Impairments increase in unsecured and commercial loans, with housing at risk if downturn deepens
Canadian banks are expected to face rising credit risks and mounting loan impairments as economic conditions deteriorate in the face of a trade war, according to a new report from Fitch Ratings.
The agency warned that Canada’s major lenders, while still maintaining strong financial foundations, are becoming more vulnerable as a 2025 recession looms. Fitch’s latest Global Economic Outlook, released March 18, projects a downturn driven by higher US tariffs, rising unemployment, and elevated inflation.
“Canadian banks face higher loan impairments and earnings pressure due to the worsening economic outlook from significant US tariffs,” Fitch said in its analysis.
Fitch maintains Canada’s sovereign credit rating at AA+ with a stable outlook, and noted that domestic banks continue to show solid financial profiles, with relatively healthy asset quality metrics, stable funding, and ample capitalization. However, the agency warned that these buffers may be tested as trade tensions escalate.
Fitch’s base case assumes that the US effective tariff rate on Canadian imports will surge from 0.1% in 2023 to 15% in 2025, before easing slightly to 10% in 2026. Canada is also expected to retaliate, heightening the risk of a drawn-out trade conflict.
Despite credit quality concerns, Canadian banks reported strong earnings in Q1 2025, driven largely by robust performance in capital markets. Trading revenue increased 22% year-over-year, with some banks reaching record highs amid elevated market volatility.
This capital markets strength helped absorb the rise in loan impairments, giving banks some short-term relief. Fitch’s credit ratings for Canada’s major banks currently range between ‘A+’ and ‘AA-’, with Stable Outlooks, except for Toronto-Dominion Bank (TD), which remains an outlier.
For now, rising impairments are not expected to trigger immediate rating downgrades.
“If impairments at Canadian banks rise to a level that results in significant losses that pressure earnings, this would not have a direct impact on rating sensitivities in the short term,” Fitch said.
However, if these earnings pressures become structural, Canadian banks could face reduced ratings headroom in the long term.
Mortgage risks remain low — for now
In the first quarter of 2025, Fitch observed deterioration in Canadian banks’ unsecured retail portfolios, alongside rising impairments in commercial lending. The agency expects some “lumpiness” in impaired loan ratios over the coming quarters as banks work to resolve outstanding balances.
“Although not our base case, a prolonged or deeper recession would lead to higher mortgage impairments that would take longer to resolve, especially if accompanied by a housing market downturn,” Fitch stated.
However, the agency emphasized that mortgage impairments would be rising from a very low base.
Business confidence plunges, loan risks grow
The trade war has already had ripple effects. According to the Canadian Federation of Independent Business (CFIB), small business confidence fell to an all-time low in March, with sentiment dropping sharply in the hospitality, manufacturing, transportation, and agriculture sectors — all of which are highly exposed to global trade volatility.
Fitch noted that Canadian banks emerged relatively unscathed during the 2018–2019 trade war, thanks to more targeted US tariffs and a shorter duration of conflict. This time, however, the scale and unpredictability of US trade policy pose more significant risks.
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Commercial and personal lending activity has already slowed since the second half of 2024, reflecting softening conditions. The first wave of tariffs is expected to have a direct impact on commercial loans, particularly for banks with exposure to industries like industrials, agriculture, automotive, construction, energy, and mining.
“The potential increase in tariffs would pressure commercial loan performance and dampen consumer spending,” Fitch said. If the downturn proves prolonged and results in structurally higher unemployment, the impact could eventually extend to mortgages and the broader housing market.
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