Large Canadian Banks Q1 2025 Earnings Round-Up: Solid Performance but Dark Clouds Approaching

Overshadowing the solid quarterly earnings results is the uncertainty related to the escalating trade war between the U.S. and Canada, as the ongoing threat of tariffs poses material downside risk to what was originally an otherwise generally positive 2025 growth outlook for North America and the Canadian banking sector. Additionally, the Bank of Canada announced its seventh consecutive rate cut on March 12, 2025, cutting the overnight rate by 25 basis points to 2.75%, as the trade war could weigh on economic activity while increasing unemployment and inflation. Although the macroeconomic environment is quickly becoming more challenging, the Big Six remain well positioned with ample liquidity, stable funding, and solid capital levels.

Key highlights include:

-- The Big Six's Q1 2025 sequential adjusted earnings increased 18.7%, boosted by higher trading revenues, which benefitted from elevated market activity.
-- Credit quality metrics weakened in Q1 2025, generally in line with expectations. The trade conflict and broad-based tariffs could result in a combination of economic deterioration, rising unemployment, and pockets of higher inflation that will undoubtedly lead to asset quality deterioration.
-- Capital levels at the Big Six remain sound and provide sufficient cushion to absorb heightened losses. Further, the Office of the Superintendent of Financial Institutions has levers it can pull to provide support, as do the federal and provincial governments.

"We had previously anticipated that credit metrics would likely moderate in the second half of the year as interest rate cuts were fully absorbed, along with the premise of a positive economic growth outlook for North America. However, a tariff war lasting for more than a few months will negatively affect both the U.S. and Canadian economies, with the Canadian economy being harder hit and potentially entering into a mild recession in 2025," said Carl De Souza, Senior Vice President and Sector Lead, North American Financial Institution Ratings. "While there will be headwinds to revenue and loan growth, the more significant impact would likely be to credit quality, with an extended period of higher-than-expected delinquencies, provisions for credit losses, and loan losses."