Canada’s Big Six banks opened the year with stronger-than-expected profits, buoyed by gains in personal and commercial banking, wealth management and capital markets. Yet beneath the solid earnings, 90-day delinquency rates for credit cards and mortgages rose year over year and continued to exceed levels at the start of the pandemic in early 2020. 

Back then, households had grace periods and government support to get them through difficult times. Not so much now. The concerning trend reflects the lagged effects of higher interest rates and a challenging jobs market on household finances as overdue and missed payments, or loan defaults, mount. The delinquencies were disclosed in data from CIBC, National Bank, Scotiabank and BMO.

Profit surge: BMO and TD both benefited from their U.S. and wholesale operations, with BMO’s net income rising 16 per cent to $2.49 billion on higher U.S. commercial banking and capital markets earnings, and TD’s profit climbing 45 per cent to $4.04 billion as wholesale banking nearly doubled and its U.S. division strengthened. 

National Bank’s profits jumped 26 per cent to $1.25 billion, with its Canadian personal and commercial banking unit lifted by the acquisition of Canada Western Bank. RBC and CIBC were driven largely by domestic banking and wealth management, with RBC’s profits up 13 per cent to $5.8 billion and CIBC’s rising 43 per cent to $3.1 billion on stronger personal banking and capital markets results.

Late-stage stress: The rise in 90-day delinquencies was a “consistent theme amongst banks this quarter,” RBC analyst Darko Mihelic wrote in a note to clients. Scotiabank’s 90-day credit card delinquencies rose to 1.36 per cent, up from 1.10 per cent a year earlier and above the 1.12 per cent level of the second quarter of 2020. Mortgage arrears also rose to 0.31 per cent, higher than 0.21 per cent figure at the peak of the early pandemic. On the earnings call, chief risk officer Shannon McGinnis said the bank was supporting clients where possible, while acknowledging “there are limitations to what we can do.”

At BMO, credit card delinquencies climbed to 1.44 per cent from 1.29 per cent in the same quarter last year, while residential mortgage delinquencies increased to 0.46 per cent from 0.29 per cent. Mat Mehrotra, head of Canadian personal and business banking at BMO, said on the firm’s earnings call that the bank was seeing “stress at the lower end of the market” in the first quarter describing it as “a broad phenomenon in the country,” though he added the bank sees conditions “stabilizing for the most part.”

CIBC reported total consumer delinquencies of 0.48 per cent, compared to 0.39 per cent a year earlier and 0.36 per cent in the second quarter of 2020. Chief risk officer Frank Guse told analysts this quarter’s figures weren’t a surprise as the economy remains “soft,” adding that credit card arrears tend to be a little higher in the first quarter and that he is “not overly concerned” with current levels.

Timothy Lane, former Bank of Canada deputy governor and senior fellow at the Centre for International Governance Innovation think tank, said the rise in delinquency levels reflects the lagged effects of higher borrowing costs and a struggling labour market. He added that 2020 was a “very different situation”, as government income support and widespread temporary payment relief by financial institutions kept delinquencies down while household savings surged.

Credit card stress, he said, often appears first, as borrowers who rely on higher-interest products generally have fewer alternatives. This, he added, was a potential “canary in a coal mine” for broader strains on household finances. Despite that, Lane cautioned that current delinquency levels remain low by longer-term standards and are “nowhere near” the levels seen in past economic ruts like the 2008 global financial crisis.

A longer-term shift: Strong fee income from wealth management and capital markets helped offset slower loan growth this quarter. Lane said that reflects a longer-term shift in banking, as financial institutions worldwide gravitate toward businesses where scale supports steady fees and trading margins and profits are harder to erode. “Businesses tend to try to find activities where their profits are not going to be competed away quite as quickly,” he said. Still, he said that competition—including from newer digital investment platforms—is changing over time, and how long those divisions continue to carry earnings will depend more on shifts in market structure.

Looking forward: Whether delinquency rates worsen from here will depend largely on the trajectory of unemployment levels, the interest rate cycle, and household borrowing, Lane said. While extreme scenarios around the USMCA negotiations cannot be ruled out, banks appear to be placing less weight on potential tariff-related fallout than they did a year ago—a shift that is reflected in lower provisions for credit losses this quarter, he said. With capital ratios well above regulatory minimums, Lane said the current level of arrears are a long way from being a major problem for the banks.