TORONTO — Canada's largest banks are poised to report a decrease in loan-loss provisions for the third quarter, suggesting that the feared impact of U.S. tariffs on their loan portfolios may not be as dire as previously anticipated.

According to forecasts, the big six Canadian banks are expected to allocate around $5.22 billion in loan-loss provisions, a noticeable drop from $6.37 billion in the previous quarter. This shift comes after months of building provisions in anticipation of a potential North American trade war, which raised concerns over defaults on various loans, including commercial, credit card, and mortgage loans.

Interestingly, data from the U.S. Census Bureau revealed that approximately 92% of Canadian exports entering the U.S. in June did so tariff-free, thanks to exemptions under the North American Free Trade Agreement (NAFTA). This insight has bolstered optimism among investors and analysts.

Prime Minister Mark Carney's recent decision to lift some retaliatory tariffs on U.S. imports adds to this positive sentiment. Canaccord Genuity analyst Matthew Lee noted a shift towards more manageable reciprocal tariffs among the countries involved in the Canada-U.S.-Mexico Agreement (CUSMA), suggesting that cooler heads are beginning to prevail.

Despite the decline in expected provisions, analysts caution that loan growth may still remain sluggish due to lackluster demand in the marketplace. The earnings season kicks off on Tuesday, starting with the Bank of Montreal and the Bank of Nova Scotia.

In a promising projection, net interest income — the gap between the interest banks earn on loans and what they pay on deposits — is expected to soar between 9.3% and 57%. Banks are also anticipated to benefit from robust performance in capital markets and wealth management segments, which are seeing increased fee income and demand.

Traditionally recognized as some of the best-capitalized banks globally, the Canadian banks have amassed excess capital but are limited in domestic investment opportunities. To navigate this, they've turned to stock buybacks, deploying approximately $4 billion in the third quarter alone.

Veritas analyst Shalabh Garg expressed anticipation for insights into capital deployment strategies from the banks’ management teams, which could be pivotal in helping them achieve medium-term financial goals.

As these institutions continue to expand in the U.S. and bolster their wealth management business, their adaptability reflects a resilience that may shield them from the fallout of international trade disputes.