With the US and Mexico coming to an agreement on the way forward for Nafta, Canada has been left out in the cold. But could Canadian banks weather a trade storm? Joy Macknight reports.

US president Donald Trump and outgoing Mexican president Enrique Peña Nieto clinched a deal to revamp the North American Free Trade Agreement during their conference call on August 27. Their northern neighbour, Canada, is now under great pressure to overcome differences with the US by the end of September.

There is much hope that an agreement will be struck, despite Mr Trump’s inflammatory tweets, but questions arise around whether the Canadian banks could withstand a freezing of relations with the country’s biggest trading partner. While they were praised for their soundness throughout the global financial crisis, how fit are they today?

The top five Canadian banks (according to Tier 1 capital) – Royal Bank of Canada (RBC), Toronto Dominion (TD) Bank, Scotiabank, Bank of Montreal  and Canadian Imperial Bank of Commerce – have been steadily beefing up their balance sheet with core capital over the past five years. RBC, for example, has increased Tier 1 capital by more than 25%, whereas TD’s has risen by 37%. Clearly, they are sitting on strong foundations.

They are also more profitable than their US counterparties, reaching an average return on equity (ROE) of 17.5% in 2017, versus the top five US banks’ average ROE of around 12.5%. However, it is the Mexican banks that are the most profitable – with a 21.9% ROE average across the top five lenders.

All data sourced from www.thebankerdatabase.com.

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