Canadian banks fail to override ‘sticky’ tariff fears

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Canada’s largest banks beat analysts’ earnings expectations fairly comfortably this week, which normally helps ease considerations linked to the economic system, however that wasn’t the case this time round.

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The banks’ quarterly calls with analysts had been dominated by questions on how United States President Donald Trump’s proposed tariffs on Canadian merchandise would possibly impression the economic system and, subsequently, the Big Six.

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So a lot in order that at one level, Royal Bank of Canada chief govt Dave McKay determined to remind listeners that the Canadian economic system carried out higher than anticipated through the three months main as much as Jan. 31.

He mentioned he understood why “quite a bit” of analysts’ questions had been in regards to the financial uncertainty stemming from Trump’s tariffs and why the main target was on the danger of rising credit score losses.

“But I do wish to carry the messaging again to the Canadian economic system, (which) carried out by means of many of the quarter higher than we thought,” he mentioned. “The shopper exercise was sturdy throughout all our companies.”

Looking forward, McKay mentioned that the financial institution was “hoping for the most effective; making ready for the worst.”

The chief govt of Canadian Imperial Bank of Commerce mentioned banking purchasers on either side of the border had been feeling “a little bit extra tentative” as a result of tariffs but additionally famous they had been resilient throughout current unsure conditions such because the surge in rates of interest and foreign money volatility.

“Clients are extra resilient than one offers them credit score for,” Victor Dodig mentioned.

Maria-Gabriella Khoury, a senior director at Fitch Ratings Inc., mentioned the calls this week had been “extra uncomfortable than earlier” discussions, however that the banks had been ready for it.

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“They haven’t had an analyst name with so many questions since pre-pandemic,” she mentioned.

The final time there have been such “sticky calls” was when oil costs crashed and the Alberta economic system struggled a couple of decade in the past.

“If you return to 2015, 2016, you’ll see the identical tone of, ‘Oh, you’ve numerous publicity to grease and gasoline. What are you doing about it? Why don’t you provision? Why didn’t you get out of it?’” she mentioned.

Analysts acknowledged the optimistic performances total, however their considerations are extra about whether or not banks are prepared for Trump’s looming tariffs, particularly whether or not they have stored apart sufficient cash to deal with loans that will probably go dangerous because the tariffs damage Canada’s economic system. Some economists even count on a recession to outcome.

Most of the banks tweaked their monetary fashions to construct a slight cushion, however analysts don’t suppose that will likely be sufficient if the 25 per cent tariff on most Canadian items involves go.

The banks didn’t considerably improve their provisions for credit score losses as a result of there isn’t sufficient info on the tariffs but.

As Khoury places it, banks can’t “yo-yo” their provisions — enterprise slang indicating steep upward and downward actions.

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“They should do it moderately and steadily,” she mentioned.

That’s one thing that was a characteristic throughout the board in discussions between financial institution executives and analysts.

“There’s so many unknowns on this tariff state of affairs,” Piyush Agrawal, Bank of Montreal’s chief threat officer, mentioned on Tuesday. “We don’t know the length … what percentages will likely be … which industries would possibly get excluded … what financial, fiscal coverage actions the federal government would possibly take right here to mitigate a number of the impression.”

He mentioned he hoped to supply higher steering within the subsequent quarter.

Similarly, Phil Thomas, Bank of Nova Scotia’s chief threat officer, mentioned it’s tough to behave on “headlines and tweets.” If tariffs do come alongside within the second quarter, which ends April 30, he mentioned the financial institution will construct its provisions accordingly.

Overall, the steps taken by the banks made sense to Khoury as they tried to deal with points they at present face, as an alternative of attempting to regulate for tariffs that “may occur, couldn’t occur.”

But if the tariffs do hit, it can take a while for the impression to “trickle by means of,” she mentioned, giving the banks time to extend the amount of cash they hold apart to deal with dangerous loans.

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“What they got here up with for this quarter is suitable,” she mentioned.

Analysts say the Big Six’s first quarter was an honest one, primarily as a result of they benefited from good capital market situations final 12 months. Some of the banks even had document buying and selling income for the quarter.

For instance, exercise within the debt markets reached document highs final 12 months as debtors regarded to frontload their wants since there was a way of uncertainty as a result of U.S. elections. After Trump received, the market was much more conducive and exercise surged in the previous couple of months of 2024.

Nevertheless, questions stay in regards to the banks’ future outcomes with tariffs looming.

“We do count on a little bit little bit of worsening over the following couple of quarters, that’s for positive,” Khoury mentioned. “But we expect the banks are at present well-positioned by way of with the ability to take care of any worsening and impairments.”

• Email: nkarim@postmedia.com

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