Canadian bank stocks have had a blockbuster run over the past year, with the S&P/TSX Composite Banks Index up more than 50 per cent including dividends. Yet as the sector’s third-quarter earnings season unfolds, a more mixed picture is taking shape — one of resilient dividends and capital strength at some lenders, alongside credit-quality concerns and stretched valuations that are pushing some money managers to look elsewhere for returns.
Record Rally Meets Valuation Questions
Royal Bank of Canada has been held up by analysts as an example of the sector’s underlying strength, with commentary from kalkine.ca pointing to strong earnings, robust capital levels and a diversified business mix — spanning personal and commercial banking, wealth management and capital markets — as support for the bank’s long-term dividend sustainability. RBC currently trades at roughly 15.2 times forward earnings, or 2.9 times book value, according to portfolio manager Paul Harris of Harris Douglas Asset Management.
That valuation is part of a broader trend: Canadian banks as a group now trade around 15 times forward earnings, well above their historical range of 10 to 12 times, according to Rob Lauzon, chief investment officer at Middlefield Ltd. Maggie Meng, senior investment analyst at Brompton Funds and co-portfolio manager of the Brompton North American Financials Dividend ETF, says the group’s multiples are at the high end of their range but still describes them as “reasonably valued” up to 15 times forward earnings, pointing to a business mix that now leans more heavily on wealth management and capital markets revenue rather than loan growth alone, making earnings less cyclical than in the past.
Cracks Beneath the Surface at CIBC
Not every bank has shared equally in the rally’s momentum. Canadian Imperial Bank of Commerce shares fell 2.84 per cent following reporting that cited earnings pressure and credit concerns weighing on sentiment for the stock, according to kalkine.ca. The pullback illustrates that even amid a sector-wide advance, individual banks remain exposed to credit-quality worries that can move share prices sharply in a single session. Separately, kalkine.ca’s dividend analysis of CIBC examined whether the bank remains a reliable long-term income holding, underscoring that investors continue to scrutinize payout durability alongside earnings performance across the Big Five.
Why Some Money Managers Are Looking South
The strength of the Canadian bank trade over the past year has prompted some fund managers to argue the better opportunity now lies with U.S. lenders. Lauzon says U.S. regional banks trade at around 11 times forward earnings, versus a historical range of 12 to 13 times — a discount he contrasts with Canadian banks’ premium to their own history. He argues U.S. banks have “an easier path to higher loan growth” given that the U.S. economy is growing twice as fast as Canada’s, and that proposed U.S. rules easing capital buffer requirements would free up capital for growth, mergers and acquisitions, and buybacks.
Harris similarly favours large U.S. banks on valuation grounds, noting JPMorgan Chase trades at 14 times forward earnings, or 2.5 times book value, while Bank of America trades at 12 times forward earnings, or 1.4 times book value — both cheaper than RBC’s multiples. He points to prospective revenue tailwinds from capital markets activity, including anticipated IPOs from AI companies such as Anthropic and OpenAI, and debt issuance tied to hyperscaler AI infrastructure spending, as reasons U.S. banks’ earnings growth could outpace Canadian peers’.
Still, none of the managers described themselves as bearish on Canadian banks. Lauzon notes Canadian lenders have benefited from foreign investors seeking exposure to Canada’s economy amid Prime Minister Mark Carney’s infrastructure buildout, since “banks are the ones doing loans and bond deals.” Harris, who holds Canadian bank stocks in his dividend portfolio, says he wouldn’t add significantly more at current prices but would keep existing positions, adding that “over the long term they tend to do very well, and you get a strong dividend.”
Dividend Strength Still a Draw
Despite the valuation debate, income-focused strategies built around Canadian bank exposure continue to draw investor interest. Big Bank Split Corp, a fund providing exposure to Canadian bank shares, saw its stock rise 1.72 per cent, which kalkine.ca attributed to continued appeal from bank exposure and income generation. That reflects a broader theme running through the sector’s current earnings cycle: even as some analysts flag credit pressures at individual banks like CIBC or point to cheaper alternatives south of the border, the dividend profile of Canadian banks — reinforced by capital strength at institutions like RBC — remains a central reason investors continue to hold the group. Harris cautioned, however, that a sharp economic slowdown remains the key risk for banks broadly, noting that while lenders now carry more capital and have passed stress tests for severe downturns, share prices and valuation multiples would still be vulnerable in such a scenario.
This article is for informational purposes only and does not constitute financial, investment, or legal advice. Consult a licensed financial advisor before making investment decisions.
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