Amid intensifying economic uncertainty, the Canadian banks’ provisions for credit losses are expected to rise, says DBRS Ltd. in a new report.
The rating agency says credit quality remains strong at the big banks, yet it expects the big banks’ provisions for credit losses to rise in the months ahead thanks to the ongoing global trade tensions, which have boosted economic uncertainty.
DBRS notes that under the prevailing global accounting standard, known as IFRS 9, which was implemented in 2017, “forward-looking economic factors play a key role in estimating expected credit losses.”
So, the rise in economic uncertainty may prompt an increase in expected losses among the banks, even if the prevailing credit environment remains relatively benign.
“DBRS expects credit losses for the large Canadian banks will continue to normalize due to economic uncertainty stemming from recent trade disputes as well as uncertainty on future interest rate movements, which may result in weakening global growth,” says Robert Colangelo, senior vice-president at the rating agency.
“In Canada, trade policy poses a clear downside risk to the economic outlook despite recent data providing some optimism that activity has started to rebound. However, DBRS has not identified any broad-based signs of credit deterioration as labour market conditions remain strong in both Canada and the United States,” he adds.