A ratings agency review of Canada's largest lenders shows six straight years of credit normalization, and explains why housing and tariffs now decide what comes next.
Big Six impaired loans have nearly tripled from their 2022 lows, reaching $37.5 billion in the second quarter of 2026, according to a new asset-quality review of Canada’s largest banks published by Morningstar DBRS on September 4, 2026. The ratings agency’s conclusion, however, is deliberately measured: credit conditions have clearly deteriorated, but the deterioration is orderly, the reserves behind it are adequate, and there is “no cause for significant concern at this stage.”
The report matters because it puts a single number on something Canadian households and business owners have been experiencing piecemeal for four years — higher carrying costs, tighter budgets, and lenders that have become steadily more careful. It also identifies the two variables that will decide whether the trend flattens out or keeps climbing: home prices and trade policy.
Where the Big Six Impaired Loans Figure Stands Now
Gross impaired loans across the six banks rose to $37.5 billion in Q2 2026, up from $13.2 billion in the third quarter of 2022. As a share of total lending, impaired loans now sit at 0.85% — and that ratio has increased in every single quarter since late 2022, an unbroken run of nearly four years.
Provisions for credit losses on impaired loans, which represent money the banks have actually set aside against loans already in trouble, followed the same path. They climbed from $1.1 billion in early 2022 to $4.8 billion in early 2025 and have stayed elevated since.
| Measure | Figure | Period |
|---|---|---|
| Gross impaired loans | $37.5 billion | Q2 2026 |
| Gross impaired loans | $13.2 billion | Q3 2022 |
| Impaired loans as share of total loans | 0.85% | Q2 2026 |
| Provisions on impaired loans | $1.1 billion | Early 2022 |
| Provisions on impaired loans | $4.8 billion | Early 2025 |
| Allowances for credit losses | $36 billion (0.80% of gross loans) | Q2 2026 |
The $5.6 Billion Released in 2021 and the Reversal That Followed
Morningstar DBRS traces much of the current picture back to what it calls an “atypically benign credit environment” in 2021. Government pandemic support, near-zero interest rates, falling unemployment, unusually large household savings buffers and strong corporate earnings combined to keep loan losses artificially low.
Confident enough in those conditions, the banks released $5.6 billion in provisions they had previously set aside against performing loans. That release effectively reset the baseline — which is part of why the subsequent climb looks so steep.
The reversal began in 2022, as inflation surged, interest rates rose sharply, pandemic support programs wound down and savings were drawn down. The agency describes that year as the start of a normalization that “ultimately” became the deterioration still visible today.
Unsecured Consumer Credit and Commercial Loans Are Carrying the Damage
The stress is not evenly spread. Morningstar DBRS says the deterioration has been concentrated largely in unsecured consumer lending — credit cards, lines of credit and similar products — and in commercial loans across several sectors.
That pattern is consistent with what bank executives have been describing publicly through the year, including in recent commentary from Big Six CEOs on how credit is holding up through the trade war. Unsecured balances typically show damage first because there is no collateral cushion and borrowers under pressure tend to prioritize housing payments.
Interest rates below their 2023 and 2024 peaks are providing some relief, the report notes. But that relief is partial: mortgage renewals and other loan repricing have left many Canadians carrying heavier fixed obligations than they did before, while elevated food, energy and housing costs continue to squeeze what is left over.
Why Mortgage Delinquencies Remain the Quieter Part of the Picture
Mortgage arrears have increased alongside everything else, but Morningstar DBRS describes them as still “relatively low” — a function of the Big Six concentrating on prime borrowers with stronger credit profiles and verified incomes.
That distinction is important for readers trying to gauge how serious the numbers are. A rising impaired-loan total driven mainly by unsecured consumer and commercial exposures is a very different signal than one driven by widespread mortgage default, which would carry far larger balance-sheet consequences given the size of the banks’ housing books.
Housing Is the Swing Factor: 77% to 85% of Consumer Loan Books
The report is blunt about where the decisive variable lies. Residential real estate-secured lending accounts for between 77% and 85% of the banks’ consumer loan books, and retail portfolios collectively make up almost 60% of total lending. Housing, in other words, is not one input among many — it is the dominant one.
