The second-quarter earnings season for Canada’s Big Six banks has sent a clear signal: the country’s largest lenders are preparing for a tougher economic environment. As economic uncertainty mounts—driven by trade tensions, higher interest rates, and a softening outlook—banks are sharply increasing the funds they set aside to cover potential loan defaults. Here’s what you need to know.
Provisions for Credit Losses Surge to 15-Year Highs
One of the most telling metrics from the latest results is the provision for credit losses (PCL)—the amount banks set aside to absorb future loan losses. In Q2 2025, the combined PCLs of the Big Six reached their highest level since 2010, excluding the pandemic spikes in 2020. At 0.15% of total loans, PCLs are well above the 17.5-year average of 0.09%, reflecting growing concern about Canadians’ ability to meet their debt obligations.
This surge is not just a backward-looking adjustment. PCLs are inherently forward-looking, serving as a barometer of banks’ expectations for future defaults. The sharp rise suggests banks are bracing for more borrowers—both households and businesses—to struggle with repayments in the months ahead.
Multi-Year Highs
The allowance for credit losses (ACL), the reserve banks maintain on their balance sheets to absorb actual loan losses, also climbed to $36.6 billion in Q2, up nearly 17% year-over-year. At 0.86% of total loans, the ACL now sits above its long-term average and at its highest level in 14 years outside of the pandemic period.
Net Write-Offs and Realized Losses Climb
Net write-offs—actual loan losses realized—rose 8.3% year-over-year to $3.7 billion. While still manageable, this uptick is another indication of mounting financial stress among borrowers.
Why Are Banks Acting Now?
Several factors are driving this more defensive posture:
• Rising Interest Rates: Higher rates are making it harder for consumers and businesses to service debt, increasing the risk of defaults.
• Trade Uncertainty: Ongoing trade tensions and new tariffs, particularly from the U.S., have clouded the economic outlook and weighed on business confidence and investment.
• Economic Slowdown: Loan growth has slowed, and analysts expect only modest increases in the coming quarters as banks tighten lending standards and brace for a potential recession.
Bank-by-Bank Highlights
• TD, BMO, RBC, and Scotiabank each set aside over $1 billion in PCLs this quarter, reflecting a cautious approach to both performing and impaired loans.
• National Bank and CIBC set aside smaller, but still significant, reserves. Notably, CIBC’s lower-than-expected PCLs helped offset other pressures, while National Bank attributed part of its increase to its acquisition of Canadian Western Bank.
• Loan Growth Flat: Most banks reported flat or modest loan growth, with consumer and business confidence subdued by the uncertain outlook.
What’s Next?
While the banks’ capital positions remain strong and they are well-prepared to absorb higher credit losses, the elevated PCLs are a warning sign. If economic conditions worsen—particularly if tariffs persist or unemployment rises—actual defaults could climb, putting further pressure on earnings and potentially leading to tighter lending conditions for households and businesses.
However, there are also signs of resilience. Most banks beat analyst expectations on earnings, thanks in part to diversified revenue streams and disciplined cost control. If the economic outlook stabilizes, some of these provisions could be released, boosting future profits.
Bottom Line
Canada’s Big Six banks are sending a clear message: they see storm clouds on the horizon and are preparing accordingly. For borrowers, this means credit could become harder to access, and for investors, it’s a reminder to watch credit quality metrics closely in the quarters ahead.
As always, the banks’ actions serve as a leading indicator for the broader Canadian economy. Their heightened caution should not be ignored.