Amid ongoing economic and geopolitical uncertainty, the Big Six banks are facing gloomier conditions that will weigh on earnings in the year ahead, says Morningstar DBRS Inc.
In a new report, the rating agency said that while the basic economic outlook has improved, the growing array of downside risks is clouding that outlook. In addition, continued uncertainty around U.S. trade policy and geopolitics will produce an “unfavourable operating environment” for the big Canadian banks in 2026.
“The outlook for consumer confidence and business investment in Canada remains fragile and generally tepid, while consumer sentiment in the U.S. has reached a 50-year low,” DBRS noted.
If trade tensions with the U.S. ramp up or uncertainty around trade policy increases, the banks would be “adversely affected,” the report said.
“Looming risks such as upcoming negotiation on the Canada-United States-Mexico Agreement add key elements of uncertainty that could negatively affect GDP growth, unemployment, and inflation,” said Carl De Souza, senior vice-president, sector lead, North American financial institution ratings at DBRS, in the report.
And, in the meantime, the impact of higher tariffs on certain sectors — such as steel, lumber, aluminum, and autos — will likely drive larger credit losses before the banks’ provisions for these kinds of losses “potentially peak in the second half of the fiscal year,” the report said.
“We view unsecured retail and commercial loans as likely areas of credit stress,” it said.
Some of these pressures should be at least partly offset by fees from capital markets activity and wealth management, although these revenues are expected to decline from last year’s record levels too.
Overall, DBRS expects the banks to face lower earnings in the coming year, amid higher credit costs, weaker capital markets revenues and slower net interest income growth.
However, it noted that the big banks remain “well positioned” to weather the storm, “with ample liquidity, stable funding and sound capital levels underpinning their credit ratings.”