Canada’s six biggest banks reported higher profit when excluding taxes and provisions for bad loans in the second quarter.Chris Helgren/Reuters
U.S. President Donald Trump’s turbulent tariff and policy maneuvers are upending markets, hiking risk of loan defaults and stalling business investment. But the hit to Canada’s biggest banks has been more muted than feared.
When the country’s lenders reported second-quarter financial results over the past week, they set aside more money for debt defaults as trade uncertainty weakens the ability consumers and businesses to pay back their loans.
Beyond the reserves for bad loans, however, the banks’ earnings signal they are able to withstand economic shocks – so long as trade and geopolitical tensions don’t escalate.
The current state of the softening economy and precarious trade policy is manageable, but the outlook could worsen significantly if uncertainty persists or escalates, according to Bank of Montreal chief risk officer Piyush Agrawal.
“If nothing gets resolved and we are in this high uncertainty environment and back to an April 2 kind of announcement, that – you can see in our base case forecast – has a significant impact on Canadian and U.S. economies," Mr. Agrawal said during a conference call with analysts, referring to Mr. Trump’s revealing of so-called “reciprocal” tariffs.
Even as companies pull back on earnings guidance because of economic uncertainty, Canada’s six biggest banks reported higher profit when excluding taxes and provisions for bad loans.
A breakdown of the big banks’ second-quarter earnings
Four lenders – Royal Bank of Canada RY-T, Bank of Nova Scotia BNS-T, Bank of Montreal BMO-T and National Bank of Canada NA-T – raised their dividends between 3 to 4 per cent. Canadian Imperial Bank of Commerce CM-T, Toronto-Dominion Bank TD-T, RBC and BMO also all have active share buyback programs to return capital to investors.
Before Mr. Trump unleashed his tariff plan, CIBC and TD decided to raise their dividends at the end of last year. With CIBC also repurchasing $6-million of its $20-million share buyback program in the second quarter, chief financial officer Robert Sedran said the bank is still confident in its decision as the bank posted stronger revenue and good credit quality.
“It gave us the confidence last year to increase the dividend. It gives us the confidence to continue to buy back stock,” Mr. Sedran said in an interview. “Our capital ratio is strong, our liquidity ratios are strong, and so we feel like we’re dealing with the environment from a position of strength.”
Ahead of potential economic tailspins, Canada’s banking regulator has the authority to pause dividend increases and share buybacks. In March 2020, the Office of the Superintendent of Financial Institutions (OSFI) levied restrictions on the banks as COVID-19 pandemic lockdowns began, to ensure they had enough liquidity to continue lending and manage loan defaults.
This time around, the banks believe they have more than enough capital to manage financial stress among consumers and businesses.
The lenders are carrying ample capital as a buffer against an economic downturn. In recent years, OSFI raised the common equity tier 1 (CET1) ratio – a measure of a lender’s ability to absorb losses – to 11.5 per cent, prompting lenders to stash billions of dollars in excess capital.
Canada’s six biggest banks are leaps above that minimum, with CET1 ratios ranging from 13.2 per cent to 14.9 per cent.
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This quarter, the banks increased provisions for credit losses – funds lenders set aside for loans that could default – driven by reserves for debt that is still being repaid, rather than loans that are in arrears.
RBC increased provisions by the most out of the group, largely based on caution around a deteriorating economy.
Banks assess provisions based on models that use economic forecasting to predict future losses. In the second quarter, RBC created a new trade disruption scenario, which assesses the potential for a recession because of escalations in the global trade war and geopolitical risks that could cause severe unemployment, inflation, supply chain disruptions and asset price decreases.
The bank’s chief executive officer Dave McKay said they knew the higher-than-expected provisions would cause the lender’s profit to miss analyst estimates, but that they preferred to take a conservative approach in anticipation of a volatile environment.
Some of the banks also disclosed tariff exposure in their loan portfolios.
The industries most exposed to policy and trade risk – including automotive, agriculture, manufacturing and retail – represent about 9 per cent of TD’s gross loans and acceptances. The bank said its exposure to borrowers most sensitive to these risks is relatively small, representing less than 1 per cent of the bank’s gross loans.
At CIBC, Mr. Sedran said they looked at more than 2,000 individual clients to assess the likelihood of revenue and cost pressure due to tariffs.
The bank’s loans vulnerable to tariff risks amount to 4 per cent of the total book. Less than 1 per cent were assessed as high-risk.