Loan-loss buffers shrink amid calmer U.S. trade outlook
Canada’s largest banks are poised to post stronger third-quarter earnings as loan-loss provisions are expected to decline significantly from the previous quarter. Analysts forecast a combined total of C$5.22 billion in provisions, down from C$6.37 billion in Q2, signaling renewed optimism in credit conditions following eased tensions over U.S. tariffs.
Concerns about a potential North American trade war had prompted lenders to brace for a wave of defaults on mortgages, credit cards, and business loans. However, with roughly 92% of Canadian exports entering the U.S. tariff-free as of June, fears of widespread credit deterioration have not materialized.
Tariff pullbacks and trade zone stability offer relief
Prime Minister Mark Carney’s recent removal of select retaliatory tariffs against the U.S. added to a sense of stabilization within the CUSMA (Canada, U.S., Mexico) trade bloc. “Cooler heads may be prevailing,” noted Canaccord Genuity analyst Matthew Lee, pointing to the manageable nature of reciprocal tariffs now in place.
While provisions are expected to ease, demand for new loans remains soft. Analysts see weak loan growth as a drag, even as net interest income continues to expand. Banks are expected to post year-over-year net interest income increases between 9.3% and 57%, fueled by favorable rate spreads.
Capital markets and wealth management provide momentum
Beyond core lending, Canadian banks are seeing positive momentum from their capital markets and wealth management businesses. These units benefit from fee-based income and investor activity, providing a buffer against sluggish loan demand in the domestic market.
With limited growth opportunities in a mature Canadian banking environment, lenders have turned to stock buybacks as a strategy for deploying excess capital. In Q3, they collectively repurchased around C$4 billion in shares, with Bank of Montreal and Bank of Nova Scotia leading off the earnings season this week.
Focus shifts to U.S. expansion and capital allocation
Canadian banks have been steadily increasing their U.S. presence to diversify income streams. Investments in wealth management and U.S. operations continue, though analysts are eager to hear updated capital deployment plans. “Given the robust capital positions, we look forward to commentary on capital deployment plans,” said Veritas analyst Shalabh Garg.
With resilient balance sheets and improving credit metrics, Canada’s top lenders appear well-positioned to navigate the rest of 2025. Still, the sustainability of recent gains hinges on global trade stability and the banks’ ability to find high-return investments beyond their home turf.
