Canada's major banks had anticipated reducing provisions for credit losses in the second half of 2026, but analysts now believe this is increasingly unlikely given deteriorating economic conditions. According to reports from Financial Post, Matthew Lee, an analyst at Canaccord Genuity Corp., stated that PCL improvements now feel like a fiscal year 2027 story. The challenging macroeconomic environment has led most analysts covering the Big Six to expect the banks to push back their guidance on provisions for credit losses when they report second-quarter earnings next week.
While analysts don't expect material degradation in PCLs, they warn of negative market reaction to more conservative management commentary. As reported by Financial Post, Jefferies Inc. analyst John Aiken noted that any shift towards a more conservative commentary, after previously arguing for a better second half, will likely be viewed negatively. The market will be closely listening to management's commentary on upcoming earnings calls, with any shift away from optimistic second-half expectations potentially impacting bank valuations.
Multiple factors have contributed to the deteriorating credit environment, according to CIBC Capital Markets analyst Paul Holden. As reported by Financial Post, these include higher inflation, rising unemployment, increasing mortgage delinquency rates, higher borrowing costs and a lack of progress on trade negotiations with the United States. Holden, who had previously expected PCLs to peak in the second quarter, now takes a more cautious view on credit conditions.
The credit stress is reflected in rising insolvency rates, with about 37,000 people filing for insolvency in the first three months of this year, according to the Office of the Superintendent of Bankruptcy. As reported by Financial Post, this represents the highest level since 2009, when North America was reeling from a recession. Mario Mendonca, an analyst at TD Securities Inc., acknowledged that while this increase is well-known, the banks' current high valuations are supported by strong fundamentals.
Despite credit pressures, analysts expect the banks to maintain strong performance, primarily driven by capital markets and wealth management results. According to Financial Post, Jefferies analyst John Aiken expects the second quarter to reflect a similar profile to the first quarter: slowing but still positive loan growth with elevated but not critical credit losses. Lee projects bank earnings per share to increase by 18.7% compared to a year ago, but decline by 7% from the first quarter. Bank of Montreal, Bank of Nova Scotia and National Bank of Canada will report results on May 27, while CIBC, Toronto-Dominion Bank and Royal Bank of Canada will report on May 28.
