Canada's leading banks are taking precaution in the face of a possible recession by setting aside more money for credit losses. 
The Bank of Nova Scotia and the Bank of Montreal both missed analyst expectations in the second quarter amid heightened operating expenses and greater than anticipated loan loss provisions. The weakness seen in this quarter is expected to continue for the reminder of the year as more money will be allocated to the risk of loans losses, one analyst is forecasting. 
“(Bank) earnings are expected to be challenged in fiscal 2023, we’ve seen that with this morning’s earnings calls from BMO and the Bank of Nova Scotia -- and one of the primary drivers of that is increased provisions for credit losses which are expected to continue increasing," Carl De Souza, senior vice-president of North American FIG at DBRS Morningstar, told BNN Bloomberg in an interview on Wednesday. 
He stressed that a high interest rate environment has put pressure on consumers who are now spending more disposable income on servicing their debt.
Scotiabank reported $7.93 billion in revenue, a decline from the $7.94 billion this time last year. The bank also set aside $709 million for possible sour loans, up $219 million annually — marking a 224 per cent rise year-over-year. 
BMO’s results also showcased revenue decline to $8.44 billion in the second quarter, down from $9.32 billion from the same time last year. Credit losses for the quarter totalled $1.02 billion, up from $50 million the year prior. 
Despite the pressure, both banks maintained a dividend hike. 
In the event of a coming recession, De Souza is confident that the banking sector is planning accordingly. 
“The Canadian banks are positioned well going into this environment to navigate the challenges and they are coming from strength," he stated. 
He referred to their prudent approach as the main reason why the sector has maintained pristine credit quality. 
“They have very strong credit quality entering this period, they have ample liquidity and solid capital levels,” he added.