Loan loss provisions set aside by Canada's big five banks increased 13x times YoY amid concerns over economic slowdown and higher defaults in the commercial real estate industry. Loan loss provisions are allocated by financial institutions to provide cover for potential losses from loans and mitigate the impact of loan defaults. This helps banks maintain sufficient capital reserves and protect their stability and ability to continue lending despite the risks. All the banks pointed to risks in North America's commercial real estate sector as the reason for increasing their credit loss reserves. All the top five banks reported their earnings last week. Combined, the banks disclosed C$3.37B ($2.48B) in credit loss provisions for the first quarter of this year. Almost C$1B more than the previous quarter and 13 times more than the first quarter of last year.
The Bank of Nova Scotia's chief risk officer said in the earnings call that the higher provisions are due to an unfavorable macroeconomic outlook. The bank assumed an increased risk of recession and a potentially more challenging credit cycle. The Royal Bank of Canada doubled its provisions for CRE losses from pre-pandemic levels, while the Toronto-Dominion Bank increased theirs 2.5 times from before the pandemic. However, the banks were optimistic about their mortgage and personal loan portfolios. Recently the CMHC revealed Canada has the highest debt level among all G7 countries. The only bank to exceed analysts' profit expectations was the Canadian Imperial Bank of Commerce. All the other four banks missed expectations. According to the Financial Times, the Canadian banks performed worse than the large banks in the U.S. TD Bank recently called off its acquisition of First Horizon due to uncertainty about when they would receive regulatory approval. Experts are concerned about the 50% office occupancy rate in all major cities because of the banks' commercial property loan exposure. Around 10% of their lending portfolio is tied to commercial real estate. A National Bank Financial analyst, Gabriel Dechaine, said the portfolio had grown faster than the overall wholesale portfolio over the past seven years. Office loans, on average, represent 12% of commercial real estate loans of the big banks. He added that Canadian banks' exposure to poor commercial real estate loans had not increased remarkably. According to his estimate, the Bank of Montreal, TD Bank, and National Bank have around 10% of their assets exposed to office space, while Royal Bank of Canada has about 20%. |
