Varun Kohli June 8, 2023 No Comments

The second-quarter results from Canada’s prominent banks reflect the impact of increased inflation and the central bank’s efforts to curb it, leading to a challenging environment for the financial sector. Four of the Big Five banks fell short of expectations, as they grappled with rising costs, increased provisions for bad loans, and a decline in revenue due to sluggish loan growth. However, CIBC emerged as an exception, outperforming analysts’ predictions. Amidst a slowdown in Canadian mortgage loan growth, attention has shifted to the banks’ U.S. operations following recent high-profile bank failures. Executives from several banks have acknowledged the more difficult economic conditions, and TD Bank Group has warned of tougher times ahead, revising its medium-term earnings growth target. This article explores the latest developments in Canada’s banking sector and their implications.

Disappointing Earnings and Struggles with Rising Costs:

The majority of Canada’s major banks reported earnings that fell short of expectations in the second quarter. This outcome was primarily driven by a surge in provisions for bad loans and the challenge of containing escalating costs. TD Bank Group, for instance, experienced a decrease in profits, with second-quarter earnings reaching $3.35 billion, down from $3.81 billion in the same period last year. To address potential credit losses, TD increased its provisions to $599 million, a significant rise compared to $27 million in the previous year. Similarly, RBC reported a profit of $3.65 billion for the quarter, down from $4.25 billion in the same period last year, largely due to provisions for credit losses amounting to $600 million, compared to a recovery of $342 million in the previous year.

Uncertain Economic Environment and Macroeconomic Deterioration:

Bank executives highlighted the challenging economic conditions, particularly in the U.S., as a significant factor impacting their financial performance. TD Bank Group, in particular, faced obstacles due to the collapse of its proposed $13.4-billion takeover of First Horizon Bank. Additionally, TD acknowledged the deterioration in the macroeconomic environment, leading to a revision of its medium-term earnings growth target. The bank’s CEO, Bharat Masrani, emphasized the unpredictable operating environment as TD adapted to these circumstances.

CIBC Outperforms Expectations:

While most banks faced setbacks, CIBC bucked the trend by reporting better-than-expected results. The bank’s CEO, Victor Dodig, acknowledged operating in a more fluid economic environment. CIBC’s second-quarter profit amounted to $1.69 billion, surpassing last year’s $1.52 billion. Notably, CIBC took early action by increasing provisions for credit losses to $438 million, up from $303 million in the previous year.

Impact of Slowing Loan Growth:

The Canadian mortgage loan growth has significantly slowed, leading to flat results for several banks compared to the previous quarter. This trend has shifted the focus towards the performance of the banks’ U.S. operations, given recent high-profile bank failures. The challenging economic conditions have prompted bank executives to express caution regarding future earnings growth, further highlighting the impact of declining loan growth.


Canada’s economic stability is being threatened by its status as the country with the highest level of household debt among the G7 nations. The Canada Mortgage and Housing Corporation (CMHC) recently warned that rising home prices have led to an inevitable increase in household debt, making the economy susceptible to a global economic crisis. According to Aled ab Iorwerth, Deputy Chief Economist at CMHC, Canada’s household debt has been steadily rising due to soaring home prices, creating a concerning situation. Currently, mortgages account for about three-quarters of the total household debt in Canada. During the 2008 recession, household debt comprised 80 percent of the Canadian economy, and by 2010, it had climbed to 95 percent. More alarmingly, the size of household debt has already surpassed that of the overall economy in 2021. In contrast, the United States experienced a decline in household debt from 100 percent of GDP in 2008 to approximately 75 percent in 2021. While the U.S. witnessed a reduction in household debt, Canada has seen an ongoing increase, highlighting the urgent need to address affordability issues within the housing market. This trend is concerning because high levels of household debt can inflict severe damage during economic downturns, leading to widespread job losses and making it difficult for mortgage holders to meet their obligations. Similar to the situation in the United States in 2007 and 2008, heavily indebted households can quickly exacerbate economic deterioration.

CMHC’s ab Iorwerth has already observed “early warning signs” indicating that a growing number of consumers are encountering financial difficulties. While Canada benefits from a robust institutional framework and prudent financial regulations that currently shield most borrowers from elevated mortgage rates, the nation’s high household debt remains a vulnerability in the event of a severe global economic downturn. To reduce the risk associated with high household debt, the CMHC suggests improving housing affordability in Canada. This can be achieved through measures such as increasing housing supply, renovating existing rental properties, and constructing modern and attractive rental units. By providing viable alternatives to homeownership, Canadians can be dissuaded from taking on excessive debt.

Canada’s major banks have faced hurdles in the second quarter due to heightened inflation, efforts to curb it by the central bank, rising costs, and slower loan growth. While most banks reported earnings below expectations, CIBC emerged as an outlier, delivering better-than-anticipated results. The uncertain economic environment, particularly in the U.S., has added to the difficulties faced by the banks, prompting caution about future earnings growth. As the financial sector navigates these challenges, it will be crucial for banks to adapt and strategically manage provisions for a rainy day.

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