By Robb M. Stewart

OTTAWA--Canada's big banks are slowly building buffers against the risk of loan losses as clients grow increasingly wary of escalating trade tensions with the U.S.

Executives at the lenders this week said clients are more cautious and some are pausing investments and delaying big decisions while they wait to see how things play out with President Trump's threatened tariffs on imports from even the U.S.'s closest trading allies.

Most of the Big Six banks--Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank--increased provisions for credit losses in the latest quarter as they plan for a worsening economic backdrop and the possibility of a trade war between Canada and the U.S., though they say they have the balance-sheet strength and liquidity to withstand what might come. For now, the banks say they are monitoring loan portfolios closely and planning while they and their customers wait.

Trump early this month delayed broad 25% tariffs on imports from Canada and Mexico, with a lower 10% levy on Canadian energy products, but has several times this week said the measures would go into effect as planned March 4. He has also threatened "reciprocal" tariffs from next week, and has announced 25% tariffs on imports of steel and aluminum into the U.S., much of which comes from Canada.

"Clients across the board, across the country are feeling a little more tentative in terms of commitments going forward until there's more certainty," Victor Dodig, chief executive of Canadian Imperial Bank of Commerce, told investors following the release of the lender's first-quarter results Thursday. "I think that holds true on both sides of the border."

CIBC, like its peers, has done a bottom-up analysts of its credit portfolio to identify industries and clients that could be more materially exposed to tariffs.

"Clients are more resilient than one gives them credit for," Dodig said. "When you think about what business banking clients have gone through over the past half decade, you've seen currency volatility, particularly with US/CAD exchange rates. You've seen a surge in interest rates. You've seen supply chain disruption. You've seen labor supply issues. Yet they've been able to manage through all of this. And we see that the last three years are no different for us than the last 10 years in terms of loan losses."

If hefty U.S. tariffs are maintained for an extended period, and matched by retaliatory measures in Ottawa, economists expect it to trigger inflationary pressures while also weighing on economic growth, possibly pushing Canada into a recession. Bank executives note the duration, as well as ultimate percentage of tariffs and any government fiscal policy supports, aren't known, so modeling is tough.

"It possible that in the near term, if we got an extreme scenario on tariffs that would have a negative impact on Canadian GDP, for example," Bank of Montreal CEO Darryl White said earlier in the week. "But it's also possible that it would have a lesser impact on U.S. GDP. And it's also possible that within the course of time, two, three, four, five years, we'll end up in a place that round trips to where we are today."

David McKay, CEO of Royal Bank of Canada, the country's biggest bank by market value, said that even under a scenario of sweeping tariffs the world won't collapse overnight and conditions in some ways should be easier to navigate than they were during the pandemic.

"We aren't shutting the whole economy down like we had to during Covid. So I would expect, whatever the scenario is, this should be more manageable," he said.

Still, Royal Bank does expect commercial-banking-loan growth could moderate near-term as clients hold back plans and investments amid tariff uncertainty. Tariffs also could affect the likelihood and timing of credit-loss-allowance releases and the anticipated coming peak in credit-loss provisions, it said.

The big banks each reported earnings that were stronger than analysts had forecast, bolstered by capital-markets and wealth-management activity that helped offset higher provisions. All the banks also maintained strong capital, with a common equity Tier 1 ratio that remains well above the minimum required by the country's banking regulator.

Royal Bank set aside 1.05 billion Canadian dollars, the equivalent of US$732.3 million, for possible loan losses in the three months to Jan. 31, up from credit-loss provisions of C$840 million in the quarter before and C$813 million in the same period last year. Provisions at Toronto-Dominion Bank, the country's second-largest lender, rose to C$1.21 billion for the quarter from C$1.11 billion in the quarter before and C$1 billion last year.

Across the six big banks, provisions for credit losses totaled C$5.2 billion for the latest quarter, C$1.09 billion higher than for the same period a year earlier.

"There's no doubt that tariff and trade risks are clouding the economic outlook," TD CEO Raymond Chun said.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

February 27, 2025 15:23 ET (20:23 GMT)

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