Key Takeaways
- Trade policy uncertainty and sectoral tariffs are expected to create an unfavourable operating environment for Canada’s big six banks in fiscal 2026.
- Credit quality is likely to deteriorate further before provisions for credit losses potentially peak in the second half of the fiscal year.
- Earnings are expected to remain solid but lower year over year due to higher credit costs, slower net interest income growth, and weaker capital markets revenues.
- Diversified fee-based income across products and geographies should help offset lending pressures and support earnings resilience.
- Strong capital, liquidity, and cost discipline leave Canadian banks well positioned to manage economic and geopolitical volatility.
Introduction to the Canadian Banking Sector
The Canadian banking sector is expected to navigate a challenging operating environment in 2026, with trade policy uncertainty, tariffs, and geopolitical risks weighing on growth and credit conditions. According to Carl De Souza, senior vice-president at Morningstar DBRS, the baseline macroeconomic outlook has generally improved, but looming risks add key elements of uncertainty that could negatively affect GDP growth, unemployment, and inflation. Despite these challenges, De Souza expects lower but still solid year-over-year earnings in fiscal 2026, reflecting higher credit costs, slower net interest income growth, and lower capital markets-related revenues.
The Impact of Trade Uncertainty on Canadian Banks
Trade policy uncertainty and sectoral tariffs are expected to create an unfavourable operating environment for Canada’s big six banks in fiscal 2026. De Souza notes that pressures from sectoral tariffs will likely result in further credit deterioration for the Big Six banks in fiscal 2026 before provisions for credit losses potentially peak in the second half of the fiscal year. Additionally, the Canadian and U.S. economies could experience adverse effects if upcoming negotiations on the CUSMA trade agreement prove problematic and/or the U.S. decides to exit the agreement. However, De Souza believes that the Big Six maintain very diversified business models that have proven resilient and provide earnings resilience in an uncertain and potentially volatile operating environment.
Geopolitical Concerns and Their Impact on the Banking Sector
Geopolitical concerns, such as the situation in Venezuela, the ongoing conflict between Ukraine and Russia, and other conflicts, including in Gaza, are also being watched closely by De Souza. These developments could have broader global implications for growth, as well as trade impacts, and skew risks to the downside in 2026. However, De Souza remains optimistic that cooler heads will prevail, and trade issues and CUSMA negotiations are resolved in an orderly manner, limiting more severe downside risks. The Big Six are also focused on cost discipline, with several undertaking restructuring programs, which should help manage non-interest expense growth and support positive operating leverage.
The Role of Artificial Intelligence in the Banking Sector
De Souza also discussed the role of artificial intelligence (AI) in the banking sector, noting that all the banks are talking about AI and deploying it in various forms. Two banks, TD and RBC, have actually quantified AI initiatives, projecting revenue uplift and cost savings. TD has projected about $500 million in potential revenue uplift and $500 million in cost savings in the medium term, while RBC has cited up to $1 billion in AI enterprise value by 2027. While it will take time to see tangible results, De Souza expects continued progress in the coming years, including fiscal 2026.
Conclusion and Outlook for the Canadian Banking Sector
In conclusion, the Canadian banking sector is expected to face a challenging operating environment in 2026, with trade policy uncertainty, tariffs, and geopolitical risks weighing on growth and credit conditions. However, the Big Six banks maintain diversified business models that have proven resilient and provide earnings resilience in an uncertain and potentially volatile operating environment. With strong capital, liquidity, and cost discipline, Canadian banks are well positioned to manage economic and geopolitical volatility. While earnings are expected to remain solid but lower year over year, the sector is expected to continue to navigate the challenges ahead and emerge stronger in the long term.