bank results posted this week in the United States suggested that the outlook for credit conditions may be deteriorating, putting pressure on Canadian banks to hold onto their loan-loss provisions. “In our view, banks with the most ex-Canada lending exposure could be under the most pressure to retain performing provisions,” Gabriel Dechaine, who leads the team of analysts at National Bank Financial, wrote in the note, which names Bank of Montreal, Toronto-Dominion Bank and Bank of Nova Scotia. The analysts noted that BMO and TD, with their substantial lending operations in the US, have found themselves in an “interesting position”, since they are also under pressure to generate internal capital as part of planned acquisitions announced recently.
J.P. Morgan, which is often seen as a reflection of US economic conditions, booked higher loan-loss provisions in the first quarter of this year. Citing greater “downside risks”, the investment banking company set aside US$902 million to cover potential loan losses in its earnings report on Wednesday. The firm’s chief executive Jamie Dimon pointed to the geopolitical tensions in Eastern Europe and inflation among forces which are now threatening the economy.
Meanwhile, National Bank analysts do not believe that credit conditions have actually deteriorated, but that the outlook may have instead. Since the first quarter of 2021, the Six Big Banks of Canada have released $6.5 billion of performing allowances for credit losses, which is nearly half the amount set aside in the first year of the COVID-19. “In the current context of geopolitical uncertainty and the increased probability of a recession (or stagflation), we believe banks may be compelled to take a more conservative stance with regard to the pace of performing ACL releases,” Dechaine wrote.
