Canada’s mid-size banks are heading into 2026 with more credit strain and a tougher economic backdrop, according to DBRS Morningstar’s 2026 Medium-Size Bank Outlook.
The report covers three federally regulated institutions outside the Big Six — Equitable Bank, Fairstone Bank of Canada and Laurentian Bank of Canada — and concludes that the operating environment for these lenders has shifted and is now expected to be “unfavourable,” shaped by slower growth, weaker economic indicators and early signs of stress across loan portfolios.
DBRS notes that credit vulnerabilities are “increasing,” particularly in unsecured retail and certain commercial exposures. The report adds that the economic picture remains uncertain, with some risks tied to broader policy developments.
“While stimulative government policies should support growth, the Canadian economy could experience adverse effects if upcoming negotiations on the Canada-United States-Mexico Agreement prove problematic,” said Shokhrukh Temurov, Vice President, North American Financial Institution Ratings. “Compared with large Canadian banks, the MSBs’ earnings and asset quality could be disproportionately affected in a stressed environment because the MSBs typically have a less diversified product mix and higher borrower concentration risk in their loan portfolios.”
Taken together, DBRS expects credit performance to weaken next year, but not in a way that threatens the stability of these institutions. The report notes that mid-size banks enter 2026 with solid liquidity, funding and capital positions, which provide a buffer as credit conditions soften.
Asset quality softens, but stability holds
Much of the pressure anticipated in 2026 stems from credit performance, with DBRS expecting impaired loans and provisions for credit losses to rise as the economy softens and unsecured retail borrowing and certain commercial segments absorb the brunt of the impact.
Mortgage portfolios remain a relative outlier, as the report notes that mid-size banks are largely concentrated in prime residential lending with conservative loan-to-value ratios, strong collateral positions and underwriting that tends to be anchored in established urban markets. Those features help cushion residential credit performance as the broader credit cycle turns.
Rates are another piece of the puzzle, with the Bank of Canada expected to pause further rate cuts for now. As a result, mortgage holders won’t get the same payment relief seen after earlier rounds of easing. DBRS suggests that will limit the benefit for variable-rate households and keep debt-service costs elevated as credit charges move off historically low levels.
The agency still expects earnings to hold up this year, but says the balance of risks has shifted as loan growth slows, funding competition remains firm and credit costs return to something closer to normal.
Sector dynamics and ratings context
DBRS also provides ratings context for the group, noting that Equitable Bank is rated BBB (high) with a Stable trend, while both Fairstone Bank of Canada and Laurentian Bank of Canada are rated BBB and remain “Under Review with Positive Implications,” reflecting ongoing transactions and strategic repositioning.
Despite the softer operating environment, the report underscores the structural strengths of the group. DBRS says mid-size banks continue to maintain strong liquidity positions and regulatory capital ratios well above minimum requirements, giving them room to absorb credit normalization.
All told, the DBRS analysis suggests 2026 looks tougher for Canada’s mid-size banks, with higher credit costs and slower growth testing resilience rather than capital strength.
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Last modified: January 13, 2026