The Canadian banking sector could be a good option for investors navigating tariff uncertainty, one portfolio manager says, as the Big Six lenders report earnings this week.
Bank of Montreal and Bank of Nova Scotia released first quarter earnings on Tuesday kicking off earnings seasons with both lenders beating analysts’ estimates, according to Bloomberg News.
“If you want to be anywhere in the Canadian market in the present uncertainties, the banks are a very good place to be,” Gavin Graham, CIO and portfolio manager at Spire Wealth Management, said in an interview with BNN Bloomberg Tuesday.
He added that Bank of Montreal, Toronto-Dominion Bank and Royal Bank of Canada in particular have strong U.S. operations that could act as a “hedge” against tariff uncertainty.
“Secondly, if we are going to see a refocus on domestic business, on breaking down interprovincial barriers, on reallocating the focus of the Canadian exports away from an exclusive focus on the U.S. towards other markets, that’s obviously got to be good news for the banks,” Graham said.
“They will be hit if there is a slowdown or even a recession caused by the effect of tariffs being imposed, but we don’t know what those tariffs are. We don’t know exactly how large they’ll be and whether there’ll be any exemptions or cutouts.”
Graham said Canada’s large lenders are in a “very strong competitive position” due to robust capital positions and dividends paying around 4.5 to five per cent.
While reporting earnings, Bloomberg News reported that both BMO and Scotiabank warned that that tariffs could present challenges for clients while impacting their credit outlooks.
‘Peak’ loan loss provisions
BMO and Scotiabank both cited the possible impact tariffs could have on the performance of loans not yet in default, Bloomberg News reported. BMO set aside $152 million in provisions for performing loans while Scotiabank set aside $98 million.
In total, Scotiabank’s provisions for credit losses (PCLs) totaled $1.16 billion, higher than $1.09 billion forecasted by analysts. BMO’s PCLs totaled $1.01 billion, less than the $1.08 billion forecasted by analysts.
Graham said he believes Canada’s major lenders are moving toward peak loan loss provisions. Amid tariffs threats, he said he thinks banks are acting conservatively regarding PCLs being put in place.
“I think the banks are erring on the side of being conservative, but yes you’d have to feel that this is probably, if not the peak quarter, then next quarter, which would be through to the end of April, by which stage we should have at least have some clarity on the tariffs that that will be the peak for PCLs,” he said.