Morningstar DBRS outlines two distinct ways falling home prices would hurt:
- Thinner equity buffers: Declining prices reduce homeowners’ equity, leaving them with “less cushion” if their income comes under stress — which would push up provisions taken against performing loans, not just impaired ones.
- Weaker recoveries: Lower property values mean the banks recover less when an impaired loan is ultimately resolved through sale of the underlying asset.
On that front the agency sees tentative stabilization. Home-price declines in Ontario and British Columbia are moderating, and tighter inventory in Ontario suggests prices there could firm further. That is one of the more constructive observations in the report, though regional markets remain uneven — Montreal, for instance, saw sales fall sharply as listings built up over the same stretch.
Tim O’Brien on the Canada-U.S. Trade Breakdown
The second variable is political. “The recent breakdown in bilateral trade talks between Canada and the U.S. makes a broader Canada-U.S.-Mexico deal more difficult to achieve,” said Tim O’Brien, managing director of North American financial institution ratings at Morningstar DBRS.
O’Brien framed the consequences as three open questions: how much additional tariffs will hurt Canadian businesses, how effective government support measures will prove, and whether unemployment can continue its recent decline. “Developments among these and other forces will indicate whether better days are ahead for the Banks’ asset quality,” he said.
That places bank credit quality squarely downstream of trade policy — a linkage that has also shaped monetary policy, with the Bank of Canada extending its rate hold into a seventh consecutive decision as it waits for clarity on tariffs and the labour market.
The $36 Billion Reserve Cushion and the 1% Line to Watch
Against the $37.5 billion in impaired loans, the banks held $36 billion in allowances for credit losses in the second quarter, equal to 0.80% of gross loans. Morningstar DBRS calls those reserves satisfactory and notes they have been broadly stable over the past year — meaning the banks are not scrambling to top up coverage.
The agency also gave readers a concrete marker. If the impaired-loan ratio climbs above 1% of total loans, that would warrant closer attention, though it would not by itself signal a significant deterioration in credit conditions. From 0.85%, that threshold is within reach if the current quarterly pace continues.
Underpinning the agency’s relatively calm verdict are the banks’ strong liquidity, funding and capital positions — the same capital strength that has allowed lenders to keep reporting solid returns even as loss provisions stayed high, as seen when Scotiabank hit its return-on-equity target two years ahead of schedule.
What Borrowers and Business Owners Should Take From It
For households, the practical read is that lenders are absorbing rising losses without distress, but they are also pricing and underwriting accordingly — particularly on unsecured products, where the deterioration is concentrated. Borrowers approaching renewal remain the group the report identifies as carrying heavier obligations than before.
For commercial borrowers, the tariff question is the one to track. Sector-level commercial stress is already contributing to the impaired-loan total, and O’Brien’s comments suggest the trajectory from here depends heavily on how the trade file resolves.
The figures above come from a ratings agency’s own analysis of the banks’ reported results and are not investment or borrowing advice; readers making decisions about their own credit should confirm current terms directly with their lender.
Frequently Asked Questions
What counts as an impaired loan?
An impaired loan is one where the lender no longer expects to collect the full amount owed under the original terms, typically after a borrower falls significantly behind. It is a more serious classification than a loan merely in arrears.
What is the difference between provisions and allowances for credit losses?
Provisions are the amounts charged against earnings in a given period to cover expected losses, while allowances are the cumulative reserve sitting on the balance sheet. The banks reported $36 billion in allowances in Q2 2026, or 0.80% of gross loans.
Does a 0.85% impaired-loan ratio signal a banking crisis?
Morningstar DBRS explicitly says no, citing the banks’ liquidity, funding and capital strength. It flagged a move above 1% as the point warranting closer attention, while noting even that would not necessarily indicate significant deterioration.
Are mortgage defaults the main driver of the increase?
No. The report attributes the deterioration largely to unsecured consumer lending and commercial loans, with mortgage delinquencies rising but remaining relatively low because the Big Six lend mainly to prime borrowers.
Which banks are included in the Big Six?
The Big Six refers to RBC, TD, Scotiabank, BMO, CIBC and National Bank. The report assessed asset quality across the group collectively rather than ranking individual lenders.
