One day after the Trump administration imposed sweeping tariffs on Canadian and Mexican imports, U.S. and Canadian banks said they're watching to see how much harm the tariffs, and a potentially severe trade war, could inflict on their businesses and those of their clients.
While there's still general optimism about the U.S. economy and little concern about potential credit deterioration, banks are trying to get their arms around the possible fallout from tariffs, both already imposed and threatened. Companies that lend to the automobile industry, which has supply chains spanning across North America, say they are paying close attention.
The Bank of Nova Scotia, the third-largest Canadian bank by assets, has CAD$17 billion worth of exposure to the auto sector, Chief Risk Officer Phil Thomas said Wednesday at an RBC Capital Markets conference in New York City.
Thomas described the tariff situation as "a slow-moving crisis" that could cause damage to both sides of the U.S.-Canada border.
"Duration is kind of the word of the day," he said. "There's tons of variables right now for us to digest."
Executives at Toronto-based BMO Financial Group echoed that concern.
"The unknown factor here is the time dimension, because if it's only for 90 days or 180 days, you can hunker down," said Tayfun Tuzun, BMO's chief financial officer. "But if it ends up being a longer period of time when we are under this regime, then we're going to see stress."
Canadian banks have been bracing for the impact of Trump's tariffs. Last week,
On Tuesday, President Donald Trump imposed 25% tariffs on Canadian and Mexican goods. Canada responded with an equal-sized tariff on American products, and Mexico's government pledged to announce retaliatory measures on Sunday.
Since then, the situation has been in flux. A few hours after the administration imposed the 25% duties, Commerce Secretary Howard Lutnick said that the president would "work something out" with Canada and Mexico.
On Wednesday afternoon, Trump said he'd pause tariffs on vehicles coming from Canada and Mexico for one month, though other tariffs that could impact the auto industry are still scheduled to take effect on April 2.
Jessica Caldwell, head of insights at the auto industry data firm Edmunds, said that the one-month reprieve is welcome, but added that automakers are still facing long-term uncertainty.
"The reality is that a month is nowhere near enough time for automakers to relocate factories or reconfigure supply chains," Caldwell said in a written statement.
For investors, Scotiabank's Thomas said, one of the worst things about the standoff is its unpredictability.
"The problem with tariffs right now is that that's creating this uncertainty where people are not willing to make an investment," he said. "People are keeping their powder dry, and it's just creating … this spin cycle now."
There could be more direct harms coming. BMO estimated that about 20% of Canada's gross domestic product is exposed to the tariffs either directly or indirectly, and the bank's economists are now forecasting a downturn.
"The impact on Canada is clearly very, very important," Tuzun said. "Our economics department is predicting that the Canadian economy will move into a mild recession with rising unemployment."
Other bank leaders see the nascent trade war as a source of opportunity as well as risk. TD Bank Group, for example, is looking forward to a stronger U.S. dollar, growth in core deposits and a chance to deepen relationships with its wealth management clients.
"They're seeing uncertainty, and they understand the value of having … strong bankers providing advice," said TD Chief Financial Officer Kelvin Vi Luan Tran, referring to the bank's wealth management clients. "So I think that is actually an opportunity for us to further solidify these relationships, deepen those relationships and acquire new clients."
TD will be able to ride out the economic consequences of tariffs, Tran said, even if they cause a "downturn" in Canada's economy. The trickier part will be guiding clients through such choppy waters.
"Obviously, it's generally negative for the economy," Tran said. "But we're a strong bank. We're well capitalized. … So our thoughts are really about our customers and our clients."
Robert Sedran, chief financial officer at the Canadian Imperial Bank of Commerce, expressed a similar point of view.
"I think we start from the perspective of, this is something that is not really happening to us," he said at the RBC Capital Markets conference. "It's happening to our clients."
The situation has allowed CIBC the opportunity to "stand behind our brand promise, which is we're a very relationship-focused bank," Sedran added. "We have been getting closer to our clients through this period."
Canada and Mexico are not the only countries to suffer Trump's economic wrath. The president on Tuesday also raised his previous tariff on Chinese goods to 20%. China quickly responded with a tariff on U.S. products of up to 15%.
The combination of retaliatory tariffs from Canada, Mexico and China is likely to take a toll on the American economy. On Wednesday, the Federal Reserve released its latest summary of commentary on current economic conditions — which draws on the views of bankers, businesses, community organizations, economists and others. Concerns about the impact of tariffs were prominent.
The central bank's contacts in most of its 12 regional districts said they expect tariffs to lead to higher prices. In the construction sector, there was "nervousness" about the impact of tariffs on the price of lumber and other materials, according to the report. The U.S. construction sector relies substantially on lumber imported from Canada.
Top executives at U.S.-based banks spoke at the conference Wednesday about the potential impact of tariffs on prices.
"There's an affordability impact," said Russell Hutchinson, the CFO of Detroit-based Ally Financial, which has a major presence in the auto lending business. "And as you recall, the consumer is already dealing with affordability."
Still, Hutchinson said his bank knows how to survive economic disruptions — particularly learned from the COVID-19 crisis.
"We've obviously gone through the pandemic and the post-pandemic period," Hutchinson said. "And so we've managed through much bigger swings and much bigger disruptions to the supply chain. … I think we've got a lot more tools today just having come through that experience."
For his part, Scotiabank's Thomas held out some hope that the trade conflicts will eventually diminish.
"I'll cross my fingers," he said. "Maybe some cooler heads will prevail, and we'll all win."
