- Key insight: BMO Financial Group and Scotiabank sought to assure investors Tuesday that the mounting trade dispute between the U.S. and Canada will have limited impacts on the two banks' businesses.
- What's at stake: The new round of tariffs injects further economic uncertainty into the U.S.-Canada trade relationship, which could increase risks for banks.
- Forward look: Observers will be listening later this week to comments about the trade war from executives at other large Canadian banks.
UPDATE: This story has been updated with additional comments from analysts at Moody's and Morningstar DBRS.
As the temperature rises in the new U.S.-Canada trade war, Canadian banks say they can handle the heat.
On Tuesday, just days after trade talks between the United States and Canada fell apart, two of Canada's biggest banks reported their quarterly earnings. As executives answered questions about the impact of new tariffs, "manageable" became the word of the day.
"Is it manageable? Of course it is," said
Bank of Nova Scotia executives made a similar assessment.
"I think this obviously creates uncertainty, but with the current tariffs, it's manageable," said Scotiabank CEO Scott Thompson.
The two banks' comments came amid a fraught period that erupted late Friday, when Canada suspended trade negotiations with the U.S., triggering a new round of tariffs on Canadian goods. Canada retaliated with its own tariffs on Tuesday.
As tensions rose, economists and other market-watchers voiced concern that the two countries may continue to escalate the tit-for-tat with additional tariffs.
"While the direct economic impact appears manageable, the outcome drags out uncertainty and the breakdown in negotiations suggests current tariff rates are more likely a floor than a ceiling," analysts at Wells Fargo wrote Monday in a research note.
So far, however, Canada's biggest banks have expressed confidence that they can weather the storm.
During BMO's call, White argued that the trade war does not qualify as a widespread credit event. While the imposition of U.S. tariffs is "acute," the CEO said, the tariffs will only be applied to 5% of exports from Canada, thus reducing the bank's lending and credit risk.
White also said that the Canadian economy is not only growing — unemployment in the country has been
"Liberation Day was 16 months ago," he said, referring to President Trump's term for April 2, 2025, when the U.S. imposed widespread tariffs on scores of countries. "There's been a lot of change that has been navigated."
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On Tuesday, Canada announced retaliatory tariffs on $27.6 billion of U.S. imports, matching the U.S. duties, as Prime Minister Mark Carney had promised. Canada said its tariffs will take effect Sept. 8.
The counter-tariffs will focus on steel and aluminum, dairy, appliances, agricultural equipment, pulp and paper, plastics, and electronics, the Canadian government said. In certain industries, such as steel and aluminum, existing counter-tariffs will increase from 25% to 50% to match U.S. rates, according to the Canadian government.
Analysts at Moody's and Morningstar DBRS agreed that Canadian banks seem well positioned to endure the escalation. But as the U.S.-Canada relationship enters a volatile new phase, they also said the sheer uncertainty of the situation poses risks.
"I think what has changed, really, is the predictability of trade policy that companies would need to continue to make investments and grow their business," Moody's analyst Robert Colangelo told American Banker. "That certainly has become more difficult and more challenging."
Tim O'Brien, Morningstar's managing director for North American financial institutions, raised the same concern.
"It's uncertainty that was not there on Friday, and ultimately that uncertainty will find its way into provisioning and asset quality," O'Brien said.
He added, however, that domestic policy will play a role in how well Canada's businesses absorb the shock.
"The government of Canada has also said that there will be a support package, and as we learned in the COVID period or the post-COVID period, those support packages can be quite robust," O'Brien said.
BMO expects its fourth-quarter provisions for credit losses to be "in line" with those established in the third quarter, Chief Risk Officer Piyush Agrawal said Tuesday. For the bank's third quarter, which ended on July 31, provisions totaled $722 million Canadian dollars, down from CAD $797 million in the year-ago quarter.
Agrawal said BMO has a diversified loan portfolio and disciplined underwriting standards, and it has already stress-tested the areas of its loan book that are most exposed to disruptions in trade between the two longtime allies. Direct exposure is less than 1% of the bank's total loan book, with a large portion of those loans made to high-quality borrowers, he said.
"We're focused on helping our clients navigate change," BMO CEO White said. "That's not new."
Scotiabank raised its provisions for credit losses in the third quarter to CAD $1.08 million, up CAD $38 million from the same period last year. The bank did not offer guidance on next quarter's provisions.
