Canadian Banks’ Earnings Clouded by Economic Uncertainty

Canadian banks are set to announce their quarterly earnings this week, and while analysts are optimistic about the results, they note that potential U.S. tariffs may dampen the mood.

The Big Six banks — namely, Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and the National Bank of Canada — are expected to post moderate earnings growth overall for their first quarter, according to a Monday (Feb. 24) report from The Wall Street Journal (WSJ).

However, a possible trade war with the U.S. means that these banks will need to shore up capital to support elevated credit-loss provisions, or money set aside for loans that don’t get repaid.

“Several analysts have trimmed core earnings forecasts for the sector in anticipation of higher credit-loss provisions on currently performing loans,” the WSJ noted. “Analysts at RBC Capital Markets project total credit-loss provisions will increase about 32% on the prior quarter and about 70% year-over-year across all six banks, to 5.6 billion Canadian dollars ($3.95 billion). Higher provisions will eat into earnings for this quarter.”

On Feb. 1, President Donald Trump enacted a 25% tariff on imports from Canada and Mexico, as well as a 10% tariff on Canadian energy, but later placed a 30-day pause on the levy.

According to a Monday report from CNBC, Trump said he intends to resume the tariffs once the deadline expires next week.

When the tariffs were first announced, Canadian Prime Minister Justin Trudeau announced retaliatory tariffs that will impact U.S. beer, wine, bourbon, fruit, fruit juices, perfume, clothing, shoes, household appliances, sports equipment, lumber and plastics.

As PYMNTS noted at the time, industries reliant on cross-border trade are likely to be the worst affected by a trade war.

“The most immediate impact of tariffs is often felt in supply chains,” PYMNTS wrote. “Industries that rely on the seamless movement of goods across borders are particularly vulnerable. Tariffs, whether they are imposed on raw materials, intermediate goods or finished products, drive up the cost of production. For manufacturers, this often means higher prices for components, parts and materials sourced from countries involved in trade disputes.”

Consequently, businesses have scrambled to diversify their supply chains, shifting from a “just-in-time” to a “just-in-case” model to hedge against geopolitical risks and economic uncertainty.

A potential trade war has also made consumers uneasy, with consumer sentiment down nearly 10% from last month and about 16% lower than a year ago, according to February data from the University of Michigan’s latest Consumer Sentiment Index.