Canada's major six banks are anticipated to increase credit loss provisions due to the uncertain implications of the U.S. tariff threat, potentially impacting first-quarter earnings and beyond. Amid ongoing concerns about high Canadian debt levels and escalating economic worries, banks have been setting aside funds, affecting their profitability.
The looming 25% tariff by President Donald Trump on non-energy Canadian imports in March is expected to prompt banks to allocate additional reserves, despite prospects of strong capital markets and wealth management earnings. According to RBC Dominion Securities analyst Darko Mihelic, banks are likely to bolster their provisions beyond previous estimates, anticipating a more pessimistic outlook.
Projections suggest varying increases in loan loss provisions, from 6.4% for Royal Bank of Canada to potentially 80% for Bank of Montreal, while CIBC may see a slight decrease. Net income forecasts vary, with estimates ranging from a 7.5% decline for BMO to a 13.8% rise for RBC.
Mihelic predicts a collective 70% surge in provisions to $5.6 billion and foresees a 10% decrease in core earnings year-over-year for the first quarter. Quarterly reports are set to begin with BMO and Bank of Nova Scotia, also known as Scotiabank, this week.
The uncertainty surrounding tariff threats has impacted bank stocks and the Toronto Stock Exchange, amid concerns of a potential economic downturn. Analysts expect discussions during earnings calls to focus on the impact of tariffs on key earnings factors, particularly provisions reflecting tariff risks.
So far this year, four of the six major banks have experienced stock declines, while the Toronto Stock Exchange has shown a 3% increase. Scotiabank, with its strategic focus beyond the U.S., is observed as potentially more vulnerable in a tariff scenario based on its North American trade growth strategy.
Analysts emphasize the significance of trade negotiations in defining the banks' future performances. CIBC analyst Paul Holden suggests Scotiabank's stock might face challenges unless tariffs are resolved with minimal impact, emphasizing the importance of Canada and Mexico reaching an agreement.