Canada’s big banks face a high bar for earnings

Canada’s major lenders have navigated a shifting tariff landscape, weak economic growth, and a sluggish recovery in the housing market so far this year, seemingly with ease. Their resilience has driven their shares higher, upping the ante to impress Bay Street with their results.

“The biggest risk at a juncture like this isn’t so much what the actual results are because they’re going to be good and they’re going to be record-breaking, but it could be, ‘Has the bar been set too high?’” said Brian Madden, chief investment officer with First Avenue Investment Counsel. His fund owns TD Bank, Royal Bank, and BMO.   

Big banks still delivering strong earnings growth

Big Canadian banks have seen their stock prices rise sharply this year, with gains ranging from around 20% to 35% year to date. But, failing to meet expectations doesn’t mean the stock needs to “crater,” Madden said. “It just might mean that they need to chop around sideways for a while while they grow into the multiple as earnings catch up to the price,” he said. 

Madden said he expects the midpoint of annual earnings growth for the Big Six to come in at around 13%. He said the banks have been dealing with the economic situation exceptionally well, with credit loss provisions—money set aside by banks to cover bad loans having peaked in most cases. He added that provisions are now coming down as a percentage of average loans. 

Canada’s economy remains a mixed picture

Growth in the Canadian economy this year has been mixed, with the year starting off with a mild contraction and rebounding in the spring. Inflation has also been creeping up to the high end of the Bank of Canada’s 1 to 3% target range. Meanwhile, the labour market has been showing signs of recovery with unemployment falling to its lowest level in two years in July.

“With the Canadian economy still mired in its doldrums, we do not expect much relief on the credit front, but nor do we anticipate that it will be a huge headwind, either,” John Aiken, an analyst at Jefferies, said in a note to investors. 

He said he remains concerned that current valuations do not fully reflect the uncertain outlook for bank earnings, but does not have any specific concerns heading into the earnings reports. “While we do not believe that the third quarter will pull the rug out from under their valuations, we maintain our stance that earnings will need to grow into their current prices, which is far from a near-term guarantee,” Aiken said.   

He also said fee income will likely be helped by financial markets activity giving a boost to wealth and capital markets divisions, but trading and advisory fees might have peaked in the second quarter. 

Article Continues Below Advertisement

Madden said all six of the major banks are expected to deliver positive growth in their capital markets businesses, but some are expected to fare better than others. “The ones that stand out as being most improving would be TD, BMO, and (CIBC). And the one where I think it’s most material to the overall bank would be Royal, given the size of that franchise,” he said.   

Canaccord Genuity Corp. analyst Matthew Lee said he was raising his capital markets forecast ahead of Canadian bank earnings as the outsized performance of U.S. banks suggested trading remained active during the period.

“On the investment banking side, Canadian domestic deal flow continues to ramp up, buttressed by increased Big Six participation in U.S. and global transactions,” he wrote in a report.

Meanwhile, Mike Rizvanovic, an analyst at Scotiabank, said in a note that credit losses will be closely watched as provisions for credit loss ratios have ticked higher over the past few years. He said provisions for credit losses on impaired loans are “likely to move a bit higher sequentially.” 

What to watch as banks report earnings

Scotiabank and BMO Financial Group are set to report their results on Tuesday, followed by National Bank of Canada on Wednesday. CIBC, Royal Bank of Canada, and TD Bank are scheduled to report earnings on Thursday.

During their second quarter, many bank executives had expressed a general cautious optimism about the future as their earnings beat expectations. Five of those—TD, Royal Bank, Scotiabank, BMO, and National Bank—hiked their quarterly dividends.     

For Royal Bank and BMO, Madden said he will be watching for any updates on the joint sale of Moneris Solutions Corp., announced in August.

For TD, he said he will be watching for progress on its previous anti-money laundering issues, where it’s been working to implement more controls and mitigation measures. In 2024, the bank was fined more than US$3 billion by U.S. regulators after pleading guilty to multiple charges tied to money-laundering failures.