Trade war risks remain the most prominent clouds darkening Canada’s economic horizon, according to several of the country’s largest banks, with approaching continental trade talks set to determine whether the coming months will bring clear skies or a recessionary storm.
Executives at Royal Bank of Canada and National Bank of Canada cited the potential renegotiation of the United States-Mexico-Canada Agreement, or USMCA, as a key source of uncertainty while discussing their third-quarter results on Wednesday. Their comments echoed the tone of cautious optimism struck by their counterparts at Bank of Montreal and Bank of Nova Scotia on Tuesday.
All four banks set aside lower provisions for credit losses – money for loans at risk of default – than analysts were expecting. That suggests they are less concerned about the possibility of tariffs causing a North American recession than they were three months earlier.
“The only thing that is holding us back from sitting down and reaffirming and updating guidance is uncertainty around the tariff scenario right now,” RBC chief executive officer Dave McKay said on a Wednesday morning conference call.
If Canadian exports to the United States that are compliant with USMCA are able to maintain their qualified exemption from U.S. tariffs, Mr. McKay said, “the economy should remain resilient.”
“However, as trade tensions extend, there may be persistent impacts, including declining consumer confidence, lower corporate profit margins, rising inflation and softening labour markets in both the U.S. and Canada,” Mr. McKay said.
The USMCA is up for review in mid-2026, though U.S. President Donald Trump has repeatedly suggested discussions could begin much sooner. Earlier this month, Ontario Premier Doug Ford said he expected negotiations to begin by November.
Noted trade expert Lawrence Herman argued in an Aug. 14 opinion piece that it’s a fantasy to think the USMCA will survive, though National Bank CEO Laurent Ferreira has higher hopes.
“I have full confidence that our government will make sure that the renegotiation of the USMCA will be beneficial for our country,” Mr. Ferreira said in an interview.
“There’s still uncertainty, and there could be more job losses with the current tariffs and uncertainty around how everything unfolds, but there are positive signs as well.”
RBC set aside $881-million in provisions for credit losses in the quarter. That is a 34-per-cent increase from the same period last year, but significantly lower than the $1-billion Canaccord Genuity analyst Matthew Lee had been expecting.
During the second quarter, when trade tensions were at a peak amid Mr. Trump’s tariff war threats, RBC had set aside $1.42-billion in provisions for credit losses.
While RBC did benefit from lower-than-forecast provisions, “that was only part of the story, with strong revenue growth likely a more important headline,” Jefferies analyst John Aiken said in a note to clients on Wednesday.
“With solid performances across all of its operating segments, we believe the results not only support RBC’s current premium valuation but will likely garner continued outperformance,” Mr. Aiken said.
RBC reported adjusted third-quarter earnings per share of $3.84, well above the average analyst expectation of $3.29 a share, according to S&P Capital IQ.
Earmarking less money for bad loans allowed the lender’s commercial banking division to report a 40-per-cent increase in profit from the prior three-month period. The second quarter reflected higher provisions on performing loans because of the potential effects of trade disruptions, including tariffs, RBC said.
Capital-markets profit was more than $1.3-billion at RBC, up 13 per cent on a year-over-year basis, primarily because of higher revenue in global markets and corporate and investment banking. In a Wednesday note to clients, National Bank Financial analyst Gabriel Dechaine said RBC’s capital-markets business had roared back to life after a disappointing second quarter relative to its peers. He increased his price target on RBC to $203 a share, from $180.
During the second quarter, RBC implemented a new trade disruption scenario that chief risk officer Graeme Hepworth said on Wednesday reflected “the potential for a severe North American recession driven by an escalating global trade war and rising geopolitical risk.”
Mr. Hepworth said RBC will continue to set aside larger-than-usual provisions for potential bad loans over the coming quarters. That will likely remain the case until the uncertainty surrounding North American trade policy is resolved, he said.
National Bank set aside $203-million in provisions for credit losses in the quarter, well below the $253-million analysts had been expecting.
Executives with the bank said they are making progress on integrating Canadian Western Bank with their own businesses. National Bank has booked cost savings of $69-million from the merger so far, and moved a first tranche of clients from Canadian Western over to its systems.
The Montreal-based lender also announced plans to buy back two per cent of its outstanding common shares, though RBC analyst Darko Mihelic said in a Wednesday note to clients he was “somewhat surprised (disappointed)” that the buyback program was not larger.
Third-quarter profit at National Bank of $2.68 on an adjusted per-share basis was below average analyst expectations of $2.71 a share, according to S&P Capital IQ.
That result was an outlier among the four major Canadian banks to report third-quarter results thus far, with BMO, Scotia and RBC all beating analyst expectations. Toronto-Dominion Bank and Canadian Imperial Bank of Commerce are due to release their third-quarter results on Thursday.