Canada\u2019s bank stocks are historically expensive. No one seems willing to bet against them<\/a><\/p>\nHere\u2019s what\u2019s actually behind the bank bubble burst of bullishness \u2014 and then the reasons to be skeptical \u2014 because this is a case where the fundamentals are genuinely good, but probably don\u2019t justify the full move. Not nearly.<\/p>\n
The single biggest driver is the credit-loss story shifting into reverse. Heading into 2025, the consensus fear was a mortgage-renewal cliff \u2014 roughly two million borrowers from the 2020-2021 record-low-rate vintage coming up for renewal at rates 2%-3% higher, heading into a real estate deflation cycle, with attendant predictions of a default wave. We were expecting a negative credit cycle too, but it never materialized. Rate cuts in 2024 and 2025 eased the credit stress, and the predicted surge in defaults proved way overblown.<\/p>\n
The result showed up directly in 2026Q2 earnings as sharply falling provisions: RBC\u2019s PCL (Provision for Credit Losses) fell 36% on a YoY basis, BMO\u2019s fell 28%, and TD\u2019s fell 20%. Falling loan loss provisioning flows straight to the bottom line.<\/p>\n
That produced across-the-board earnings beats. From the fiscal 2026Q2 prints: RBC net income +25% (EPS +27%), BMO net income +34% (EPS +41%), CIBC +23%, and TD +15%. Return on equity expanded meaningfully \u2014 CIBC\u2019s adjusted ROE hit +16.4%, and BMO\u2019s jumped to +13.5% from +9.8% a year earlier. And the banks rewarded holders with dividend hikes (RBC +7.3%, TD +3.7%, BMO +2.4%), which supports the shares in a market that prizes Canadian dividend yields and payout ratios.<\/p>\n
Two other tailwinds: capital-markets\/trading revenue has been strong (RBC\u2019s revenue +19%, CIBC\u2019s +21%), and the U.S.\/international growth engines \u2014 TD\u2019s East Coast franchise, Scotiabank\u2019s pivot toward mature North American markets and its KeyCorp stake, RBC\u2019s wealth division, and U.S. expansion \u2014 have added to the story.<\/p>\n
Now for the skeptical read on the situation.<\/p>\n
The valuations are the tell. The Big Six Banks have historically traded around 11x earnings; today, the average is roughly 15x on expected 2027 earnings \u2014 a level rarely seen in the past. The operating backdrop, as solid as it is, doesn\u2019t support a re-rating of this size.<\/p>\n
As for earnings quality, it is worth scrutinizing. Falling PCLs are a powerful EPS lever but a non-repeatable one \u2014 that kind of provision-release boost that typically is done once. Once provisions normalize, you need actual loan and revenue growth to carry earnings, and that\u2019s precisely what has been soft. Leaning on capital-markets revenue is also fragile: trading and advisory fees are historically volatile and a low-multiple line of business, which is why the rating agencies and OSFI have discouraged banks from over-relying on them \u2014 yet investors are treating soaring capital-markets profits as the new normal.<\/p>\n
Meanwhile, a couple of specific risks should be on our radar screen, as in the recent run-up in bond yields. This is the elephant in the room that could reawaken the mortgage-renewal problem. Fixed mortgage rates track government bond yields, which have surged as markets price potential BoC rate hikes to combat oil-driven inflation. The banks avoided the mortgage cliff in 2025, but that might not hold into late 2026 and 2027.<\/p>\n
The momentum risk is the one that should worry a fundamentals-oriented investor most. The rally has been increasingly momentum-driven. Just like U.S. Tech and Asian semiconductors. So if you have been late to the trade like us, it doesn\u2019t make much sense to jump in at this point and follow the herd. Patience will be virtuous.<\/p>\n
For those investors who rode the Canadian bank wave, perhaps think about trimming your oversized holdings and keeping them at an appropriate weight in the portfolio. And let\u2019s not confuse a series of one-offs that have boosted earnings with something we should be extrapolating into the future, which the pricing action in this last leg up has come to signify. All the more so at P\/E multiples rarely seen before \u2014 not to mention a price-to-book ratio of 2.7x versus the ten-year average of 1.7x. That is a near-60% premium!<\/p>\n
This all looks more like a late-stage momentum move on a good-but-not-great fundamental base rather than a durable re-rating. We shall wait for valuations to mean-revert and the momentum component behind the rally to subside before making a decision to move into this space.<\/p>\n
David Rosenberg is founder of Rosenberg Research<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"Canadian banks have been the TSX\u2019s version of the U.S. AI trade \u2014 the single sector carrying the…\n","protected":false},"author":2,"featured_media":808598,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[901,888,902,879,877,903,45,49,48,876,895,896,891,878,875,46,549,295,894,887,914,880,881,893,889,890,884,904,885,909,910,912,907,911,905,908,882,898,899,714,897,906,865,61,900,892,886,883,913],"class_list":["post-808597","post","type-post","status-publish","format-standard","has-post-thumbnail","category-business","tag-alberta","tag-arts-news","tag-bc","tag-breaking-news","tag-breaking-news-video","tag-british-columbia","tag-business","tag-ca","tag-canada","tag-canada-news","tag-canada-sports","tag-canada-sports-news","tag-canada-trafficcanada-weather","tag-canadian-breaking-news","tag-canadian-news","tag-economy","tag-education","tag-environment","tag-federal-government","tag-foreign-news","tag-globe-and-mail","tag-globe-and-mail-breaking-news","tag-globe-and-mail-canada-news","tag-government","tag-life-news","tag-lifestyle","tag-local-news","tag-manitoba","tag-national-news","tag-new-brunswick","tag-newfoundland-and-labrador","tag-northwest-territories","tag-nova-scotia","tag-nunavut","tag-ontario","tag-pei","tag-photos","tag-political-news","tag-political-opinion","tag-politics","tag-politics-news","tag-quebec","tag-sports-news","tag-technology","tag-travel","tag-trudeau","tag-us-news","tag-world-news","tag-yukon"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/808597","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=808597"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/808597\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/808598"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=808597"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=808597"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=808597"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}