Jefferies Financial Group downgraded both Royal Bank of Canada and Toronto-Dominion Bank to “Hold” from “Buy,” leaving no Canadian banks under their coverage with a “Buy” rating. (Andrew Francis Wallace/Toronto Star via Getty Images) · Andrew Francis Wallace via Getty Images
Jefferies Financial Group downgraded two of Canada’s largest banks on Tuesday to “Hold” from “Buy” in a bearish preview of the fourth-quarter earnings season that stands out against a generally more upbeat take from other analysts.
“After an exceptionally strong run in the fall, the Canadian banks are trading at levels that could charitably be described as fully valued,” analyst John Aiken wrote in a note to investors. “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.”
Jefferies downgraded both Royal Bank of Canada (RY.TO, RY) and Toronto-Dominion Bank (TD.TO, TD) to “Hold” from “Buy,” leaving no Canadian banks under their coverage with a “Buy” rating.
That position is largely based on valuations rather than structural concerns. Aiken declared his outlook for the fourth quarter as “solid” and noted that “we still believe in the investment theses” of the downgraded banks. And Jefferies’ preview is still accompanied by slight upward nudges of most price targets. (National Bank of Canada (NA.TO) is the exception, with its target lowered from $153 to $152.)
Nonetheless, analysts elsewhere have largely shown more enthusiasm for the major banks, which have each seen their stock prices on the Toronto Stock Exchange rise by at least 20 per cent since the start of the year. “The positive fundamental outlook has not changed in our view,” wrote CIBC analyst Paul Holden. Scotia analyst Mike Rizvanovic forecast “another solid quarter … to end a very strong year.”
Analysts’ views diverge most significantly over credit risk, capital markets momentum, and how long current earnings strength can last.
Jefferies and National Bank Financial analysts expect credit costs to stay elevated, while Desjardins and CIBC expect provisions to level off or improve as loan quality stabilizes. On capital markets, Jefferies predicts a moderation from recent highs, whereas Scotiabank and RBC think activity will remain strong through year-end. National Bank Financial cautioned that growth in capital markets faces “an incredibly high bar.”
Valuation differences persist as well. National Bank’s assessment mirrors Jefferies’ take that the banks are fully priced, while CIBC’s Holden argues that solid capital positions could justify modest multiple expansion. Scotia’s Rizvanovic suggested that although valuations are at a 13.2x multiple of fiscal 2026 earnings estimates, they sit at “a more reasonable” 11.9x on estimates for the 2027 fiscal year, “which we believe leaves some upside potential post-quarter.”
Concerns about valuations underpin Jefferies’ downgrade of Royal Bank and TD, with Aiken writing that the banks’ “multiples fully reflect their upside.” Jefferies also lifted Canadian Imperial Bank of Commerce’s (CM, CM.TO) target to $118 — an 11 per cent increase — for what it called steady execution. It trimmed its EQB Inc. (EQB.TO) target to $93 from $107 because of “profitability headwinds.” Although upside is in play, Aiken wrote, the heightened downside risk means “any miss on earnings in the fourth quarter could have significant negative consequences for valuation multiples.”
National Bank Financial upgraded Royal Bank to “Outperform” while downgrading Bank of Montreal (BMO.TO, BMO) to “Sector Perform.” Analyst Gabriel Dechaine wrote that RBC remains ”the sector’s quality leader,” citing its capital-markets strength and ability to maintain superior returns on equity. National Bank’s targets rose by an average of 13.6 per cent, including a 23.5 per cent jump for Bank of Nova Scotia (BNS.TO, BNS) — though the new $100 target is consistent with other analysts.
Another focal point heading into results is National Bank’s update on its acquisition of Canadian Western Bank. Multiple analysts said updates on expected revenue synergies and capital relief could prove to be a catalyst for the stock.
Analysts expect the banks to keep returning capital through buybacks and dividend increases, supported by the strong balance sheets and high capital levels they’ve built up since the pandemic. Canada’s major banks begin reporting results on December 2, when Scotia opens the season.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
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