But which of the Big Six are most at risk from erosion of economic conditions?
Canada’s big six banks are considered robust with well-diversified loan books that help them stave off financial pressures. But what happens if the trade war escalates, weakening the Canadian economy and pushing up unemployment?
In that scenario, financial institutions may start to suffer from factors such as erosion of their retail lending business and other commercial activities, according to a new analysis from S&P Global Ratings.
The report notes that large banks hold significant commercial and corporate loans (making up 32% of their total loan book) and much of this lending is to sectors that are not directly impacted by tariffs. But unsecured lending in the retail space could be risky if economic conditions deteriorate.
Among the Canadian banks designated as D-SIBs (domestic systemically important banks), the report says that those with higher exposure to the Canadian market are more likely to suffer great stress than those with a geographically diversified loan book. Although it notes that overall, consolidated at 70%, Canada’s big six have a high percentage of domestic loans in relation to their total loans.
BMO has the lowest domestic share of total loans at below 60%, while TD and Scotiabank are nearer 70%, RBC and CIBC are near 80%, and National Bank is closing in on 90% although has a smaller share of domestic retail loans of the others except for BMO.
Wealth management revenue could drop
While credit quality is a major concern if the economy takes a downward trajectory, revenues of the Big Six are also considered by the analysis, including lending activities but also the banks’ other activities.
Again, reliance on domestic revenue is high, ranging from around 70% for RBC and TD, down to 40% for BMO and Scotiabank, less than 30% for CIBC, and around 10% for National Bank.
If the Canadian economy stalls but the US economy remains strong, those banks with higher US loan books should see weaker domestic revenues offset by their revenues south of the border.
Beyond lending, the report highlights how weaker equity markets could impact wealth management and investment banking revenue generated in Canada, while those banks with larger capital market businesses could benefit from greater trading activity amid volatile markets.
Overall, S&P Global Ratings’ analysis of the Canadian D-SIBs finds that longer duration tariffs are expected to constrain profits but the stress should be manageable and the firm’s outlook for the Big Six banks remains stable.
