Big Six Banks Face 16x Earnings Test as Q3 Results Begin

Canada's Big Six banks report third-quarter results this week with shares up an average 26% in 2026, trading at about 16 times expected earnings versus a 10-year historical average of 10.8 times.

"It is hard to say if bank stocks can continue to push higher. It is easier to say that third-quarter results should not be the reason for the stocks to trade lower," said Paul Holden, an analyst at CIBC Capital Markets.

Based on FactSet data, adjusted per-share earnings for the large banks are expected to jump 28% from a year earlier and top-line revenue 22%. Bank stocks trade at 2.6 times book value compared with a historical average of 1.7 times. KBW analysts, who recently resumed coverage of Canada's banks, note shares now trade at an 8% premium to U.S. peers versus a 5% discount historically.

The results begin Tuesday with Bank of Montreal and Bank of Nova Scotia, followed by the remaining four lenders through Thursday. Analysts broadly anticipate a continuation of recent trends, with growth driven by capital markets activity, wealth segment revenue and credit losses held in check. Improving commercial loan growth and signs that credit losses won't become a concern are also expected to feature in the reports.

Valuations Stretch to 16x Expected Earnings

Holden said bank stocks are trading at about 16 times expected earnings, well above the 10-year historical average of 10.8 times, and at 2.6 times book value compared with a historical average of 1.7 times. The continued growth, coupled with strong capital ratios that have allowed for ongoing share buybacks, plus expectations that Ottawa's push for nation-building infrastructure projects will boost investment flows, has raised interest in bank stocks. The Toronto market is up 16% so far in 2026.

KBW argues the elevated trading multiples are justified by a number of factors, including improving prospects for Canada's economy and the banks' scale in the domestic market. The firm also points to the lenders' strategies for penetrating the U.S. market as a reason for the premium. Even with the banks trading at elevated valuations, BofA Securities argued investors should maintain their exposure to what its analysts call a Canada story underpinned by the improving domestic outlook under Prime Minister Mark Carney and a banking sector well positioned to convert that into higher returns.

Trade Risks Cloud the Outlook

The outlook isn't without clouds. The recent breakdown in bilateral trade talks between Ottawa and Washington and an escalation of tariffs raise questions about the impact on Canadian business, the effectiveness of government support measures, and employment levels, said Tim O'Brien, managing director for North American financial institution ratings at Morningstar DBRS.

"That said, the banks' AA-range credit ratings reflect superior underlying credit profiles that are well-positioned to deal with any further near-term deterioration in the credit environment," O'Brien and his team said in a research report.

The trade tensions come at a delicate moment for the sector. Canadian banks have benefited from a domestic economy that has shown resilience, but a prolonged tariff dispute could pressure corporate earnings, weaken loan demand and push credit losses higher than the benign levels analysts currently expect. The banks' ability to navigate these headwinds while maintaining their capital return programs will be a key focus for investors this week.

If results meet the 28% EPS growth consensus, the rally could extend. A miss on credit quality or forward guidance could trigger a correction given how much is already priced into the shares.

This article is for informational purposes only and does not constitute investment advice.