Canada’s big six banks are bracing for a surge in credit loss provisions, as analysts warn that mounting economic uncertainty surrounding potential U.S. tariffs could weigh on first-quarter earnings and beyond.
Banks Preparing for Economic Risks
Financial institutions have already been setting aside more funds to account for potential loan defaults, fueled by persistent high unemployment in Canada. The latest threat from U.S. President Donald Trump to impose a 25% tariff on non-energy Canadian imports in March has only intensified concerns, leading banks to build even larger financial buffers.
Despite robust capital markets activity and wealth management earnings, analysts believe the looming tariffs could force banks to increase their provisions for bad loans, affecting their overall profitability.
Projected Impact on Loan Loss Provisions
According to RBC Dominion Securities analyst Darko Mihelic, large Canadian banks are likely to increase provisions for credit losses beyond earlier estimates. The first-quarter loan loss provisions are expected to rise between 6.4% (Royal Bank of Canada) to 80% (Bank of Montreal). Conversely, CIBC (TSX:CM) is projected to show a slight 0.7% decline in provisions, according to LSEG data.
The six banks’ net income forecasts range from a 7.5% decline for BMO to a 13.8% increase for RBC, reflecting the uneven impact of economic challenges across the financial sector. Mihelic projects that aggregate provisions will jump by 70% to $5.6 billion, while core earnings could decline by 10% year-over-year in the first quarter.
Bank Stocks React to Tariff Threats
The uncertainty triggered by Trump’s tariff threats has impacted both bank stocks and the broader Toronto Stock Exchange (TSX), raising fears that the duties could trigger a recession.
So far this year, four of the big six banks—RBC, Scotiabank, CIBC, and National Bank—have posted losses between 2.3% and 6%, while the TSX has gained 3%. Meanwhile, TD Bank has surged 12%, and BMO has climbed 2.5%.
Scotiabank’s Unique Position in Trade Uncertainty
Among the big six, Scotiabank (NYSE:BNS) (TSX:BNS) stands out for its unique exposure to North American trade. The bank recently divested some of its South American assets, focusing on the $1.5 trillion North American trade corridor. Analysts caution that Scotiabank could face a more significant impact than its peers in the event of heightened trade restrictions.
According to CIBC analyst Paul Holden, Scotiabank’s stock could struggle to outperform until a clearer trade agreement is reached between Canada, Mexico, and the U.S.. “We could return to a more positive call if Mexico and Canada negotiate relatively harmless tariffs,” Holden noted.
Earnings Reports and Market Outlook
The big six banks are set to release earnings later this week, starting with Bank of Montreal (BMO) and Scotiabank (BNS) on Tuesday. Investors and analysts alike will closely monitor earnings calls, with particular focus on how banks assess the risks of tariffs and their impact on provisions for credit losses.
