Morningstar stays optimistic, but Fitch flags trouble for lending and housing
Canada’s largest banks are facing growing uncertainty after US president Donald Trump announced sweeping new tariffs on April 2.
While Canada and Mexico were spared from the latest round of tariffs, earlier US trade penalties, including a 25% global auto tariff, remain in place, leaving Canadian financial institutions exposed to the broader economic ripple effects.
Despite these developments, Morningstar is holding steady on its valuation of Canadian banks.
“We are maintaining our fair value estimates for the Canadian banks as there seems to be room for negotiation between Canada and the US,” the firm said in a stock note.
Morningstar’s base-case forecast does not factor in a Canadian recession, but analysts cautioned that new, long-lasting tariffs could change that.
Should broader tariffs targeting Canada emerge and persist, Morningstar warned the domestic economy could suffer serious consequences. Morningstar pointed to the risk of higher inflation, increased unemployment, and weaker consumer spending, which would lead to lower balance sheet growth, higher credit costs, and pressure on bank profitability.
Read more: Canada plans countermeasures despite partial exemption from Trump's new tariffs
Morningstar also flagged that some Canadian banks could be more vulnerable than others depending on their exposure to the US economy.
Bank of Montreal and Toronto-Dominion Bank are particularly at risk, with BMO deriving approximately 40% of its earnings from the US and TD around 30%. Royal Bank of Canada follows with 25% exposure, while Canadian Imperial Bank of Commerce reports about 20%. Bank of Nova Scotia and National Bank of Canada, with only around 10% of earnings tied to the US, are comparatively less exposed.
Scotiabank, however, may face different pressures due to its sizable international presence. Roughly 30% of the bank’s earnings come from Latin America, specifically from markets like Peru, Chile, Colombia, and the Caribbean, which are now subject to a 10% reciprocal tariff rate under the new US policy. Although Mexico avoided some of the harsher measures, Scotiabank’s 13.5% earnings exposure in that country remains a factor to watch.
While Morningstar’s assessment suggests room for negotiation and stabilization, Fitch Ratings offered a more pessimistic outlook in a separate report. The credit agency now expects Canada to enter a recession in 2025, citing the broader fallout from higher tariffs. It warned of increased inflation, elevated unemployment, and the resulting impact on consumer spending, loan volumes, and credit performance.
“The initial round of US tariffs is likely to have a near-term direct impact on Canadian banks’ commercial loans,” Fitch said. “Banks with greater exposure to industries vulnerable to increased tariffs, such as the industrial, agricultural, automotive, construction, energy or mining sectors, face more risks.”
Fitch noted that a deeper or more prolonged downturn could heighten pressure on mortgages and the housing market, warning that today’s economic environment is more volatile than during the 2018–2019 trade dispute.
Read more: Canadian banks face growing risk to mortgage portfolios in deeper downturn scenario: Fitch
“That was partly because US tariffs on Canadian goods were more targeted, tariff rates were lower, and the conflict was resolved in a relatively short period,” the agency noted.
Now, Fitch assumes that the effective US tariff rate on Canadian imports will rise to 15% in 2025, up from just 0.1% in 2023, with Canadian retaliation expected.
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