Nestled in the balance sheets of Canada’s biggest banks are fears that the economy is set for a rough patch that could see more Canadians defaulting on their loans.

While some experts say the country’s banks are just “being prudent,” they say that move signals choppy waters ahead for Canadians with outstanding loans as interest rates continue to put pressure on household budgets.

Canada’s five biggest banks — RBC, Scotiabank, CIBC, BMO and TD Bank — moved in lockstep this past week to increase their loan loss provisions as they reported second-quarter earnings. All except for CIBC missed earnings expectations in the period.

Loan loss provisions, or provisions for credit losses, are essentially money that banks set aside in case the loans they’ve given out to clients go sour.

Laurence Booth, finance professor at the University of Toronto’s Rotman School of Management, says banks always try to put aside more money to cover these losses if they think their clients — be they everyday consumers, commercial customers or homeowners with a mortgage — are more likely to default on their loans.

With fears of a recession rumbling for much of the past year, Canada’s banks are building up their reserves in case the economy takes a hit and Canadians or businesses aren’t able to pay down their loans.

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“This is (as) regular as clockwork. Whenever we get a slowdown in the economy, or a forecast of a slowdown …(the banks) increase their provisions,” Booth tells Global News.

Booth notes, as well, that just because banks are raising their provisions doesn’t mean they’ll need them if a pronounced recession doesn’t come to pass.

The last time Canadian banks raised their loan loss provisions by significant magnitudes was at the start of the COVID-19 pandemic, when they feared consumers would be out of work and without steady income for an uncertain period of time.

Gregory Taylor, chief investment officer at Purpose Investments, says banks quickly lowered those provisions again once the federal government stepped in with COVID support programs in the early months of the pandemic.

“Now we’re seeing them reverse that, put them back on and try to be a little bit cautious heading into what could be a volatile period,” Taylor says.

“The banks are being a little prudent, from this point of view.”

Canadian bank loan provisions also extend to lenders’ activities in the U.S. market, Booth notes, where the financial system has faced turmoil in recent months over the collapse of Silicon Valley Bank and other regional players.

While Canada’s large and well-capitalized banks have been well-insulated from the specific vulnerabilities that spurred uncertainty south of the border, Booth says banks such as TD have been pushing more into the U.S. market in recent years and have to adjust their risk profiles accordingly.

“The strength of the Canadian banks has allowed them to move into the U.S. with acquisitions, but that then exposes them to the risks of the U.S. market, which generally has higher provisions for credit losses,” he says.

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TD Bank’s planned $13.4-billion acquisition of U.S. regional bank First Horizon was scuttled earlier this month after regulators denied the necessary approvals for the deal.

While the acquisition’s collapse was a factor in TD’s earnings miss last quarter, the extra capital the bank now has on hand because of the failed deal is helpful given the dour economic outlook, said CEO Bharat Masrani on an earnings call.

“We are going through an uncertain period here from an economic perspective … so to have the level of capital we have, that is a good thing,” he said.

Taylor agrees that it was probably good for TD overall that it didn’t have to pay the original price it offered for First Horizon as regional banks in the U.S. go through a revaluation.

Some analysts have said TD should take the opportunity to pause and rethink its U.S. expansion strategy.

“TD should revisit the idea of whether or not they should be pursuing aggressive growth in United States banking through acquisitions,” Veritas analyst Nigel D’Souza told Reuters this week.

Canada’s banks are battening down the hatches on the loan side of their businesses at the same time as Canadians’ debt levels, particularly mortgage debt, continue to climb.

The Canada Mortgage and Housing Corp. (CMHC) said this past week that the country has the highest household debt in the G7, with the bulk of that held in mortgage loans.

Total residential debt surpassed $2 trillion in January, CMHC said on Thursday, up six per cent year-over-year.

Canada’s economy is heavily reliant on the health of the housing market, which Taylor says means any signs of stress in banks’ mortgage books are “something to monitor” if they start to appear.

“It’s probably too soon to say whether it’s going to be a really big issue or not, but it’s definitely one of the reasons the banks were increasing their provisions going into the quarter,” he says.

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Booth notes that mortgages are one of the last things Canadians’ tend to default on as they’re willing to make most sacrifices before losing their home and the equity they’ve built up in it, which helps keep rates of mortgage delinquency relatively low in Canada.

From a macro perspective, both Booth and Taylor say there’s not much cause for concern for the banks themselves as they’ve put aside more money for loans going bad.

But on an individual level, Canadians should take the higher loan loss provisions as a sign that they might need to tighten their belts in the months to come.

“While Canadians don’t have to worry about their banks, they do have to worry about whether they can afford higher interest costs and that means that they have to cut back other spending,” Booth says.

Messaging from the Bank of Canada and U.S. Federal Reserve in recent weeks that interest rates might need to remain higher for longer — or even rise further — means that Canadians should plan for an elevated interest rate environment, Taylor says.

