired loans. Even if the Bank rate were start to drop, the lag times that prevailed in the past, suggest that it will be at least two or three quarters before rate cuts have a positive effect. Is the Bank listening?

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