Investment Q&A

There is certainly some flexibility, and banks can massage earnings somewhat. Banks' provision for credit losses (PCL)are determined based on models that estimate expected future losses from loans and other credit exposures, using a combination of historical loss data, current economic conditions, and forward-looking information. Banks do have a degree of flexibility in setting these provisions, but their estimates are guided and constrained by accounting standards and regulatory rules. Since essentially all quarterly earnings reports have some provision for losses, if PCLs decline one year then year-over-year earnings comparisons will certainly improve. Banks start with loans in arrears, and if these extent too long then the bank needs to determine whether to set aside a loss provision. Operating earnings are more 'reliable' but because banks are in the business of lending money then PCLs are certainly a big and necessary component of earnings/losses. While it is debatable, most banks have a fairly good record here. If their losses are 'wrong', then there would be continuous re-adjustments to earnings and most banks do not experience enough of this to cause investor concern.