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The imposition of severe sanctions on Russia won’t directly harm the Canadian banks, but the broader macro effects of the conflict could be felt through robust inflation, says DBRS Morningstar in a new report.

The rating agency said the big banks have little direct exposure to both Russia and Ukraine.

Even though Canada is part of the effort to pressure Russia through measures designed to exclude it from the global financial system, significant fallout for Canadian banks isn’t expected.

“While sanctions could have an adverse impact globally through cross-border payment and foreign trade channels, we see minimal direct adverse impacts on Canadian banks,” it said.

Specifically, “The banks’ related counterparty exposures are very minimal in both absolute terms as well as a percentage of their total exposures,” DBRS said.

Nevertheless, the report indicated that the broader fallout from the invasion could spread to the economy, and, ultimately, to the banks.

“The indirect macroeconomic implications for Canada of the conflict could ripple over the coming months potentially through higher commodity prices, additional supply disruptions, and heightened financial volatility,” DBRS said. “This could add to inflationary pressures, weigh on economic activity, and dampen consumer confidence.”

The firm said its “primary concern for the Canadian banking system” is the prospect of high inflation for an extended period, which drives interest rates up higher and faster than expected, pressuring household finances.

Still, DBRS said it remains “cautiously optimistic about the Canadian banking credit outlook for 2022.”