Tariffs hit Canadian bank stocks

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Some analysts are warning that a trade war could severely impact stocks of Canadian banks as the United States and Canada break away from a long-standing, friendly economic relationship to impose tariffs on each other.

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The tariffs won’t impact Canadian banks directly, but their fortunes are “intimately tied to the health of the Canadian economy,” Bank of Nova Scotia analyst Meny Grauman said in a note on Monday amid uncertainty about a potential trade war. “In that context, the current trade war that we find ourselves in has serious negative implications for Canadian bank stocks.”

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Royal Bank of Canada analyst Darko Mihelic also expects Canadian bank stocks to suffer “ahead of the possibility of a tariff-induced recession.”

U.S. President Donald Trump on Saturday announced 25 per cent tariffs on most Canadian goods and a 10 per cent levy on Canadian energy. In response, Canada said it will impose 25 per cent tariffs on U.S. goods ranging from orange juice to household appliances to plastics.

But analysts expect the trade war to hurt Canada more than the U.S., which has an economy that’s about 10 times larger.

In the short term, Canada’s banks may face a large increase in provisions for credit losses (PCLs), which is the money lenders keep aside to tackle bad loans, Mihelic said.

PCLs dominated discussions among Canada’s biggest banks in the past 18 months as consumers gradually recovered from the impacts of the COVID-19 pandemic. Prior to the tariffs, most analysts expected concerns linked to PCLs to gradually dissipate over the next year, but that outlook seems to be changing.

“We expect performing PCLs will start to rise throughout 2025 and possibly well into 2026,” Mihelic said in a note on Monday. “We expect the banks’ base case economic assumptions will begin to reflect a recession and the pessimistic scenario will become more negative versus the soft-landing economic scenario of current assumptions prior to the tariff announcement.”

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Aside from a rise in credit losses, he also expects more volatility in capital markets and slower loan growth to negatively impact the banks.

But relief measures provided by authorities to lessen the impact of the trade war on the overall economy may help, Mihelic said.

One potential measure that analysts expect is a decline in the domestic stability buffer, which is essentially a rainy-day fund that banks keep aside to absorb unexpected financial shocks.

Canada’s top banking regulator held the domestic stability buffer at 3.5 per cent when it was last reviewed in December. The buffer is measured as a percentage of the banks’ risk-weighted assets, such as mortgages or credit card loans.

Back then, the Office of the Superintendent of Financial Institutions said the vulnerabilities and risks facing the financial system remain “generally stable” and that Canada’s biggest banks “maintained an adequate level of capital to address emerging risks.”

Peter Routledge, the office’s superintendent, also said at the time that the banking system has the resilience to operate through the uncertainty stemming from Trump’s tariff threats.

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“We think the system has resilience to operate through quite handily,” he said. “I don’t mean to say we’re not taking this very seriously, but we have confidence in the financial system’s resilience because we built a bunch of buffers.”

But while relief measures can support the economy and the banks, Grauman said they may not be enough to resolve Canada’s issues in the long run.

“As frightening as a Canada-U.S. trade war is (and it is frightening), we believe that there is something even more frightening, and that is holding on to the status quo,” he said. “This trade war requires a fundamental rethink of our economic and our fiscal priorities … a structural retooling of our economy that finally addresses our lagging productivity and overreliance on the U.S. as a trading partner.”

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