Big Six banks post lower profits in Q2, but credit provisions ease
Canada's six largest banks reported weaker top-line results for the second quarter of 2026, but the story isn't what the revenue drop suggests. Net income fell across the board. So did expenses. And for the first time in several quarters, provisions for credit losses — the money banks set aside to cover loans that might not be repaid — have stopped climbing.
This is what late-cycle banking looks like. Revenue shrinks because loan demand has cooled and net interest margins are compressed. But if you can cut faster than revenue falls, you preserve the quality of what's left. The Big Six — RBC, TD, BMO, Scotiabank, CIBC, and National Bank — did exactly that. Operating expenses declined quarter-over-quarter, a rare outcome in an industry where fixed costs are notoriously sticky.
The efficiency chase became the entire game
When revenue growth stalls, the only lever left is cost. Banks accelerated digital automation projects and reduced headcount in back-office functions. The institutions that executed this most aggressively — those with efficiency ratios already trending toward the low-50s — protected their margins better than peers still carrying bloated branch networks or redundant middle-management layers.
This isn't about one-time cuts. It's a structural shift. The branch as a profit center is functionally dead. Transactions have moved online. Wealth advisory still needs people, but retail banking increasingly doesn't. A bank that cut expenses by 8% this quarter wasn't reacting to Q2. It was embedding lower run-rate costs for the next five years.
Credit losses stopped worsening, which is not the same as improving
The easing in provisions for credit losses sounds like relief. It isn't yet. PCLs remain elevated by historical standards. They've simply stopped spiking. What changed is the forward-looking component. Banks provision based not just on current delinquencies but on what they expect to lose over the next 12 to 24 months. That expectation moderated.
The real test comes in late 2026 and early 2027, when another wave of fixed-rate mortgages renews. Borrowers who locked in at 1.8% in 2021 are renewing at rates closer to 5%. Some will handle the payment shock. Others will extend amortizations or restructure. A smaller group will default. Q2's stabilization in PCLs reflects banks getting better at identifying who falls into which category and pricing that risk into current reserves. It does not mean the risk has passed.
Capital markets acted as a hedge
Investment banking and trading revenue outperformed retail banking by a significant margin this quarter. For universal banks — those with both retail operations and capital markets divisions — this diversification absorbed much of the domestic weakness. Institutions with heavier U.S. exposure, like TD and BMO, faced different margin pressures and regulatory costs than National Bank, which is overwhelmingly domestic.
The bifurcation inside the Big Six is widening. Banks with strong wealth management platforms and robust capital markets arms are weathering the environment better than those reliant on mortgage growth and consumer deposits. This isn't temporary. The regulatory burden on retail operations continues to rise, while capital markets remain a place where scale and expertise still command premium pricing.
Capital ratios remained comfortably above regulatory floors. Common Equity Tier 1 ratios clustered between 13% and 15%, well above the 12.5% minimum. That capital is sitting idle by design. OSFI's Domestic Stability Buffer forces banks to hold significant reserves rather than deploy them for growth. In a low-growth environment, that looks prudent. In a recovery, it means Canadian banks will lag more aggressive international competitors in market-share expansion.
Dividend yields on the Big Six are currently averaging between 4.5% and 6.2%. For income-focused investors, that's the actual story of Q2.
