TORONTO, Feb 24 (Reuters) - Canada's big six banks are expected to build more credit loss provisions as they brace for uncertainty surrounding the U.S. tariff threat, analysts said, potentially weighing on first quarter earnings and beyond.
The banks have already been putting aside more funds to cover any souring loans due to continued high Canadian unemployment, which has fuelled investor concerns despite some more robust economic data recently. Also called provisions for credit losses, a rise in those funds dents profits for the banks.
U.S. President Donald Trump's threat to impose a 25% tariff on all non-energy Canadian imports starting in March means banks are likely to set aside yet more rainy day funds, even as they are expected to benefit from a boom in capital markets activity and strong wealth management earnings in the first quarter.
"(We) expect large banks to build larger performing provisions for credit losses than we previously believed... we also believe pessimistic scenario assumptions may become more pessimistic," RBC Dominion Securities analyst Darko Mihelic said.
For the first quarter, loan loss provisions are expected to jump between 6.4% for Royal Bank of Canada (RY.TO), to as much as 80% for Bank of Montreal (BMO.TO),. CIBC (CM.TO), is expected to show a fall in provisions of 0.7%, according to LSEG data.
Net income forecasts for the six banks range from a 7.5% fall for BMO to 13.8% growth for RBC.
Mihelic forecasts provisions to increase about 70% to $5.6 billion in aggregate and expects core earnings to decrease about 10% year-over-year in the first quarter.
The banks report later this week starting with BMO and Bank of Nova Scotia (BNS.TO),, also known as Scotiabank, on Tuesday.
German business leaders are urging the new government to move quickly to boost the weak economy.
The uncertainty triggered by Trump's tariff threats has weighed on bank stocks and the broader Toronto Stock Exchange, due to concerns about the duties triggering a recession.
"The potential impact of tariffs on all of these key earnings drivers is likely to dominate the earnings calls this quarter," Scotiabank analyst Meny Grauman said, noting that one key area of interest will be how banks expect provisions to reflect tariff risks.
Four of the big six banks - RBC, Scotiabank, CIBC and National Bank (NA.TO), - have lost between 2.3% and 6% so far this year, while the broader Toronto Stock Exchange has gained 3%. TD Bank (TD.TO), and BMO have gained 12% and 2.5% respectively.
Scotiabank, which sold some of its South American assets recently, is the only bank that has focused largely outside of the U.S., betting on the $1.5 trillion North American trade corridor.
Analysts have noted Scotiabank could be more significantly impacted than peers in a tariff scenario, because their diversification strategy was based on growth in North American trade.
"We could return to a more positive call if Mexico and Canada are able to negotiate relatively harmless tariffs. Until that happens, we think it will be hard for (Scotiabank's) stock to be a relative outperformer," CIBC analyst Paul Holden said.
Reporting by Nivedita Balu in Toronto; Editing by Nia Williams
