A Grey Cloud of Uncertainty: Analysts Sound the Alarm on Canada’s Banks
Analysts warn of economic uncertainty as Canadian banks brace for tariff-related headwinds and rising credit losses.
Editorial Team (ET)October 4, 2026
Canadian banks are facing renewed pressure as analysts at CIBC and Canaccord Genuity trim their price targets, citing uncertainty from U.S. tariffs and a rising tide of provisions for credit losses (PCLs). The banking sector, once seen as a beacon of stability, is now navigating uncharted waters as economic concerns mount.
Analysts Sound the Alarm on Canadian Banks
Analysts have taken a cautious stance on Canada’s major banks, scaling back price targets across the board. Canaccord analyst Matthew Lee noted that “trade uncertainty casts a grey cloud over the banks,” reflecting the broader market’s concerns about ongoing economic turbulence. Lee lowered the sector’s price-to-earnings (P/E) multiple from 11.8x to 11.3x, signaling a more defensive outlook.
Among the hardest-hit banks is Bank of Nova Scotia (BNS), with its target slashed from $81 to $75. National Bank of Canada (NA) also saw a sizable reduction, dropping from $135 to $127. Meanwhile, Toronto-Dominion Bank (TD) and Bank of Montreal (BMO) faced more modest cuts, from $96 to $95 and $156 to $152, respectively.
Tariff Protection Picks: TD and BMO Stand Apart
CIBC’s Paul Holden emphasized the importance of U.S. exposure in mitigating risk. While most Canadian banks face a challenging domestic environment, TD and BMO stand out as relative safe havens. Holden identified them as "tariff protection picks," noting their higher proportion of U.S. earnings and lower exposure to Canadian loans. In contrast, banks like BNS and NA, with a stronger reliance on Canadian markets, could face steeper headwinds if economic conditions worsen.
Holden’s analysis suggests that TD and BMO’s positioning in the U.S. could serve as a buffer against the economic uncertainty caused by tariffs. As the Canadian banking sector braces for potential downturns, these banks may prove to be the most resilient in an increasingly volatile market.
Provisions for Credit Losses on the Rise
A growing concern for investors is the rising expectation that banks will need to set aside more capital to cover potential loan defaults. Canaccord’s Lee and CIBC’s Holden both anticipate an uptick in PCLs in the second quarter of 2025.
Lee pointed out that “most of the banks signaled the need for further builds if tariffs were mandated, which implies that we will likely see further builds in Q2.” This means that financial institutions are preparing for the possibility of rising defaults, particularly in the consumer credit sector.
While TD has yet to allocate additional reserves, other banks have already begun to shore up their defenses. The uncertainty surrounding tariffs, fiscal policy, and global trade relations makes it difficult to predict the full impact, but analysts agree that caution is warranted.
U.S. Exposure Remains a Key Factor
Holden reinforced the idea that “more U.S. is better” when evaluating Canadian banks. Earnings and loan portfolios in the U.S. are under less pressure than their Canadian counterparts, making U.S.-focused banks like BMO and TD better positioned for the near term.
Royal Bank of Canada (RY) is also considered a relatively stable player, while BNS and NA have the lowest proportion of U.S. earnings, making them more vulnerable to domestic economic headwinds.
Capital Markets Momentum Slows
Despite strong first-quarter results, Canaccord now expects a slowdown in the banks’ capital markets divisions in Q2. This shift is particularly significant for BNS and CIBC (CM), which have greater exposure to non-trading capital markets.
Previously, there was optimism that capital markets would continue to drive earnings growth, but changing economic conditions and trade-related uncertainty have forced analysts to revise their forecasts. The result is a more conservative outlook for the banking sector moving forward.
###A Sector in Transition ###
Canadian banks are in a period of transition, facing challenges from multiple fronts. Uncertainty surrounding tariffs, credit losses, and capital markets performance has prompted analysts to take a more cautious approach. While some banks, like TD and BMO, appear better positioned to weather the storm, others may face a more difficult path ahead.
As the second quarter unfolds, investors will be closely watching how banks adjust their strategies in response to these evolving risks. The next few months could prove pivotal in determining the direction of Canada’s banking sector in a rapidly changing economic landscape.
