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The rally in Canadian bank equities is at risk from a potential trade war that would quickly cause a surge in unemployment and loan defaults, analysts at National Bank of Canada said.
Author of the article:
Bloomberg News
Stephanie Hughes
Published Jan 22, 2025 • 2 minute read
(Bloomberg) — The rally in Canadian bank equities is at risk from a potential trade war that would quickly cause a surge in unemployment and loan defaults, analysts at National Bank of Canada said.
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An index of Canada’s largest lenders has risen 4.6% since Donald Trump’s election and is coming off its best year since 2021. Banks continued to rally Tuesday even after the US president reiterated his threat to hammer the Canadian economy with 25% tariffs.
But National Bank’s Gabriel Dechaine said traders are dismissing the downside risks of a trade fight between the two countries.
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Canadian banks’ revenues would slip and they would need to more than double their sector provisions for loan losses if a “severe trade war” were to break out, Dechaine said in a note to investors published late Tuesday. The result would be a 30% drop in earnings per share compared with current estimates for the 2026 fiscal year, the analyst wrote, though he added that’s a worst-case scenario.
“We also believe that the uncertainty related to this issue will keep bank stocks in check until the overhang is lifted,” Dechaine wrote.
The S&P/TSX Composite Banks subindex has produced a return of 27% in the past year including dividends, and some strategists expect that rally to continue, fueled by more rate cuts from the Bank of Canada.
But all bets are off in a full-blown trade war between Canada and the US, Dechaine said.
Bank profits are sensitive to the Canada’s macroeconomic picture, and high tariffs from the US — which is the dominant buyer of Canadian exports — have the potential to cause 10% unemployment, up from the current 6.7%. Consumers would pull back on major spending and investments, and the banks’ wealth management and capital markets businesses would suffer, Dechaine said.
Trump told reporters Monday he’s thinking about 25% tariffs on products from Mexico and Canada, possibly by Feb. 1. It isn’t clear what sectors they would apply to, but he previously threatened to place them across the board, a move that would damage major trade-sensitive Canadian industries including energy and autos.
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