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‘Calm before the storm’: Canadian banks expected to start shoring up reserves as consumer credit risks build

Canada’s big banks may need to start shoring up their loan-loss provisions as the economic cycle turns and they eye growing consumer credit risks, according to a new report from Toronto-based Veritas Investment Research.

“Given cycle highs in household leverage and the fastest pace of interest rate increases in over twenty years, we expect provisions for credit losses (PCLs) in the upcoming cycle to match or potentially exceed PCLs during the global financial crisis (GFC),” Veritas investment analyst Nigel D’Souza wrote in a July 26 note to clients.

D’Souza added that the firm is estimating a PCL ratio of between 0.70 per cent and 0.80 per cent, slightly higher than during the financial crisis in 2008, as Canadian banks have grown more exposed to international assets over the years.

On top of burgeoning household debt and international exposure, another issue…

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