If and when large, pandemic-driven credit losses materialize, the Canadian banks will be ready, suggests a new report from Moody’s Investors Service.
The rating agency reported that the Big Six banks collectively almost doubled their loan-loss provisions in 2020 — in preparation for a wave of anticipated defaults, and particularly as government support programs and lender deferral arrangements wind down.
However, those losses have yet to appear.
“Despite the sharp spike in unemployment in 2020, consumer delinquencies remain low,” the report said.
The sharp increase in banks’ credit loss provisioning partly reflects recent changes in accounting standards, the rating agency said.
“Banks no longer wait for a loss event to recognize credit losses and, in addition to using historical information to estimate losses, [banks] now also use management judgement as well as reasonable and supportable forward-looking macroeconomic scenarios,” explained David Beattie, senior vice president at Moody’s, in a release.
Moody’s also reported that the banks have reduced balance sheet risk and exposure to non-mortgage consumer loans since the financial crisis in 2007-2008.
“As a result of the banks de-risking and governmental support programs, net charge-offs to date are well below previous peaks and will stay lower than in 2008-2009 period,” Moody’s said.