With four of the big six banks setting aside more than C$1 billion to protect against possible loan defaults during a period of trade uncertainty, Canada's major banks are anticipated to have strengthened loan loss reserves in the second quarter.
Excessive loan loss provisions reduce earning potential, a concern that banks have encountered recently as a high interest rate environment has made it harder for businesses and consumers to borrow money and repay loans.
Investors had been optimistic about a more favorable lending climate following a string of rate cuts by the central bank, but U.S. President Donald Trump's tariff policies have rocked financial markets and sent a shockwave of uncertainty across the global economy.
When the banks report from May 22 to 29, Bay Street analysts anticipate a sharp increase in allowances on regularly repaid loans, reflecting the worsening economic outlook from three months prior.
According to LSEG statistics, the main six Canadian banks' provision for credit losses—a closely monitored indicator of the size of souring loans—is predicted to have increased by 14.5 percent to 79 percent during the second quarter that ended on April 30.
Analysts noted that the reserve constructions are still less than they were during the COVID-19 pandemic.
Analysts surveyed by LSEG predict that BMO will post a 7.6 percent decline in earnings and a 49 percent increase in provisions. Due to its significant exposure to commercial lending, BMO is also anticipated to have some effects as companies reduce their spending.
TD Bank, which has stated that it is making progress on its anti-money laundering cleanup, is the only other bank that is anticipated to announce a decline in profit. The bank's credit loss provisions are also anticipated to increase by 22 percent.
The largest lender in the nation, Royal Bank of Canada, is anticipated to see the largest increase in net income, rising 11 percent, thanks to its size and the acquisition of HSBC Canada.
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Due to its fee-driven nature, which keeps margins high, the capital markets industry has helped the banks during a period when the personal and business banking sectors were struggling. The first-quarter results of both Canadian and U.S. banks showed trade volumes driven by market volatility, and this pattern is anticipated to continue in the second quarter.