TORONTO – Banks went into last quarter’s earnings results with analysts worried they might not be able to justify lofty valuations, only to have almost all of the banks handily beat earnings expectations.
Heading into fourth-quarter results that kick off Dec. 2, valuations are even higher, but analysts are somewhat divided on whether it means market optimism has overshot underlying economics risks.
Earnings come as the overall Canadian economy has been shaky. GDP shrank 0.4 per cent in the second quarter, while expectations are that it could show a modest 0.5 per cent gain for the third. Unemployment has stayed elevated, coming in at 6.9 per cent for October.
Uncertainty caused by U.S. trade policy has also helped keep home sales below long-term trends and left businesses hesitant to invest.
The overhangs have meant loan growth at banks has also been modest, but analysts still expect earnings to be boosted by buzzing capital markets, wealth management and steady performance in other divisions.
“We expect another solid quarter from the large Canadian banks to end a very strong year,” said Scotiabank analyst Mike Rizvanovic in a note.
The encouraging outlook comes as Rizvanovic and other analysts don’t expect meaningful movement in provisions for bad loans the fourth quarter. Banks built up the provisions as trade tensions rose, and while they aren’t expected to unwind them much, there also isn’t pressure to add.
Pressure on borrowers has eased, thanks especially to lower interest rates. The Bank of Canada made cuts in September and October to bring the headline policy rate to 2.25 per cent, down from five per cent in mid 2024.
With stock markets booming and banks showing strength in most areas, the Big Six are trading at around 13 times their forward price to earnings level. That’s well above the roughly 10.5 times for their 20-year average.
“Canadian banks are trading at levels that could charitably be described as fully valued,” said Jefferies analyst John Aiken in a note. Jefferies downgraded RBC and TD heading into the results.
While the Canadian and U.S. economies have been defying negative expectations, the muddied economic outlook for 2026 raises concerns about how long it can last, he said.
“In an outlook where top line growth will remain challenged, and credit pressures have yet to dissipate, we believe that the current downside risk is greater than their upside risk.”
Elevated share prices have also been boosted by significant buybacks, nearly 45 million in the last quarter, to make it one of the most active on record, said National Bank analyst Gabriel Dechaine.
“With the group trading at lofty valuations, we question whether this trend can or should continue.”
He noted that bank stocks have outperformed the wider market by six percentage points (which includes TD seeing a roughly 50 per cent gain this year), to put the sector at valuations not seen since before the financial crisis in 2008-09.
The situation means banks share prices fully reflect the positives, while offering limited compensation for downside risk that the challenging credit environment presents, said Dechaine.
Longer-term though, the banks aren’t looking so expensive, said Rizvanovic.
Expectations are for stronger economic growth ahead that leaves valuations at a less lofty 11.9 times price to earnings, based on expected earnings for 2027.
The level is still above the 10-year average, but Rizvanovic said the historic trend isn’t so relevant as the banking sector is much more stable these days with very strong capital cushions.
A lot can happen between now and 2027 though, with the Canada-United States-Mexico Agreement up for renegotiation next year and U.S. policies in general still uncertain.
Given the uncertainty, Aiken is leaning on the cautious side.
“With resolution to the U.S.-Canada trade war seemingly on hold, we believe a more uncertain macro outlook could test credit quality.”
Scotiabank kicks off earnings on Tuesday, followed by RBC and National Bank on Wednesday and TD, CIBC and BMO on Thursday.
This report by The Canadian Press was first published Nov. 28, 2025.
Companies in this story: (TSX:RY; TSX:TD; TSX:BMO; TSX;CM; TSX:NA; TSX:BNS)
