Can Canadian Banks Sustain Their Rally With Perfect Earnings?
The iconic “Big Six” Canadian banks—Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM), and National Bank of Canada (NA)—are pillars of North American finance. Recently, their stocks have enjoyed a significant rally, buoyed by resilient domestic economies and the anticipation of peak interest rates. But as earnings season approaches, a critical question looms: Can this momentum continue, or are investors facing a reality check? The answer hinges not just on their core Canadian operations, but on a complex web of external pressures, from U.S. political uncertainty to global economic crosscurrents.
The Foundation of the Rally: Domestic Strength Meets Peak Rates
The recent uptick in Canadian bank stocks isn’t without foundation. For the past year, these institutions have navigated a challenging environment with notable fortitude.
Profiting from the Rate Hike Cycle
A primary driver has been the Bank of Canada’s aggressive interest rate increases. Higher rates have traditionally boosted bank profitability by widening the “net interest margin“—the difference between what banks earn on loans and pay on deposits. This dynamic has provided a substantial tailwind to earnings, even as loan growth moderated.
Resilient Credit Performance
Despite fears of a recession and rising household debt, credit loss provisions have remained relatively manageable. The Canadian job market has stayed strong, and while delinquency rates have crept up from historic lows, they haven’t spiked to crisis levels. This has allowed banks to maintain robust capital positions and return significant capital to shareholders through dividends and buybacks.
The “Soft Landing” Hope
Market optimism that central banks might engineer a “soft landing”—taming inflation without triggering a severe recession—has also lifted financial stocks. The prospect of a stable, albeit slower-growing, economic environment is favorable for banks compared to a deep downturn.
The Gathering Storm Clouds: External Threats to Growth
However, the path forward is fraught with challenges that could derail the rally. The biggest threats lie outside Canada’s borders, in the very markets these banks have expanded into for growth.
The Trump Tariff Wildcard
A major overhang is the potential return of protectionist U.S. trade policies. Former President Donald Trump has floated the idea of imposing universal tariffs of 10% or more on all imports, which would include Canadian goods. For banks with deep U.S. ties—particularly TD and RBC—this is a direct threat.
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U.S. Regional Banking Jitters
While the Big Six are globally systemically important and well-capitalized, lingering anxiety in the U.S. regional banking sector can cast a shadow. Concerns over commercial real estate exposure or deposit flight can lead to a general risk-off sentiment toward bank stocks, impacting Canadian lenders by association.
The Canadian Housing Conundrum
Domestically, the housing market remains a double-edged sword. High immigration supports demand, but affordability is stretched thin. A sharp correction, while not the base case, remains a tail risk that could impact mortgage portfolios and consumer spending power.
The Earnings Litmus Test: What Investors Will Scrutinize
This quarter’s earnings reports will be a crucial barometer. Investors will look beyond the top and bottom lines to specific metrics that signal future health or vulnerability.
Key Performance Indicators (KPIs) to Watch
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The Verdict: Sustainable or Set for a Stall?
The sustainability of the Canadian bank rally is not a simple yes or no. It is likely to be a story of differentiation and selective strength.
Banks with more diversified revenue streams, superior cost control, and manageable exposure to the most at-risk sectors (like certain U.S. commercial real estate) are better positioned to deliver “perfect” or at least “good enough” earnings to maintain investor confidence. Those with heavier reliance on a single market or showing early signs of credit deterioration may struggle.
Furthermore, valuations have risen. For the rally to continue, banks need to demonstrate they can generate earnings growth that justifies these higher prices, even in a less favorable rate environment. The era of easy money from rising rates is ending; the next phase requires operational excellence and strategic agility.
Conclusion: A Cautiously Optimistic Stance
Canadian banks are entering a more complex phase of the economic cycle. Their domestic fortress remains strong, but the moat is being tested by external forces. The upcoming earnings season will reveal whether they have the defenses to hold.
While a broad-based, explosive rally may be harder to achieve, there is a path for sustained, steady performance. Investors should prepare for increased volatility and stock-specific performance based on each bank’s unique risk profile and execution capabilities. The message is clear: look past the headline earnings number and dig deep into the details. The banks that can navigate the crosswinds of trade policy, economic uncertainty, and shifting interest rates will be the ones that not only sustain the rally but lead the financial sector into the next chapter.
