OPINION: Big banks set to post higher profits as lenders continue to shrug off trade war concerns

Canada’s biggest banks are set to post higher profits as elevated trading activity boosted by volatile equity markets is expected to curb the impact of softening loan demand from consumers and businesses.

Analysts broadly expect profits to rise in the mid-single-digit percentage points in the first quarter as the lenders continue to shrug off concerns over the U.S. trade war.

“Notwithstanding the still-unresolved tariff-related uncertainties, the Canadian banks’ business diversification (which resulted in mid-teens percentage earnings growth last year) has benefited their shareholders,” BMO analyst Sohrab Movahedi said in a recent note.

The first quarter “is unlikely to be a major inflection point. As we await resolution around tariffs, we expect a continuation of last year’s earnings drivers.”

On Tuesday, Bank of Nova Scotia BNS-T -1.65%decrease will be the first major bank to report earnings for the three months ended Jan. 31. Bank of Montreal BMO-T -2.63%decrease and National Bank of Canada NA-T -0.02%decrease will report results on Wednesday. Royal Bank of Canada RY-T -1.37%decrease, Toronto-Dominion Bank TD-T -1.54%decrease and Canadian Imperial Bank of Commerce CM-T -0.94%decrease will wrap up earnings week on Thursday.

Canadian bank stocks have edged higher by 4.2 per cent this year, trailing the S&P TSX Composite Index’s 6.5 per cent climb.

Clients continue to turn to the banks’ capital-markets and wealth-management businesses for trading and advisory services to grab a piece of whipsawing equity markets. Analysts expect this elevated activity to offset dampened borrowing in personal and business banking.

Based on regulatory data for the first month of the quarter, loans grew modestly, Bank of Nova Scotia analyst Mike Rizvanovic said in a note to clients.

“We remain positive on the large Canadian banks heading into Q1 earnings season that we suspect will once again feature strong results in market-sensitive businesses, upside to all-bank margins that will help keep [net interest income] growing despite only modest loan volumes, and credit losses remaining in a very manageable range in the absence of any signs of meaningful deterioration in the economic outlook,” Mr. Rizvanovic said.

Analysts expect provisions for credit losses – the money banks set aside to cover sour loans – to edge higher slightly, easing from their stark upward trajectory in recent years amid concerns over an economic downturn. The provisions are a closely watched measure of financial stress among customers.

Canada’s unemployment rate improved in January, suggesting that Canadian consumers and businesses will continue to withstand economic shocks. But credit card trust data – an indicator of consumer credit strength – pointed to rising delinquencies, according to CIBC analyst Paul Holden.

Overall, the banks have ample provisions to weather an economic downturn, and Mr. Holden said there is room for reserves to be released in the U.S. as regional banks recently set aside fewer provisions than expected. Lenders unwind reserves when confidence increases in the ability of consumers and businesses to pay off their loans. The release of built-up reserves also bolsters the banks’ profits.

“In Canada, however, given the still-uncertain macro backdrop, we believe it is still too early to see releases,” Mr. Holden said.

“The banks have updated their forecasts for 2026 unemployment and GDP growth, which have improved from last quarter. This would typically indicate the possibility to release performing provisions, but we believe it is still too early given heightened uncertainty in the outlook.”