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In a recently published report titled “Trade Risks Would Compound Canadian Banks’ Consumer Exposure,” Fitch Ratings argued that the escalating trade tensions with the United States and the possible exclusion of Canada from a renegotiated NAFTA deal could increase “increase risk for Canadian banks amid a slowing mortgage market and rising interest rates, potentially exacerbating the debt-service burdens of highly levered households.”

Key quotes from the publication

“Downside economic risks from tariff-related job losses could also translate into higher losses in bank consumer portfolios.”

“However, capital levels at the six major Canadian banks appear sufficient to absorb the potential downside shocks.”

 “Canadian bank earnings are highly correlated to GDP, which Fitch expects to moderate this year.”

“In a scenario where the US imposes auto import tariffs at 25% and additional tariffs on China, with trading partners retaliating symmetrically and a NAFTA collapse, Canada’s GDP would be cut by 0.8 percentage points in 2019 and 0.2 percentage points in 2020.”

“We believe a significant tariff or trade shock could lead the Bank of Canada to pause raising (or even cut) rates to help borrowers.”