Canadian Banks: Preparing for higher PCLs
Report by Veritas Investment Research
Shalabh Garg attempts to quantify the performing loan provisions that Canadian banks might build over the coming quarters. He uses the banks' response to macroeconomic uncertainty in the early days of the pandemic as a reference point for provisioning built through the reclassification of some Stage 1 loans to Stage 2 under IFRS 9 and an increase in the allowances for credit losses ratio for both Stage 1 and 2 loans. Shalabh believes RBC and TD, followed by Scotiabank and CIBC, will likely undertake substantial performing provisions for credit losses over the coming quarters if trade policy uncertainty persists. He does not expect impaired PCLs to spike in the near term, unless economic conditions deteriorate materially and drive the unemployment rate higher. He believes valuations will come under further pressure only when impaired PCLs ramp up.