Investing.com -- The 2025 outlook for Canadian financials has softened due to rising trade tensions and the risk of a domestic economic downturn, according to a new report from Jefferies. While Jefferies maintains a moderately optimistic stance for a recovery in 2026, it warns that downside risks remain elevated.
The firm notes growing uncertainty linked to domestic political developments and potential trade negotiations, which could affect capital deployment and lending outlooks. Although Canadian financials have historically demonstrated resilience in downturns, Jefferies sees limited visibility in current conditions.
Jefferies’ revised base case anticipates slower economic growth, rising unemployment, and a sharper deterioration in credit quality. Financial institutions with greater international exposure, such as life insurers and banks like Toronto Dominion Bank (TSX:TD), Bank of Montreal (TSX:BMO), and Royal Bank of Canada (TSX:RY), are expected to outperform peers with more domestic lending concentration.
Consumer credit has already weakened and is projected to decline further, with greater losses expected on the business lending side. This may also weigh on insurer investment portfolios, Jefferies said.
Wealth management is expected to remain steady barring a severe market correction. Volatility has improved near-term prospects for trading but continues to suppress advisory and capital markets activity.
Among top picks, Jefferies remains constructive on high-quality, diversified firms including Royal Bank, TD, Manulife (TSX:MFC), and Sun Life Financial (NYSE:SLF) Inc. (TSX:SLF). However, banks with heavier domestic exposure, such as Canadian Imperial Bank Of Commerce (TSX:CM) and National Bank of Canada (OTC:NTIOF) (TSX:NA), have been downgraded to Hold from Buy due to increased provisioning risk.
For investors adopting a more defensive stance, Jefferies highlights property and casualty insurers such as Definity Financial Corp (TSX:DFY) and Intact Financial Corporation (TSX:IFC), along with Great-West Lifeco Inc . (TSX:GWO) and its parent Power Corporation Of Canada (TSX:POW), all of which have historically outperformed during economic stress.
Despite near-term challenges, Jefferies emphasizes the sector’s historical resilience and notes that opportunities remain for well-positioned names capable of navigating market uncertainty.