Capital markets expected to drive Big 6 banks as earnings season kicks off

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After beating expectations in a challenging operating environment last year, Canada’s major banks are in a good position as they head into first-quarter earnings season this week, analysts say.

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But many of the same challenges they faced will carry over into 2026, including the uncertainty around trade negotiations and the upcoming review of the Canada–United States–Mexico Agreement (CUSMA) in July. Bank executives will also be watching to see how monetary policy, government fiscal support and Ottawa’s stimulative spending affect the labour market, consumer credit and economic growth.

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Overall, however, analysts are forecasting solid capital markets and wealth management income, positive operating leverage and contained credit losses to drive earnings in the first quarter, which ended Jan. 31.

“We are expecting another set of strong results across the group, supported by a favourable capital markets backdrop,” Paul Holden, an analyst at CIBC Capital Markets, said in a note on Feb. 12. “While macro uncertainty persists, sector fundamentals remain constructive and should again drive positive earnings momentum this quarter.”

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He said the speed and scale at which banks increase their return on equity (ROE) will be a key upside driver, adding that most either increased or pulled forward their targets in fiscal year 2025.

“The banks that can deliver the most ROE expansion over the next two to three years are most likely to be the best-performing stocks,” he said.

Gabriel Dechaine, an analyst at National Bank of Canada, said it was not remarkable that the Big Six outperformed the S&P/TSX composite index in 2025.

“What is remarkable is that this outperformance was delivered against a backdrop of weak gross domestic product (GDP) growth, rising unemployment and economic uncertainty created by the Trump administration’s tariff strategy,” he said in a Dec. 17 note.

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Despite those issues, the sector’s valuations continue to reach new highs that “defy conventional thinking,” Dechaine said.

“On one hand, strong equity markets that have driven capital markets and wealth businesses, and a seemingly more dovish regulatory environment, argue for higher multiples,” he said. “On the other hand, a backdrop of elevated unemployment and low GDP growth provides an argument against.”

Matthew Lee, an analyst at Canaccord Genuity Corp., said the Big Six’s multiples are “far above historical levels,” but the group still trades at a 0.6 times to 0.7 times multiple of the S&P/TSX composite index, which is largely within its historical range.

“We believe there remains upside to the bank equities, primarily based on strong balance sheets, well-provisioned credit and the potential for multiple years of low double-digit EPS growth,” he said in a note on Feb. 12.

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Historical multiples are “far less relevant today,” said Mike Rizvanovic, an analyst at Bank of Nova Scotia.

“Having said that, we don’t foresee the likelihood of multiple expansion in the near term, which means that any upside will need to be driven by upward revisions to EPS estimates,” he said in a Feb. 19 note.

Analysts’ outlooks for capital markets revenue remain strong, but Dechaine said it will be hard, if not impossible, for the segment to outperform after a “banner year” in 2025.

“However, assuming the market backdrop remains supportive, corporate and investment banking revenues that were up a comparatively low 10 per cent could pick up the slack,” he said.

But Lee said consumer weakness and a softening residential real estate market could put pressure on banks’ domestic credit.

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“In our view, the strength of the Canadian consumer is the linchpin for personal banking with soft job numbers magnified by growth in the card portfolio,” he said. “On the commercial side, we believe that Canadian residential real estate development will be an area of focus given declining urban condo prices and the capital-intensive nature of the business.”

After gradually increasing over the past two years, analysts expect banks’ provision for credit losses (PCLs) — the money banks set aside to cover loans that go bad — to range from flat to modestly elevated in the quarter.

Dechaine said the credit outlook is “arguably the biggest source of forecast uncertainty” in the banking sector, and many investors are wondering if the banks will reach a “peak PCL” milestone in 2026 and start releasing provisions.

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“We believe banks are waiting for clarity on the future of the CUSMA trade agreement, which might not be provided until mid-year,” he said.

Bank of Nova Scotia kicks off the first-quarter earnings season on Tuesday. Bank of Montreal and National Bank of Canada will report results on Wednesday, followed by Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank on Thursday.

• Email: jswitzer@postmedia.com

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