Canadian Banks Avoid the Worst Case Tariff Outcome in Recent Earnings
Canada's major banks are anticipated to have reduced loan-loss reserves in the third quarter compared to the previous quarter, as U.S. tariffs appear to have impacted their loan portfolios less severely than expected.
Canada's largest six banks are projected to allocate a combined total of C$5.22 billion for loan-loss provisions in the third quarter, down from C$6.37 billion in the second quarter, based on data gathered by LSEG.
The banks increased their provisions in recent quarters, preparing for potential bad loans amid concerns that a possible North American trade war would impact the economy and lead to defaults on commercial loans, credit cards, and mortgages.
Approximately 92 percent of Canadian exports by value reached the U.S. without tariffs in June, as they were tariff-exempt under the North American Free Trade Agreement, according to data from the U.S. Census Bureau.
Prime Minister Mark Carney lifted certain retaliatory tariffs that Canada had placed on the United States.
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"After three months, we think calmer minds could be taking charge with feasible mutual tariffs enacted among the CUSMA countries," noted Canaccord Genuity analyst Matthew Lee, mentioning the trade area of Canada, the U.S., and Mexico.
Lee and other analysts anticipated that the banks would gain from a gradual reduction in loan-loss provisions, but that loan growth would stay sluggish because of low demand.
Earnings season will start on Tuesday for Canadian banks, with Bank of Montreal and Bank of Nova Scotia leading the way.
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Net interest income - the variance between banks' earnings on loans and their payments on deposits - is projected to increase by 9.3 percent to 57 percent.
Analysts anticipated that the banks would receive a lift from capital markets and wealth management divisions, which gain from fee revenues and increasing demand.