Trade war threatens to halt Canadian banks' rally
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.
An index of Canada’s largest lenders has risen 4.6 per cent since Donald Trump’s election and is coming off its best year since 2021. Banks continued to rally Tuesday even after the United States president reiterated his threat to hammer the Canadian economy with 25 per cent tariffs.
But National Bank’s Gabriel Dechaine said traders are dismissing the downside risks of a trade fight between the two countries.
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 per cent 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 per cent in the past year including dividends, and some strategists expect that rally to continue, fuelled by more rate cuts from the Bank of Canada.
But all bets are off in a full-blown trade war between Canada and the U.S., Dechaine said.
Bank profits are sensitive to the Canada’s macroeconomic picture, and high tariffs from the U.S. — which is the dominant buyer of Canadian exports — have the potential to cause 10 per cent unemployment, up from the current 6.7 per cent. Consumers would pull back on major spending and investments, and the
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