Canadian banks are cautioning that consumers could be hit harder by tariffs than other groups as layoffs loom and businesses pause expansion plans.
At a conference held by Royal Bank of Canada on Wednesday, senior executives from some of the country’s biggest banks said that they are scanning their customer portfolios across personal, commercial and corporate banking for those most affected by tariffs, to reach out to them pro-actively and compile data on potential loan losses.
Bank of Nova Scotia BNS-T chief risk officer Phil Thomas said job losses caused by tariffs will determine whether retail customers are able to absorb trade-war shocks.
“What keeps me awake at night will be the Canadian retail consumer,” he said.
In recent years, Canada’s banks have been setting aside more provisions for credit losses – the funds lenders reserve to cover potential loan defaults – as a buffer against higher interest rates and a slowing economy.
During first-quarter earnings that ended Jan. 31, the lenders adjusted their provisions slightly to account for the uncertainty caused by U.S. President Donald Trump’s tariff threats, but reserves for the year ahead will depend on the duration of the trade war.
Increases to provisions will likely be driven by rising risk in the retail business, Mr. Thomas said. It also depends on the type of fiscal stimulus or financial support the federal government provides for consumers and businesses.
“This is where unemployment starts to become the catchword for the industry and for us more broadly,” he said. “Small businesses: Will they start laying off people because tariffs are impacting their business directly? And mid-market commercial: These will be the clients that we’ll be very active with in terms of what support they need from the bank.”
The heads of Scotiabank’s businesses have been meeting more frequently to discuss what they are hearing from customers. In the past 24 hours, its bankers started “a very progressive, pro-active outreach” to gather intel and help the bank make more informed decisions.
Mr. Thomas spoke with a mortgage broker recently who said that homebuyers were pulling out of deals because they were unsure whether tariffs would affect their job security.
“The unfortunate consequence both for the Canadian consumer and the U.S. consumer is that people are uncertain, and uncertainty creates volatility and doesn’t lead to the growth that we would want to see,” Mr. Thomas said. “We’ve been sitting in this holding pattern since coming out of COVID where we’re waiting for rates to come down, people are keeping their powder dry and it’s creating this more uncertainty and this spin cycle.”
Toronto-Dominion Bank TD-T chief financial officer Kelvin Tran said that while the immediate impact is on directly affected industries, including auto, agriculture and manufacturing, a prolonged trade war would deteriorate consumer sentiment and business investment.
“Then you have a higher unemployment rate, then that seeps into the bigger economy,” Mr. Tran said during the conference.
Canadian Imperial Bank of Commerce estimates 20 per cent of the country’s gross domestic product is exposed to the current U.S. tariffs, its chief financial officer Robert Sedran said.
Businesses have paused their long-term plans as they wait to see how long the trade war will last.
“When we think about the pipeline of opportunity that we saw in terms of loan growth and just the business that we saw and what they were going to be doing, a lot of it has been slowed or is being delayed a little bit just because it’s the rational thing to do in this environment,” Mr. Sedran said.
“You stop, you evaluate, and until you get a little bit better certainty, you’re probably not pulling the trigger on the big capital investments or the big expansion plans.”
Canadian banks are known for managing risks relatively well compared to global peers. The sector came out of the global financial crisis and COVID-19 lockdowns relatively unscathed.
But tariffs imposed by Canada’s largest trading partner are more nuanced in terms of the industries and segments that will be affected, and the type of government and central bank support that will be provided to help prop up the economy.
“This is a different type of stress scenario,” Bank of Montreal chief financial officer Tayfun Tuzun said. “We haven’t seen a similar one, and therefore it is throwing a bit of a curveball in gauging the impact on Canada.”