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An escalating trade war would likely crimp, but not cripple, the earnings of Canada’s big banks, according to report published Tuesday from Toronto-based DBRS Ltd.

The Big Six banks are “well positioned to cope with the potential adverse impacts from ongoing trade disruptions,” the report says.

Although the banks would likely see their credit costs rise due to their exposures to vulnerable sectors, their commercial loan portfolios are well diversified, and they have strong underlying earnings that would help offset this effect, the report says.

In particular, more severe trade disruptions would start to impact the banks’ lending exposures to sectors that are vulnerable, such as agriculture, the auto sector, energy, forestry, manufacturing and mining. In total, these sectors account for approximately 23% of these banks’ total commercial lending portfolios, the report says, and this total includes loans to companies that are less exposed to trade disruptions as they are foreign firms, or multinationals.

Indeed, for the second quarter, the combined provisions for credit losses in the six vulnerable sectors was “not material,” totalling $23 million. “The potential impact on the large Canadian banks would be manageable, though noticeable on earnings, if adverse effects were limited to companies in these vulnerable sectors, with only a modest impact on the Canadian economy,” the report says.

The banks could be hit harder if the trade war led to a more extensive downturn in the global economy. Yet, even then, they are underpinned by, “earnings power strong enough to absorb an elevated level of credit costs and their earnings are diversified by product and geography,” the report says.

According to the report, the banks’ combined income before provisions and taxes (IBPT) was $60.3 billion in 2017, which was up 10% from 2016, and represents a gain of almost 40% since 2012.

“The improvement in IBPT in recent years has resulted from the focus of these banks on geographic diversification, as well as on containing expenses and generating positive operating leverage,” the report says.