Immigration and trade policies cloud next year’s outlook, RBC CEO says as two major banks report Q4 earnings

Royal Bank of Canada’s chief executive officer says tighter immigration and trade policies are clouding the banking industry’s outlook for next year, and political leaders need to resolve the concerns causing uncertainty.

Canada’s largest lender and National Bank of Canada NA-T both reported fourth-quarter earnings Wednesday, and leaders of both cautioned of risks to the economy as the banking sector moves into a new fiscal year. The banks posted profits that beat analyst expectations on higher-than-expected revenue growth, even as provisions for loans that could default edged up.

Among the risks looming in 2025, RBC RY-T CEO Dave McKay also pointed to weaker consumer spending and business conditions, as well as rising unemployment. On tariffs, he said that government leaders need to find a solution and Canada needs to explore options to reinforce its economy in the face of these threats.

“This was a strong message that we have to improve certain aspects of our operations in Canada around our borders. And there are other ways of solving that without hurting both economies – the Canadian economy and the U.S. economy,” Mr. McKay said during a conference call with analysts, adding that the uncertain outlook does not affect the bank’s strategy or business operations.

“I expect our political leaders to find a better path to do that. The key is not to overreact right now.”

U.S. president-elect Donald Trump has said he plans to impose 25-per-cent tariffs on all products from Canada and Mexico. And the Canadian government has said it will scale back its annual immigration targets.

At the same time, some conditions are improving to help counteract these concerns. Mr. McKay said that consumer income and savings levels are rising, and the Bank of Canada has slashed the cost of borrowing.

National Bank CEO Laurent Ferreira said Wednesday that the Canadian government needs to act quickly to get ahead of the negotiation tactics of the new U.S. administration.

“We need to take this very seriously, and we need to think about what the response would be from Canada,” Mr. Ferreira said in an interview. “Whether it’s the business community or government, we should all get together, discuss and have a more united approach toward what we should do. There are growing concerns amongst everyone, including government, about productivity in our country.”

Bay Street is closely watching policy developments in the U.S. as president-elect Donald Trump prepares to take office. Scotiabank CEO Scott Thomson predicted Tuesday that uncertainty prompted by government leadership changes in the U.S. and Mexico – markets that are key to his plan to rejig the bank – will ease quickly.

On Wednesday, Moody’s Ratings upgraded its global outlook for banks to stable from negative, citing stabilizing economic growth and easing interest rates. But the ratings agency added that geopolitical conflicts, trade tensions and policy changes in the U.S. create significant uncertainty and risks.

RBC and National both posted higher fourth-quarter profit Wednesday that exceeded analyst estimates. On Tuesday, Scotiabank reported higher net income, but missed analyst estimates. Toronto-Dominion Bank, Bank of Montreal and Canadian Imperial Bank of Commerce will wrap up earnings week for the Big Six lenders on Thursday.

RBC has spent much of the past year integrating its takeover of HSBC Bank Canada, which includes a large book of commercial and corporate clients with ties to China and other global markets.

In response to an analyst question about whether a trade war could affect the HSBC clients that RBC acquired, Mr. McKay said that the majority of the businesses are based in Canada but may do business with China.

“We thought about that when we made the acquisition, but these clients are, are embedded in Canada, and are strong Canadian clients – both on the commercial and consumer side – and are very large, significant clients with the global operations, not just back to Hong Kong,” Mr. McKay said.

RBC personal banking head Erica Nielsen and commercial banking head Sean Amato-Gauci both said that retention rates of HSBC clients and advisers are above expectations. Mr. Amato-Gauci added that the bank has also acquired 3,500 new small business clients.

National Bank is in the midst of an acquisition of its own. Canada’s second-largest bank plans to close its takeover of Edmonton-based Canadian Western Bank early next year, extending the reach of the Montreal-based lender into Alberta and British Columbia.

Mr. Ferreira said during a conference call with analysts that the deal is in the final stages of approvals, as Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, is reviewing the proposal. The final step will be for Minister of Finance Chrystia Freeland to greenlight the deal.

Even though National Bank’s fourth-quarter earnings beat analyst expectations, investors reacted negatively. Its stock slumped 3.4 per cent at 3 p.m. in Toronto, while the S&P/TSC Composite Banks Index remained relatively flat.

National Bank’s share price has been on a tear this year, surging 34 per cent and outperforming most of the other Big Six banks.

The lender set aside $162-million in provisions for credit losses – the funds banks set aside to cover loans that may default. That was higher than analysts expected, and included $145-million against loans that the bank believes may not be repaid.

Loan loss provisions are a key indicator of the health of the Canadian consumer and businesses. Banks have been ratcheting up reserves as high interest rates put pressure on the ability of their clients to pay off their debt.

RBC set aside $840-million in provisions – higher than analysts anticipated – and included an uptick in reserves for loans that the bank believes may not be paid off.

“Looking ahead to 2025, we expect the current trend of a rising unemployment rate and slower GDP growth to persist,” National Bank chief risk officer Jean-Sébastien Grisé said during the conference call. “Interest rates remain restricted and there remain significant uncertainties in the forecast of economic growth.”