Royal Bank of Canada RY-T chief executive officer Dave McKay says tariffs are already slowing business activity, but the severity of the hit depends on the extent and duration of the trade war moving forward.
“It’s a little frustrating to see the loss of momentum that we have today,” Mr. McKay said during a conference Tuesday. “We have to deal with it. Still hope for the best outcome that these tariffs are short-lived and we get back on to a growth agenda on all sides of the border that we were on before.”
Earlier on Tuesday, U.S. President Donald Trump levied 25-per-cent tariffs on Canadian goods, with a 10-per-cent tariffs on energy and critical minerals. Prime Minister Justin Trudeau said Canada is retaliating with $30-billion in tariffs on U.S. goods, rising to $155-billion in 21 days.
In February, RBC posted higher first-quarter profit that beat analyst expectations as consumers and businesses benefited from lower interest rates. The bank set aside more provisions for potential loan defaults, but the increase was largely due to one large account with a utilities client.
Since the quarter ended on Jan. 31, the U.S. tariff threats have boosted uncertainty for consumers and businesses, Mr. McKay said.
“That negative narrative and the volatility around that narrative from January to today and to last night has had an immediate impact on the psychology of consumers, psychology of small businesses and the psychology of large corporates,” Mr. McKay said.
In January, activity in the housing market and consumer spending slowed. Companies have started laying off workers, causing greater concern among consumers, he said.
Mr. McKay cited U.S.-based Target Corp.’s fourth-quarter earnings, which saw sales and profits drop as customers curbed their spending. The retailer said there will be “meaningful pressure” due to tariffs and increased costs.
Small businesses have slowed down hiring and are pausing investment decisions. Merger and acquisitions activity is starting to slow. Sectors such as the auto industry will feel “enormous pain.”
“When there’s uncertainty and unpredictability, it’s harder to put capital to work,” Mr. McKay said. “And that’s what’s manifested itself into the month of February – that things are slowing a little bit and a little more cautious and markets are reacting to that quite significantly.”
The greatest strength of the U.S. over the past century has been its ability to build global partnerships that allowed capital to flow into the country and bolster its position as the “centre of economic gravity,” according to Mr. McKay.
“That’s the great secret sauce of the U.S. economy in many ways,” he said. “Tariffs impede that, they don’t enable that. The concern is this is a grand experiment. We’ve not seen this level of tariffs before. And it’s a real departure from what’s built some of the great pillars of success in this country.”
The S&P/TSX Banks Index dropped 2.8 per cent Tuesday, weighing on the S&P/TSX Composite Index as the benchmark index fell 1.7 per cent.
Beyond slower economic growth, the greatest impact to Canada’s banks will be in their unsecured consumer lending portfolios – which include personal loans, student loans, and most credit cards – as they are more sensitive to unemployment rates, according to research by Bank of Montreal analyst Sohrab Movahedi.
Industries directly impacted by tariffs, including auto, agriculture, metals and forestry products, will likely cut expenses and lay off employees, he said.
“Beyond unsecured consumer, the banks’ lending exposure to the more acutely targeted industries in Canada amounted to low to mid-single digits of their total portfolios,” Mr. Movahedi said in the note to clients.