Canadian banks raise provisions for credit losses

Cushioning against tariff impact on GDP growth

Canada’s chartered banks are preparing for the likely effects of the new U.S. tariffs announced last week by the Trump administration. The tax covers goods exported to the U.S.A, even from allies that have existing free trade agreements, such as the U.S.-Mexico-Canada (USMCA) deal negotiated by President Trump himself in 2019.

These consist of a 25% tariff on goods that are not compliant with the USMCA, 25% on aluminum and steel, and 10% on potash. But the situation is so fluid and changes depending on what Mr. Trump has decided overnight that it’s difficult to draw any conclusions about the effects except the most broad-reaching generalizations.

The best estimate of the effects of the new tariffs is the exercise carried out by the Bank of Canada during the more limited tariffs imposed by the first Trump administration in 2018-19. That review found that tariffs lasting for an extended period would reduce Canadian GDP by over 1%.

In the second half of 2024, Canadian GDP was relatively strong, growing 0.6% in the fourth quarter after a 0.5% increase in the third. The growth was driven by increases in household spending, business investment, and higher export volumes.

Canada’s merchandise exports to the U.S. rose 7.5% in January 2025, reaching record levels for the second consecutive month. Exports of motor parts and vehicles rose 12.5%, leading to a merchandise trade surplus with the U.S. of $14.4 billion, up from $12.3 billion in December 2024.

Of course, this surge in exports reflects companies very logically attempting to stock up with goods, especially autos, ahead of the tariffs. Many estimates calculated that tariffs on autos, even though they are compliant with USMCA rules, would increase the price of an average car or truck by up to US$10,000.

The front loading of demand ahead of what Mr. Trump called “Liberation Day” (i.e., the introduction of tariffs on April 2) and the likely sharp drop in activity afterwards will present challenges to companies. It’s reasonable to assume that will result in a sharp slowdown in Canadian economic growth, if only because of the negative effects of the tariff uncertainty on consumer spending and business investment.

Some experienced market observers, like economist David Rosenberg, think the Bank of Canada will have to cut short-term interest rates as low as 1.5% from their present level of 2.75% to offset the slowdown.

It’s not only Canada and Mexico that will be affected. Goldman Sachs has just increased its forecast of the probability of a recession in the U.S. to 35% from 20%. It also reduced its GDP forecast for 2025 to 1.5% from 2%, cut its forecast for the year-end level of the S&P 500 to 5,700 (which would actually be an improvement from where we are now), and increased the number of 0.25% interest rate cuts by the U.S. Federal Reserve Board from two to three by year-end.

Banks upping provisions for credit losses

The banks are attempting to negotiate this uncertainty by pre-emptively increasing provisions for credit losses (PCLs). In the quarter that ended Jan. 31, the chartered banks considered the implications of potential tariffs when setting PCLs provisions. Scotiabank’s chief risk officer, Phil Thomas, said the bank’s modelling included the risk of the U.S. imposing a 5% tariff on half of Canadian exports to the U.S. and 10% on half of Mexican exports. This led to PCLs of $1.2 billion for Scotiabank in the first quarter, slightly higher than expected and up from $962 million in 2023-24.

“It’s really hard to give you a range or an outcome at this point in time without having some understanding of what these tariffs look like,” Mr. Thomas said in late February. “If tariffs come along in the second quarter, we’ll do the appropriate build (of provisions) and it’ll be a sizeable but manageable build.”

BMO set aside $1 billion in PCLs, slightly lower than expected by analysts, but up from $627 million in the previous year. Its chief risk officer Piyush Agrawal stated: "Given the pronouncements coming out of the U.S. administration, we felt it was prudent to consider the sensitivities in the environment as a result of the tariff threats." 

RBC set aside $1.05 billion in PCLs, up from $813 million in the same quarter last year, while TD provided for $1.21 billion, up from $1 billion in 2023-24. CIBC was an outlier, reporting $573 million in PCLs, down 2% from a year earlier.

These increases in PCLs have offset what was a strong quarter for almost all the banks. Healthy equity markets saw wealth management and investment banking/capital markets boosting the banks’ bottom line.

To the end of March, the share prices of most banks were down by between 11% (CIBC and Scotiabank) and 6% (RBC and National). BMO was off only 1%. The exception was TD Bank, which was up 13% as it recovered from its U.S.$3.1 billion fine for the failure of its anti-money laundering (AML) controls in the U.S., which led to a cap on its U.S. retail assets,

All the banks, with the exception of Scotiabank (off 3%) are ahead over the last 12 months. The iShares S&P/TSX Capped Financials Index ETF (TSX: XFN) is ahead 20.09%, outperforming the 15.6% posted by the broader iShares S&P/TSX 60 Index ETF (TSX: XIU) over the same period.

Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management. He is currently Chief Investment Officer of Calgary-based Spire Wealth Management.

Notes and Disclaimer

Content © 2025 by Gavin Graham. This article first appeared in The Internet Wealth Builder newsletter. Used with permission.

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