Canada’s largest banks have leaned heavily on their capital markets divisions to drive earnings growth in recent quarters, according to new analysis circulated to investors, even as economists debate how a cooling labour market and anticipated Bank of Canada rate cuts could reshape the sector’s outlook in the months ahead.
In a research note highlighted by The Globe and Mail‘s market strategist Scott Barlow, Scotiabank analyst Mike Rizvanovic said the capital markets segment across the large Canadian banks has beaten consensus earnings expectations in each of the past seven quarters, by an average of 15 per cent. Yet the following year’s consensus earnings estimates for that same segment have only been revised up by an average of 4 per cent after each beat — a persistent gap that Rizvanovic said has created a favourable dynamic for the group and played an important role in driving consistent earnings-per-share beats.
Why Capital Markets Has Become the Growth Engine
Bank management teams, per the note, continue to frame the segment’s recent strength as a structural shift rather than a temporary cyclical peak, pointing to robust client activity, healthy corporate balance sheets, a strong pipeline of deal activity, and ongoing efforts to diversify revenue streams. That framing matters because it shapes how investors price in the durability of recent earnings beats heading into future quarters.
Not every bank carries the same exposure to this engine, however. Rizvanovic’s analysis found National Bank of Canada is the most exposed among the large Canadian lenders, with capital markets accounting for 35 per cent of its consolidated earnings over the most recent 12-month period. TD Bank sits at the other end, with capital markets representing just 14 per cent of its earnings mix. The analyst estimated that a 10-per-cent reduction in the segment’s earnings would trim average 2027 fiscal-year EPS estimates across the group by about 2 per cent — ranging from a 1.0-per-cent hit for TD to a larger 2.8-per-cent hit for National Bank, illustrating how differently a capital markets slowdown would ripple through each institution’s bottom line.
Capital Markets Exposure and Earnings Sensitivity at Canadian Banks
Macro Backdrop: Jobs Data and Rate Expectations
The capital markets dependency comes against a mixed domestic economic backdrop. Statistics Canada reported that employment fell by 68,000 in September, with the unemployment rate edging up to 6.5 per cent, following an earlier decline in August. That weakening labour picture has fed market expectations for further Bank of Canada interest rate cuts, a dynamic that traders have been weighing alongside corporate earnings and commodity price moves in recent trading sessions on the Toronto Stock Exchange.
On the broader market, the S&P/TSX Composite Index has shown resilience even as global technology and semiconductor shares came under pressure, with financial, mining and energy shares helping offset weakness in telecommunications names such as BCE, Rogers Communications and TELUS. Reuters reporting cited easing bond yields and gains in energy stocks as additional support for the Canadian benchmark during this period, underscoring how intertwined bank and financial-sector performance is with broader commodity and rate-sensitive trading themes in Canada.
Lessons from South of the Border
While the Globe and Mail analysis centres on Canadian institutions, earnings season for major US and European banks has offered a cautionary parallel. Bank of America shares fell 7 per cent after the lender reported lower third-quarter profit and set aside $1.2 billion in provisions tied to federal penalties over failures to detect potentially illicit transactions. JPMorgan Chase and Goldman Sachs both saw shares decline after fixed-income trading revenue missed estimates, while Morgan Stanley’s stock moved lower even after reporting higher quarterly income on strong equity trading revenue. Those results illustrate how volatile trading-revenue-dependent earnings can be from quarter to quarter — a dynamic directly relevant to Canadian banks’ own reliance on capital markets activity.
What It Means for Investors
The gap between consistently strong capital markets results and more modest upward revisions to forward estimates has, according to Rizvanovic’s analysis, effectively lowered the bar for Canadian banks to post earnings beats in recent quarters. Whether that pattern continues may hinge on corporate deal activity, trading conditions, and how Canadian capital markets segments respond if global volatility — of the sort recently seen in US bank and semiconductor trading sessions — spills over into Canadian institutions’ own trading and underwriting businesses. Investors assessing individual names face materially different exposure, with National Bank’s heavier capital-markets weighting creating greater sensitivity to any slowdown compared with TD’s more diversified earnings base.
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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