Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
On April 2, US President Donald Trump announced sweeping tariffs on goods imported from the rest of the world. Canada and Mexico were spared from these new tariffs; however, the previously announced tariffs on Canada are still in place, and the 25% global auto tariff has taken effect.
We are maintaining our fair value estimates for the Canadian banks as there seems to be room for negotiation between Canada and the US. As such, we have not included a recession for the Canadian economy in our base-case forecast. However, if there are new broad tariffs on Canada that last for prolonged periods, the Canadian economy could enter into a recession and the Canadian consumer will face higher inflationary prices and a higher unemployment rate. This would lead to lower balance sheet growth and higher credit costs, damping profitability and returns.
We highlight that the recession risk for the US economy has increased if the April 2 tariffs and the rest of the world’s retaliatory tariffs are upheld. Across our Canadian bank coverage, Bank of Montreal BMO and Toronto-Dominion TD have the most exposure to the US, deriving about 40% and 30% of their respective earnings there; they are likely to be more negatively affected should the US economy face pressure. Royal Bank of Canada RY has around 25% earnings exposure to the US, while Canadian Imperial Bank of Commerce CM has around 20%. Bank of Nova Scotia BNS and National Bank of Canada NA have the least US exposure among peer Canadian banks at around 10% of earnings.
On a separate note, Scotiabank derives 30% of its earnings from Latin America outside of Mexico, mostly Peru, Chile, Colombia, and the Caribbean. Most of its international markets are exposed to a 10% reciprocal tariff rate from April 2, which is better than most Asian and European countries. Scotiabank’s Mexico earnings exposure is around 13.5%; Mexico also seemed to fare better than the rest of the world from the April 2 announcements.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
