Canadian banks seen cutting loan-loss provisions as trade fears ease

Canada’s largest banks are expected to report lower loan-loss provisions in the third quarter, as the hit from US tariffs on their loan books is expected to be less severe than feared.

According to LSEG data, analysts project the country’s top six lenders will set aside about C$5.22 billion, compared with C$6.37 billion in the previous quarter.

The decline follows several quarters of rising provisions, as banks had been preparing for potential defaults across mortgages, credit cards, and commercial loans linked to the ongoing North American trade dispute.

Trade pressures easing

Worries about tariffs imposing significant damage to the Canadian economy have dissipated to some extent in the last few months.

Data from the US Census Bureau indicated that the total value of 92% of Canadian exports reached US markets tariff-free in June, boosted by exemptions concerning the North American Free Trade Agreement.

Prime Minister Mark Carney also pulled back on certain Canadian retaliatory tariffs against the US, a gesture towards a less combative trade atmosphere.

Outlook for earnings season

Canadian banks will begin reporting third-quarter results on Tuesday, with Bank of Montreal and Bank of Nova Scotia set to release earnings first.

While loan-loss provisions for the period are expected to ease compared with the prior quarter, analysts caution that overall loan growth will likely remain muted amid weak credit demand.

Net interest income—the spread between what banks earn on loans and what they pay on deposits—is projected to rise between 9.3% and 57%, providing a key source of profitability.

At the same time, fee-based businesses such as capital markets and wealth management are expected to deliver additional support, reflecting sustained client activity and demand.

Their third-quarter performance may set the tone for the rest of the year, as they balance defensive measures with targeted growth efforts.

Capital strength and deployment

Canadian banks are very well-capitalised by global standards, and this financial strength has allowed some flexibility in the way they deploy excess funds.

As the domestic market offers limited growth opportunities, banks reactivated C$4 billion in share buybacks in Q3.

Analysts will be hoping for guidance on how management teams intend to deploy capital to achieve medium-term goals.

That could mean more buybacks, more investment in the US, or investment in wealth management businesses, where demand remains healthy.

Limited growth at home spurs US expansion

The Canadian market remains oversaturated, making it difficult for banks to achieve significant domestic expansion.

As a result, they're increasingly looking south of the border for opportunities.

Investments in US businesses and wealth management platforms have been critical to their plans, providing diversification away from Canada's slower-growing lending sector.

While loan growth in Canada is projected to remain modest in the near term, the drop in provisions indicates that banks are cautiously hopeful about credit conditions normalising.

Trade tensions have eased, and the country's top lenders now have robust capital positions to help them manage a challenging climate.