One way to do that, he says, is by keeping less money in chequing accounts and putting it in investment vehicles that are showing higher rates of return. Taylor says that’s a solid approach for anyone worried about their finances through an expected period of “turbulence.”

“For Canadian consumers, it’s something that everybody should be looking at to make sure you’re getting the most for your money with higher interest earned on your cash.”

— with files from The Canadian Press, Reuters

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Nova Scotia RCMP have ordered residents of subdivisions in the Upper Tantallon/Hammonds Plains area to leave their homes in the face of a fast-moving wildfire.

The Westwood Hills subdivision in Upper Tantallon, N.S., was the first to begin an evacuation as the fire consumed at least 10 homes.

Halifax Regional Fire & Emergency District Chief Rob Hebb said dozens of crews were at the site attempting to control the fire. One helicopter was at the scene and another was on the way.

CBC Radio in Nova Scotia and New Brunswick will carry a live call-in special on the fire starting at 8 p.m. AT, which can be listened to on CBC Radio.

Nova Scotia RCMP sent a tweet prior to an emergency alert being issued telling residents of the area to evacuate their homes immediately via Winslow Drive to Hammonds Plains Road. 

Fast-moving wildfire burning in Nova Scotia

1 hour ago

Duration 0:41

Crews in Nova Scotia are working to contain a wildfire that has forced the evacuations of two subdivisions and sent thick plumes of smoke into the sky, leading to an air quality alert for the Halifax area.

RCMP corrected an earlier tweet that indicated evacuation was via Windsor Drive.

Subsequent emergency alerts at 6:11 p.m. and 7:41 p.m. said the evacuation order was extended to residents of the Highland Park subdivision in nearby Yankeetown, Haliburton Hills, Glen Arbour, Pockwock Road, White Hills subdivision and Lucasville Road to Sackville Drive.

Residents were told to take their pets with them.

People are being asked to stay away from the area to allow the evacuations to take place.

An emergency alert sent earlier said a comfort centre was open at the Black Point community centre.

Area resident Cynthia McKenzie said she left her home with her family and pets. She said they are safe and sheltering in a pet store in the area.

She said she was cooking dinner when her husband said they had to leave immediately.

“It just happened so fast,” she said. “I grabbed my animals as quick as I could and my photos and albums as best I could and got in the truck and headed out.” 

She said the smoke and flames were so bad that they had to turn around and take another route to get out of the subdivision. 

“You couldn’t see your hand in front of you,” she said.

Shawn Beaulieu, another resident of the area, said he and his son were out shopping and were told to turn around when they tried to return to the subdivision where his wife was.

He said he and his son are taking temporary shelter at a restaurant in Upper Tantallon that opened its doors to evacuees.

“It’s frustrating, but it’s better to be alive,” he said. The three were reunited later in the day.

Taylor Martin, who lives about a seven-minute drive from the fire said she and her partner, Kirk Jessome, were preparing for a possible evacuation order.

“We’re getting things together,” she said. “Packing up necessities, getting the crate for our cat ready, getting all our important documents ready. Making sure everything is set to go if we have to leave.”

She said she is lucky that she has family who will make room for them.

He said that with the fire spreading, people are outside the subdivision and waiting for what is next. The area is packed with people and he said roads are jammed. 

Environment Canada issued an air quality alert for Halifax Metro and Halifax County West shortly after 6 p.m. Sunday. It said smoke from the fire in Upper Tantallon has reduced visibility and air quality in the area downwind of the fire. 

It said people respond differently to smoke and mild irritation and discomfort are common.

The alert said people should take a break from the smoke at a community location with cool, clean air.

CBC meteorologist Ryan Snoddon said firefighters have a number of challenges.

“Halifax firefighters are not only battling the fire, they are also battling the wind,” he said. “Gusty west/southwest winds are fanning the flames right now.

“Winds shift to northerly this evening, but unfortunately, will remain breezy through the day on Monday. Winds look set to become lighter Monday night and Tuesday.”

Snoddon said there was a chance of isolated showers later Sunday, but they wouldn’t be of much help to the firefighters. He said there isn’t another significant chance of rain until Friday.

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Toronto

A man has died after a vehicle and a motorcycle collided in Scarborough on Sunday, Toronto police and paramedics say.

Officers called to Greenholm Crescent and Lawrence Avenue East just after 1:30 p.m.

A man has died after a vehicle and a motorcycle collided in Scarborough on Sunday, Toronto police and paramedics say.

Officers were called to Greenholm Crescent and Lawrence Avenue East just after 1:30 p.m.

Paramedics say they transported a man with life-threatening injuries to a trauma centre where he was pronounced dead.

The intersection has been closed and police say motorists should use alternate routes.

COLLISION: (UPDATE)<br>Greenholm Crct &amp; Lawrence Ave E<br>1:32pm<br>- the victim has been pronounced deceased <br>- the intersection remains closed <br>- use alternate routes <a href=”https://twitter.com/hashtag/GO1202915?src=hash&amp;ref_src=twsrc%5Etfw”>#GO1202915</a><br>^se

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