Canadian Banks Q4 Earnings Preview: Bank Stock Valuation Hits Peak

Robust share buybacks and surprising economic resilience have fueled elevated share valuations.

Banks entered the last quarter’s earnings season amidst analyst concerns that their lofty valuations might be unsustainable, only to see nearly every major institution comfortably exceed earnings expectations.

As they approach the fourth-quarter results, which begin on December 2, valuations are now even higher. Analysts, however, are divided on whether this market optimism accurately reflects or has overshot the underlying economic risks.

The earnings release coincides with continued volatility in the overall Canadian economy. GDP shrank by 0.4% in the second quarter, and though Q3 saw a stronger-than-expected rebound of 2.6% (compared to a forecast of 0.5%), early projections for October again indicated contraction. Unemployment remains elevated, registering at 6.9% in October.

Further contributing to uncertainty, U.S. trade policy tensions have kept home sales below historical averages and led to business hesitation regarding new investment.

Despite these headwinds, which have kept loan growth moderate, analysts anticipate that earnings will be boosted by vibrant capital markets, strong wealth management performance, and steady returns from other divisions.

“We expect another solid quarter from the large Canadian banks to end a very strong year,” stated Scotiabank analyst Mike Rizvanovic in his report.

This encouraging forecast is supported by the expectation that there will be no significant changes in provisions for credit losses (PCL) this quarter. Banks aggressively built up PCLs as trade tensions mounted. While there is no major pressure to add to these reserves, they are not expected to be significantly reduced either.

Borrower stress has eased, primarily due to recent interest rate cuts. The Bank of Canada lowered its key policy rate in September and October, bringing it to 2.25%, down from 5% in mid-2024.

“Fully Valued”

Amid strong stock market performance and the banks’ demonstrated strength across most segments, the Big Six banks are currently trading at approximately 13 times their forward price-to-earnings (P/E) level. This is notably higher than their 20-year average of roughly 10.5 times.

“Canadian banks are trading at levels that could charitably be described as fully valued,” noted Jeffries analyst John Aiken, who recently downgraded RBC and TD ahead of the results.

Aiken argues that while the Canadian and U.S. economies have defied negative forecasts, the blurred economic outlook for 2026 raises concerns about the sustainability of this resilience.

“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.”

Share prices have also been significantly lifted by substantial share buybacks, with nearly 45 million shares repurchased last quarter, making it one of the most active quarters on record, according to National Bank analyst Gabriel Dechaine.

He questioned whether this trend is sustainable, given the elevated valuations. Dechaine pointed out that bank stocks have outperformed the broader market by six percentage points, placing the sector at valuations not seen since before the 2008-09 financial crisis.

This situation implies that bank share prices fully reflect the positives, while offering limited compensation for the downside risks presented by the challenging credit environment, Dechaine concluded.

Rizvanovic, however, offered a longer-term perspective, suggesting banks look less expensive based on future expected earnings. Forecasts for stronger economic growth ahead place 2027 expected valuations at a less aggressive 11.9 times P/E.

Nonetheless, uncertainty remains, particularly with the Canada-United States-Mexico Agreement (CUSMA) slated for renegotiation next year and ongoing ambiguity in U.S. policies.

Given the uncertainty, Aiken maintains a cautious view: “With resolution to the U.S.-Canada trade war seemingly on hold, we believe a more uncertain macro outlook could test credit quality.”

The earnings season commences with Scotiabank on Tuesday, followed by RBC and National Bank on Wednesday, and TD, CIBC, and BMO on Thursday.