📈Rising ACLs (Allowance for Credit Losses) in Canadian Banks: The Good, the Bad, and the Ugly
ACLs are reserves that banks set aside to cover potential loan defaults, reflecting their estimates of future credit risk. The ACL amount is adjusted each quarter by adding PCL and subtracting net loan write-offs.
✅The Good:
Banks are setting aside substantial funds for the challenging months ahead, indicating that they are well-prepared and secure.
⚠️The Bad:
The increase in ACLs suggests that banks are anticipating a significant number of loan write-offs, which may indicate that many Canadians are struggling to make their regular payments.
🔴 The Ugly:
The large ACLs could signal that the toughest financial times are still ahead. The true impact of inflation and rate hikes will become apparent as more Canadians face difficulties repaying their loans.
Notably, all banks except CIBC have reached their 3-year maximum ACL levels, with CIBC close to its maximum.
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