CIBC analyst upgrades RBC, downgrades BMO and National as tariffs negate U.S. preference #CanadaFinance

A CIBC Capital Markets analyst has upgraded Royal Bank of Canada (RY.TO)(RY) and downgraded Bank of Montreal (BMO.TO, BMO) and National Bank of Canada (NA.TO), in response to this week’s U.S. tariff announcements.

In a note to investors published Thursday, analyst Paul Holden writes that U.S. President Donald Trump’s tariffs have prompted a change in CIBC’s “thesis for U.S. over Canada” in terms of the banks’ exposure to different markets. He also adjusted those banks’ price targets, nudging RY up to $168 from $167 and lowering BMO ($141 from $152) and NA ($115 from $127).

“Given the breadth and magnitude of tariffs applied to the rest of the world, it is expected that the U.S. economy will face a challenging economic transition in the near term,” Holden wrote.

“Global tariffs with a relatively lower average rate being imposed on Canadian exports is not a positive story for the Canadian banks, but it does change our view that overweighting banks with more U.S. earnings is the best defence.”

All three lenders’ shares were down Friday on the Toronto Stock Exchange as at 10:45 a.m. ET, with Royal Bank dropping over 2.5 per cent and BMO and NA falling more than 4.5 per cent.

CIBC upgraded Royal Bank to “Outperformer” from “Neutral,” with Holden arguing that the lender “typically performs better in down markets.” He notes that RBC’s revenue mix — with a lower proportion generated through net interest income — leaves it less vulnerable to slower loan growth, tightening margins and bad credit. “Earnings and balance sheet diversification are positive attributes when economic conditions worsen.”

In downgrading National Bank from “Neutral” to “Underperformer,” Holden points to the lender’s ABA Bank business in Cambodia, which has been hit with a 49 per cent tariff rate. That rate “is likely to have a material impact on the economy given its dependence on U.S. exports,” Holden notes, and although ABA Bank’s exposure to manufacturing is minimal, “second-order impacts through GDP growth and unemployment have the potential to be significant.”

BMO, downgraded from “Outperformer” to “Neutral,” generates the highest proportion of earnings from its U.S. businesses of all the Canadian banks, Holden says. “We no longer view that as an advantage, at least not in the near term,” he wrote.

BMO generates a greater proportion of revenue from net interest income, and the bank’s earnings are also relatively more sensitive to a worsening credit environment, Holden says.

John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.

Download the Yahoo Finance app, available for Apple and Android.