Canadian banks are expected to navigate a challenging operating environment in 2026 as trade policy uncertainty, tariffs and geopolitical risks weigh on growth and credit conditions. While earnings are likely to remain solid, pressures from higher credit costs and slower revenue growth could limit upside.
BNN Bloomberg spoke with Carl De Souza, senior vice-president at Morningstar DBRS, about how U.S. trade uncertainty, credit deterioration and global risks may shape the outlook for Canada’s big six banks in the year ahead.
Key Takeaways
- Trade policy uncertainty and sectoral tariffs are expected to create an unfavourable operating environment for Canada’s big six banks in fiscal 2026.
- Credit quality is likely to deteriorate further before provisions for credit losses potentially peak in the second half of the fiscal year.
- Earnings are expected to remain solid but lower year over year due to higher credit costs, slower net interest income growth and weaker capital markets revenues.
- Diversified fee-based income across products and geographies should help offset lending pressures and support earnings resilience.
- Strong capital, liquidity and cost discipline leave Canadian banks well positioned to manage economic and geopolitical volatility.
Read the full transcript below:
ROGER: Global uncertainty continues, and there’s been a lot of speculation around Canadian banks. How could U.S. trade uncertainty shape the outlook for the Big Six in 2026? Let’s ask Carl De Souza, senior vice-president at Morningstar DBRS. I’ve got a frog in my throat there. Carl, thank you very much for joining us. I’ll see if I can talk now.
CARL: Thanks for having me, Roger.
ROGER: How are the banks looking right now? As they start 2026, they’re coming off a good year. Are we expecting a repeat?
CARL: Yes, Roger, they did come off a very solid year, supported by their capital markets and wealth management businesses and fee income, which helped bolster revenues and net income heading into 2026. Our Canadian banking sector outlook is unfavourable, and just to clarify, this refers to the operating environment, where we expect tariff-related macroeconomic and geopolitical uncertainty to linger.
So, heading into 2026, the baseline macroeconomic outlook has generally improved, and stimulative fiscal and monetary policy should support growth. However, looming risks add key elements of uncertainty that could negatively affect GDP growth, unemployment and inflation — all important drivers of bank performance.
We believe pressures from sectoral tariffs will likely result in further credit deterioration for the Big Six banks in fiscal 2026 before provisions for credit losses, or PCLs, potentially peak in the second half of the fiscal year. We also note that the Canadian and U.S. economies could experience adverse effects if upcoming negotiations on the CUSMA trade agreement prove problematic and/or the U.S. decides to exit the agreement.
Having said all that, to answer your question, we nonetheless expect lower but still solid year-over-year earnings in fiscal 2026, reflecting higher credit costs, slower net interest income growth and lower capital markets-related revenues following a record year last year.
ROGER: That says a lot about the banks. You’ve factored in the possibility that CUSMA may fall apart, and yet you still think there’s a chance they’ll have a good year.
CARL: Yes, and there are several reasons for that. Interest rate cuts in 2025 continue to provide some relief to borrowers with respect to debt servicing costs as maturities continue to reprice. Why we expect deterioration is that there will likely be a pause in further rate cuts, a widening income gap, and sectoral tariffs that will continue to pressure pockets of borrowers.
However, the Big Six maintain very diversified business models that have proven resilient and provide earnings resilience in an uncertain and potentially volatile operating environment. Fee-based income by geography and product should enable the Big Six to bolster overall earnings and mitigate lending income pressures from slower loan growth and broadly stable to slightly improving net interest margins.
That diversification, along with exposure that several of the Big Six have to the U.S. — a more resilient economy and much larger market — continues to drive capital markets and wealth management revenues and helps maintain earnings resilience.
ROGER: Another issue you mentioned, along with trade, was geopolitical concerns. What are some of the headwinds you’re watching there?
CARL: There’s a lot going on right now. The situation in Venezuela, the ongoing conflict between Ukraine and Russia, and other conflicts, including in Gaza. We’re watching how these developments evolve and how they could have broader global implications for growth, as well as trade impacts.
The combination of these factors skews risks to the downside in 2026, but we remain optimistic that cooler heads will prevail. Ideally, trade issues and CUSMA negotiations are resolved in an orderly manner, limiting more severe downside risks. The Big Six are also focused on cost discipline, with several undertaking restructuring programs, which should help manage non-interest expense growth and support positive operating leverage.
ROGER: Did you look at artificial intelligence at all and how banks are incorporating it?
CARL: We did look at AI. All the banks are talking about AI, Roger. Two banks — TD and RBC — have actually quantified AI initiatives, projecting revenue uplift and cost savings. All the banks are deploying AI in various forms, but it will take time to see tangible results.
They will continue to maintain elevated AI-related spending, as it’s an important driver of future productivity, efficiency and potential revenue uplift. The Big Six have significant budgets to deploy here. As mentioned, RBC and TD have quantified potential gains, but those targets are several years out. Still, in coming years, including fiscal 2026, we expect continued progress.
ROGER: What kind of savings are they projecting?
CARL: TD has projected about $500 million in potential revenue uplift and $500 million in cost savings in the medium term, though it did not specify a precise timeline. At its recent investor day, 2029 was referenced, but the bank did not explicitly tie those AI gains to that year.
RBC has cited up to $1 billion in AI enterprise value by 2027, although it did not break that down between revenue uplift and cost efficiencies.
ROGER: We’ll leave it there. Carl, thank you, as always, for joining us.
CARL: Thanks very much, Roger. I appreciate it.
ROGER: Carl De Souza, senior vice-president at Morningstar DBRS.
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This BNN Bloomberg summary and transcript of the Jan. 6, 2026 interview with Carl De Souza are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
