Canadian Banks Hike Nonmortgage Retail Credit Provisioning as High Shelter Costs Put the Squeeze on Consumers

Persistent inflation and elevated interest rates are starting to take their toll on Canadian consumers, with delinquencies and insolvencies rising in recent quarters to near or above pre-pandemic levels. We believe the higher-for-longer interest rate environment will result in further asset quality deterioration as borrowers continue to get squeezed, particularly those with mortgages that have not yet repriced at materially higher interest rates.

Key highlights include the following:

-- Climbing mortgage and rent payments are placing significant pressure on Canadian consumers.

-- Credit balances and delinquency levels for nonmortgage retail products are on the rise as consumers prioritize shelter costs.

-- Canada's largest banks have been increasing PCLs for retail loans, which drive an outsized proportion of total provisioning.

“Banks and credit unions, which together underwrite over 80% of nonmortgage retail lending in Canada, remain exposed to financially stretched borrowers,” said Josh Veenkamp, Assistant Vice President, North American Financial Institution Ratings. “We expect nonmortgage PCLs to continue upward in F2024; however, the quantum of realized loan losses will largely be determined by unemployment levels, which have been steady in recent months after increasing for much of last year. Overall, we view the banks' increased provisioning as prudent, and they remain well positioned to weather the current adverse operating environment.”