Royal Bank Builds Reserves Even as Impairments Fall
Performing-loan provisions rose while actual credit losses improved — a combination that says more about the outlook than the quarter.
Royal Bank of Canada increased provisions on performing loans while impaired-loan provisions fell for a second consecutive quarter.
Reading the two lines together
Impaired provisions describe credit that has already deteriorated; performing provisions describe what management expects. Building the latter while the former improves is a forward-looking act, and the bank attributed it to its mortgage renewal cohort rather than to any observed deterioration.
The renewal wall
A large tranche of Canadian fixed-rate mortgages originated at much lower rates reprices over the next six quarters. The reserve build is the bank pricing that in before it appears in arrears.
What would change the read
If impaired provisions turn back up while performing provisions keep rising, the reserve build stops being prudence and starts being a lagging indicator.