By Robb M. Stewart

Expectations of broadly positive quarterly results from Canada's largest lenders could be drowned out by uncertainty and risk as the country remains on alert for possible sweeping U.S. tariffs.

The Big Six banks are due to serve up first-quarter earnings this week, kicked off by Bank of Montreal and Bank of Nova Scotia on Tuesday. Analysts expect the group to post modest earnings growth overall, which comes after bank executives largely signaled that one weight on their bottom lines would soon start to wane.

Now, however, the looming threat of a trade war and resulting economic uncertainties may mean that Canada's banks need to build up provisions for performing loans to reflect the hazards ahead.

"We expect first-quarter results to show positive earnings momentum, but the outlook for the remainder of fiscal 2025 will be clouded by U.S. tariff risk," said Paul Holden, an analyst at CIBC Capital Markets.

The trajectory pointed higher for Canada's banks last quarter. Executives had noted that elevated credit-loss provisions, or money set aside for loans that could sour, were nearing their peak as the U.S. economy continued to fire and Canada demonstrated signs of slowly gathering momentum with inflation under control and interest rates falling.

President Trump's policies have introduced a new set of risks that threaten to wipe out that benefit. Several analysts have trimmed core earnings forecasts for the sector in anticipation of higher credit-loss provisions on currently performing loans.

Analysts at RBC Capital Markets project total credit-loss provisions will increase about 32% on the prior quarter and about 70% year-over-year across all six banks, to 5.6 billion Canadian dollars (US$3.95 billion). Higher provisions will eat into earnings for this quarter.

RBC analyst Darko Mihelic anticipates the banks' base case economic scenarios will reflect more of a recessionary economy and for pessimistic scenario assumptions to possibly sketch out an even worse case.

The prognosis for Canadian banks was looking rosier. A string of six interest-rate cuts by the Bank of Canada since June has lowered borrowing costs and helped drive household spending, offsetting weakness in business investment. Home owners are still renewing mortgages at higher interest rates but the drop in the central bank's policy rate has softened the sting.

The outlook for interest rates, however, has been muddied by the 25% tariff on all U.S.-bound non-energy exports and 10% levy on energy products that Trump in early February paused for a month. Economists estimate a protracted trade dispute between the countries would spur price increases and weigh on gross domestic product, potentially throwing Canada into a recession and driving up the jobless rate.

The big banks' balance sheets are solid and capital buffers remain above regulatory requirements. Analysts point out the banks can bolster their capital fairly easily if needed.

However, a prolonged overhang due to trade tensions with the U.S., both from the tariff risk and a potentially tough coming renegotiation of the U.S.-Mexico-Canada free-trade agreement, could be negative for Canadian bank growth and their credit outlook, BofA Securities said.

The firm will be evaluating commentary from bank management on how tariff concerns may have impacted customer sentiment, particularly domestic. BofA said messaging on the effects to growth and credit outlooks could offer insight into whether investors are willing to look past headline risk associated with tariff threats and add investment exposure to the sector.

Following two earnings reports on Tuesday, National Bank of Canada is scheduled to report its numbers on Wednesday, while Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank all have scheduled to release earnings on Thursday.

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

(END) Dow Jones Newswires

February 24, 2025 13:39 ET (18:39 GMT)

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