Canadian banks are expected to report low profit growth as the threat of tariffs, a looming federal election and a slowing Canadian economy weigh on what otherwise would have been a stronger start to the year.
The country’s six largest lenders report earnings for the first fiscal quarter next week, and analysts expect geopolitical tensions to boost provisions for loan defaults, which would take a chunk out of net income. The pessimistic launch into the year is also weighing on the share prices of Canadian banks, which are trending far below their U.S. peers.
Canadian bank stocks have risen by 0.1 per cent this year, underperforming the S&P TSX Composite Index’s 3.2 per cent climb. The KBW Bank Index, which tracks U.S. lenders, has climbed 7.2 per cent this year.
While the banks have maintained strong capital cushions to mitigate an economic downturn, tariff and political issues are weighing on a quarter that was expected to show stronger results in key lines of business, BMO analyst Sohrab Movahedi said in a note to clients.
“Still, the confluence of the Canadian Prime Minister’s resignation, threats of U.S. tariffs on Canada and the almost daily uncertainty of how the ‘action and reaction’ details will impact the Canadian economy are understandably weighing on Canadian bank stocks’ attractiveness,” Mr. Movahedi said.
Analysts expect earnings to grow in the low-single-digit range on average compared with the same quarter last year.
On Tuesday, Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T will be the first major lenders to release earnings for the three months ended Jan. 31. National Bank of Canada NA-T will report results on Wednesday. Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T and Canadian Imperial Bank of Commerce CM-T will wrap up earnings week for the Big Six lenders on Thursday.
Provisions for credit losses (PCLs) – money that the banks set aside for loans that could default – have restrained profits at Canada’s lenders in recent years amid higher borrowing costs and inflation. The provisions are a closely watched measure of financial stress among customers.
At the end of last year, analysts believed that those provision levels had peaked, and that banks would lower or even begin releasing those reserves as the cost of borrowing dropped, taking pressure off of consumers and businesses.
But as U.S. President Donald Trump continues to threaten tariffs, the outlook on Canada’s economy is cooling. A trade war would harm economic growth and boost unemployment.
Mounting uncertainty could prompt the banks to instead bolster their provisions for sour loans, which would reduce net income.
“We expect a sequential uptick in impaired PCLs and for every bank to add performing provisions given tariff downside risk,” CIBC analyst Paul Holden said in a note to clients. “Significant tariffs, of course, would result in job losses, and in that scenario we would need to change our view and PCL forecasts.”
Some bank economists have updated their forecasts for the year to reflect the potential economic risks with moderately worsening outlooks on growth and unemployment. Currently, the greater risk is the impact that the threat of tariffs would have in slowing or delaying business investment.
Despite the rapid geopolitical shift in recent months, analysts expect the banks to post strong results in Canadian banking, as well as in capital markets and wealth management.
As the Bank of Canada has lowered interest rates, the cost of borrowing has fallen, boosting demand for consumers and businesses and easing the risk of defaults. The cost of paying customers for their deposits has also dropped, lowering expenses for the banks.
The first quarter of the year is typically a strong period for capital-markets activity, but analysts expect profits in that business to climb even more than usual on higher trading revenues, making the business a “bright spot.”
RBC, BMO and TD have larger capital-markets businesses in the U.S. than their rivals, which could help prop up their earnings. Last month, U.S. banks posted first-quarter profits that were boosted by a jolt in trading activity triggered by Mr. Trump’s election victory in November.
Canadian markets have not experienced the same high level of deal-making.
“Although the macro backdrop challenges the outlook for credit quality and loan growth, the capital-markets business could benefit from market volatility and elevated client activity,” National Bank analyst Gabriel Dechaine said in a note.