Some banks downgraded as credit quality deteriorates and tariffs disrupt confidence
The 2025 outlook for Canadian financial institutions continues to weaken amid rising trade tensions, slowing lending growth, and increased risk of a domestic economic downturn, according to a new report from Jefferies.
Analysts point to elevated uncertainty surrounding political developments and ongoing trade negotiations, which could impact capital deployment strategies and lending momentum in the financial sector.
“In a (goods) trade war, Canada is a net loser and the financials that have a greater exposure outside their domestic footprint are likely to fare better in terms of top-line performance, given the anticipated deceleration in domestic lending growth,” the research note stated.
The report, authored by John Aiken, Joe Ng, and Aria Samarzadeh, outlines a revised base-case scenario that anticipates slower economic growth, rising unemployment, and a more pronounced deterioration in credit quality throughout 2025.
“While consumer lending has already softened, we anticipate that it will continue. However, greater losses are typically incurred in business lending,” the analysts noted.
The decline in credit quality is also expected to impact investment portfolios held by insurers, adding further pressure to financial performance, particularly for institutions with high domestic exposure.
Amid the uncertain outlook, Jefferies sees greater resilience in financial institutions with international diversification, including top-tier banks and life insurers. Firms such as Toronto-Dominion Bank, Bank of Montreal, Royal Bank of Canada, Manulife, and Sun Life Financial remain favoured picks.
Jefferies remains "constructive" on these names, citing their broad geographic reach, strong balance sheets, and ability to navigate external shocks more effectively.
Meanwhile, banks with a heavier reliance on Canadian lending are facing a downgrade. Both Canadian Imperial Bank of Commerce and National Bank of Canada have been lowered from Buy to Hold ratings due to heightened provisioning risk in the near term.
Read next: Canadian banks brace for higher loan loss provisions amid trade fears
Despite current market conditions, Jefferies noted that Canadian financials have historically demonstrated resilience in periods of economic stress. Analysts believe opportunities remain for well-managed, diversified institutions that are positioned to absorb credit shocks and respond strategically to macroeconomic shifts.
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