Bank of Montreal: Tariff Uncertainty Raises Concerns for Canadian Banks

The recent announcement of retaliatory tariffs by the Canadian government in response to the Trump administration's 25% tariff on Canadian goods and 10% tariff on Canadian oil and gas goods has raised concerns about the potential impact on Canadian banks, including Bank of Montreal (BMO). Morningstar has increased its Uncertainty Ratings for BMO, along with other major Canadian banks, to reflect the increased uncertainty in the Canadian economy due to these tariffs.



The most significant trade shock since the Great Depression, these tariffs could lead to a prolonged recession in Canada, with Canadian consumers facing higher inflationary prices and a higher unemployment rate. A weaker Canadian dollar could partially buffer the price shock to the US consumer, but it is unlikely to depreciate enough to fully offset the tariffs. The Canadian dollar has already weakened by more than 7% from a year ago, but further depreciation is expected.



Across banking coverage, Canadian Imperial Bank of Commerce (CM) has the largest exposure to uninsured mortgages, making it more at risk if the housing market sees a severe downturn during a recession. Bank of Nova Scotia (BNS) also faces higher risk due to its Mexico earnings exposure of around 13.5% in fiscal 2024. If the Mexico tariff becomes effective after a delay of one month, it could negatively impact BNS's earnings and overall financial performance.



BMO's financial performance could be negatively impacted by the increased uncertainty in the Canadian economy, as well as the potential recession and housing market downturn. The bank's exposure to uninsured mortgages and Mexico earnings make it more vulnerable to these risks. Rising credit costs and low revenue growth in the US banking segment could also contribute to BMO's vulnerability.



To mitigate these risks, BMO could consider diversifying its loan portfolio, strengthening its risk management practices, and exploring opportunities to expand its business in Canada or other international markets. By taking proactive measures, BMO can better position itself to weather the storm of retaliatory tariffs and mitigate the risks to its operations.

In conclusion, the recent announcement of retaliatory tariffs by the Canadian government has raised concerns about the potential impact on Canadian banks, including BMO. The increased uncertainty in the Canadian economy, as well as the potential recession and housing market downturn, could negatively impact BMO's financial performance. However, by taking proactive measures to mitigate these risks, BMO can better position itself to navigate the challenges posed by the tariffs.