Canada’s biggest banks

defied an uncertain economy three months ago to post record quarterly results and yet the mood remained tense.

Banking executives were guarded over their outlooks as they fussed over the future renegotiation of the

Canada-United States-Mexico Agreement (CUSMA)

that has been shielding local businesses from the worst of

U.S. President Donald Trump

’s tariffs on Canadian exports.

“Should current CUSMA-compliant goods largely maintain their qualified exemption to tariffs, Canada’s effective tariff rate should remain low and the economy should remain resilient,”

Royal Bank of Canada

chief executive Dave McKay said in August.

A lot has happened since then.

Trump in October said he was ending “all trade negotiations” with Canada because of an advertisement sponsored by the Ontario government that opposed the tariffs. He also threatened to hit Canada with additional tariffs, although that didn’t materialize. The two countries are yet to reengage, though

Prime Minister Mark Carney

is scheduled to visit Trump next week.

As such, it wouldn’t be a surprise when Canada’s biggest banks reveal their fourth-quarter earnings next week if talk about trade tensions dominates outlook conversations for the next fiscal year.

“We expect a relatively conservative tone given uncertainty with U.S. trade negotiations and lacklustre economic growth in Canada,” CIBC Capital Markets analyst Paul Holden said in a note on Nov. 18.

If the geopolitical situation improves and CUSMA is “extended with relatively little strain,” banks could “give back” some of their “large reserve build,” the money they kept aside to tackle potentially bad loans in their fiscal second quarter, Canaccord Genuity Corp analyst Matthew Lee said in a note on Nov 20.

Overall, though, the Big Six are expected to post higher earnings per share in the fourth quarter, which ended on Oct. 31, compared to the same period a year ago, but lower than in the third quarter. Earnings growth will rely on capital markets, wealth management and a relatively stable credit situation, analysts say.

Despite the expectations of higher earnings, Jefferies Inc. analyst John Aiken said Canadian banks are trading at levels that could “charitably be described as fully valued” after an “exceptionally strong run in the fall.”

And with the ongoing slow economic growth environment, he said the downside risk is greater than their upside risk.

“Any miss on earnings in the fourth quarter could have significant negative consequences for valuation multiples with near-term upside likely constrained, even under a modest beat scenario,” he said in a note on Nov 25.

While provisions for credit losses, the money banks keep aside to tackle bad loans, are likely to remain stable, investors could be wary about the sector’s exposure to private credit after a couple of banks in the U.S. recently revealed loan fraud accusations against borrowers that were linked to other lenders.

Salt Lake City-based Zions Bancorp said it took a US$50-million charge over two bad loans to two investment funds that in turn purchased distressed commercial mortgage loans. Phoenix-based Western Alliance Bancorp also said it was dealing with a fraudulent borrower.

Royal Bank of Canada analyst Darko Mihelic said there is a need to better understand how each bank participates in lending to private credit, but that current disclosures are limited.

“We have several concerns about the space, including limited disclosures, rapid growth and market opacity, as there are potential risks such as recent fraud cases in the U.S.,” he said in a note earlier this week. “We hope to gain a better understanding of the industry during (fourth-quarter) reporting.”

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But Bank of Nova Scotia analyst Mike Rizvanovic said in a note sent on Tuesday that his “discussions with management indicated no concerns” on their exposure to non-bank financial institutions and private credit at this point in time.

Bank of Nova Scotia

will kickstart the Big Six’s fourth-quarter earnings season on Tuesday, followed by Royal Bank of Canada and National Bank of Canada on Wednesday, and Canadian Imperial Bank of Commerce, Bank of Montreal and Toronto-Dominion Bank on Thursday.

• Email: nkarim@postmedia.com