Canadian Bank Rally at Risk from Trade War, Warns National Bank
Analysts from National Bank of Canada caution that the ongoing rally in Canadian bank stocks may be threatened by a potential trade war with the United States. Such a conflict could rapidly lead to increased unemployment and loan defaults.
Key Points:
* The S&P/TSX Composite Banks subindex has gained 4.5% since the election of Donald Trump, experiencing its best year since 2021.
* National Bank analyst Gabriel Dechaine warns that traders may be underestimating the potential downside risks of a trade dispute.
* A "severe trade war" could reduce bank revenues and necessitate a significant increase in provisions for loan losses.
* Dechaine estimates a worst-case scenario of a 30% decline in earnings per share by fiscal year 2026.
* Uncertainty surrounding the trade issue is likely to limit further gains in bank stocks.
* Bank profits are highly sensitive to Canada's macroeconomic outlook, which would be negatively impacted by high tariffs from the U.S.
* The potential for 10% unemployment and reduced consumer spending could harm banks' wealth management and capital markets businesses.