Provision for Credit Losses (PCL)
What You Should Know
- Provision for credit losses (PCL) is an expense that reflects an amount set aside during a specific period of time to cover potential losses from unpaid loans.
- PCL assesses a bank’s financial position and credit risk because it shows an expected amount of loans and accounts receivable that will not be repaid.
- A large PCL (relative to loans) is often viewed as an increase in credit risk, while a relatively low or negative PCL is often associated with a decrease in credit risk.
- PCL is an expense from an income statement that accumulates in the balance sheet under a contra-asset account Allowance for Credit Losses (ACL).
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What Is Provision for Credit Losses (PCL)
The provision for credit losses (PCL) is a recognized expense to account for potential losses from unpaid loans or accounts receivables. It is an accounting expense recorded on the income statement of banks and other financial institutions to account for expected credit losses during the reporting period. PCL reduces the net carrying value of loans or accounts receivables and increases the allowance for credit losses (ACL), a contra-asset account on a balance sheet.
Provision for Credit Losses for the Big 6 Canadian Banks
All Values Are in Millions of CAD$
| Q1 2023 | Q2 2023 | Q1 2025 | Q2 2025 | ||||
|---|---|---|---|---|---|---|---|
| BMO | 99 | 99 | $705 | $906 | $1,523 | $1,011 | $1,054 |
| TD | 99 | 99 | $1,071 | $1,072 | $1,109 | $1,212 | $1,341 |
| Scotia bank | 99 | 99 | $1,007 | $1,052 | $1,030 | $1,162 | $1,398 |
| CIBC | 99 | 99 | $514 | $483 | $419 | $573 | $605 |
| National Bank | 99 | 99 | $138 | $149 | $162 | $254 | $545 |
| RBC | 99 | 99 | $920 | $659 | $840 | $1,050 | $1,424 |
Source: WOWA Data Labs
PCL as % of Total Net Loans and Acceptances for the Big 6 Canadian Banks
| Q1 2024 | Q2 2024 | Q1 2025 | Q2 2025 | |
|---|---|---|---|---|
| RBC | 0.09% | 0.09% | 0.10% | 0.14% |
| TD | 0.11% | 0.12% | 0.13% | 0.14% |
| CIBC | 0.11% | 0.09% | 0.10% | 0.11% |
| National Bank | 0.05% | 0.06% | 0.10% | 0.19% |
| Scotia bank | 99 | 0.13% | 0.15% | 0.18% |
| BMO | 0.10% | 0.11% | 0.15% | 0.16% |
Source: WOWA Data Labs
Understanding How Provision for Credit Losses (PCL) Work
Banks and financial institutions often issue short-term and long-term loans to customers and business partners. These loans are expected to be repaid with interest, but there is always a credit risk that some borrowers will not repay their loans in full.
To provide accurate and truthful information about their financial state, banks, and financial institutions must account for the credit risk in their financial statements. They estimate potential credit losses based on historical data, current economic conditions, and forward-looking information to determine provision for credit losses (PCL) for a given period.
Once the PCL is estimated, it is recorded as an expense on the company’s income statement, which usually reduces its reported income. To reflect the adjustment in the balance sheet, the PCL amount is added to the allowance for credit losses (ACL), a contra-asset account that offsets the gross value of loans or accounts receivable.
Can Provision for Credit Losses Be Negative?
Yes, a negative provision for credit losses means that the financial institution reduced its previous estimates for credit losses. Generally, this indicates that the company expects lower future write-offs or recovery of previously written-off debts. A negative PCL increases the income and decreases ACL.
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Importance of Provision for Credit Losses (PCL)
PCL aims to estimate credit losses based on historical data, current economic conditions, and future market expectations. This is an important metric for the company, the regulators, and the public for different reasons:
- Financial Stability & Risk Management: Financial institutions set aside PCL (Provision for Credit Losses) to maintain adequate levels of ACL (Allowance for Credit Losses) to cover expected future losses in their lending portfolio. This provisioning process is a crucial component of risk management strategy, helping ensure sufficient liquidity and capital reserves to maintain normal operations while preparing for anticipated credit losses.
- Reporting Uniformity & Regulatory Compliance: Financial regulators aim to promote transparent financial information of financial institutions to the public. This should increase confidence in the markets, which leads to increased participation and decreased market manipulation and misrepresentation.
- Investor Confidence: PCL gives investors and the public an understanding of what the company expects to lose due to credit risk. This metric allows large investors and the public to make educated investment decisions and achieve a more optimal portfolio allocation.
Difference Between Provision for Credit Losses And Allowance for Credit Losses
People often confuse the difference between provision for credit losses (PCL) and allowance for credit losses (ACL) because they are related. They both represent credit risk metrics and relate to each other, but they appear in different financial statements. PCL is an expense recorded in an income statement for a certain time period. ACL is a balance sheet contra-asset account that keeps track of the money put aside for credit losses. It would result from subtracting the realized write-offs from the total PCL for all the past reporting periods up to and including present.
Allowance for Credit Losses vs Provision for Credit Losses
| Provision for Credit Losses (PCL) | Allowance for Credit Losses (ACL) | |
|---|---|---|
| Definition | An expense that reflects changes in expected credit loss during a specific time period. | A contra-asset account that keeps track of total historical PCL and is adjusted by the bad debt write-offs. |
| Financial Statement | Income statement | Balance sheet |
| Account Type | Expense | Contra-asset |
| Timing | Estimated for a time period (e.g. Quarter or Annum) | Estimated at a certain point in time (e.g. End of Q4 2024) |
| Impact on Financials | Reduces net income | Reduces net carrying value of loans or accounts receivable |
| Calculation Basis | Estimation based on historical data, current economic conditions, and forward-looking expectations | The aggregate of PCL values adjusted for write-offs and recoveries up to a certain point in time. |
PCL contains information about the company’s sentiment for the ability of its clients to cover their debt obligations.
Provision For Credit Losses vs Write-Offs
PCL (Provision for Credit Losses) and ACL (Allowance for Credit Losses) are closely related, but they represent different things on a financial statement. PCL is thenon-cash expense a bank records on its income statement to build up the ACL. The ACL, in turn, is the balance sheet account that holds the cumulative total of these provisions.
Think of it like this: A bank sets aside a Provision (PCL) each quarter, and that provision is added to its Allowance (ACL) balance, which acts as a reserve to cover future loan losses.
Write-offs, on the other hand, are the realized losses that are directly debited from the ACL account when a loan is deemed uncollectible. In a sense, the ACL is the reserve fund, the PCL is the quarterly contribution to that fund, and a write-off is the withdrawal from that fund to cover an actual loss.
Summary
PCL (Provision for Credit Losses): An income statement expense that increases the ACL.
ACL (Allowance for Credit Losses): A balance sheet reserve for future loan losses.
Write-Offs: Actual losses that are deducted from the ACL.
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