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Canada's biggest banks are so surprised by the shrinking number of bad loans that they are digging deep into their books to make sure they aren't blindsided by a sudden shock.

When Royal Bank of Canada and Toronto-Dominion Bank released their second quarter earnings last week, both lenders reported plummeting provisions for credit losses, a form of safety cushion set up to absorb any losses from non-performing loans. RBC's credit provisions now total $244-million, down 16 per cent from the previous quarter, while TD's amount to $392-million, down 14 per cent from the first quarter.

Such drops are undeniably good news, because it means the banks' chances of being repaid in full are climbing, but some worry that the results are so great because they are simply some sort of calm before a storm.

"[We're] thinking it's too good to last," RBC chief financial officer Janice Fukakusa said in an interview.

The longer the credit environment stays this way, the more RBC feels the need to analyze its loan books. Instead of simply taking the good news and running with it, the bank is putting in extra work to see whether somehow their loss assumptions are off, or if they've missed something obvious.

The big worry is that credit provisions are backward-looking metrics, so the banks have to keep updating their models to make sure they don't miss something that could hit them in the future. To do that, RBC is reviewing credit quality on a much more granular level. "We're being even more vigilant," Ms. Fukakusa said.

To understand just how far loan loss provisions have fallen since the financial crisis, RBC's peaked at $974-million in the second quarter of 2009, while TD's climbed as high as $772-million in the same quarter.

RBC's current loan losses provisions are especially promising in Canadian banking and wealth management, with both the commercial loan book and the credit card portfolio looking particularly strong. TD chalked its recent success up to "broad-based improvements in asset quality," and its loan losses could have been even lower had it not been for acquisitions of the Target and Aeroplan credit card portfolios that required that the bank add more of a safety net.

Despite the benign outlook for Canadian credit, Big Six lenders with Caribbean operations have seen their provisions for the region spike. Just over a week ago Canadian Imperial Bank of Commerce reported a $123-million jump in Caribbean loan losses, and RBC reported slightly higher provisions for the region on Thursday. Bank of Nova Scotia, the other Canadian lender with substantial operations in the region, reports earnings on Tuesday.

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