Canada's Big Banks: Are They Really that Cyclical?

Why It Matters

The re‑rating of Canada’s banks could reshape portfolio allocations, offering higher‑yielding, lower‑cyclical exposure if credit risks stay contained.

Key Takeaways

• Canadian banks' valuations hit 24‑year highs, prompting re‑rating debate.
• Earnings momentum driven by strong margins, capital markets, and operating leverage.
• Capital ratios above 13% allow stock buybacks without diluting strength.
• Credit cycles diminishing; mortgage losses low, unsecured losses minimal impact.
• Potential risk remains in commercial lending and USMCA trade uncertainties.

Summary

The discussion centers on whether Canada’s six major banks are truly cyclical or entering a new, less‑volatile era. Their shares have surged over 54% this year, pushing valuation multiples to 24‑year highs and prompting analysts to question whether fundamentals have fundamentally shifted or if a correction looms.

Mary Mondanka points to several drivers of the recent outperformance: earnings momentum fueled by expanding margins, robust capital‑markets revenue, and operating leverage exceeding 3%. All banks maintain CET1 ratios above 13% and are executing sizable share buybacks without eroding capital, while avoiding dilutive U.S. acquisitions. Moreover, the amplitude of credit cycles appears to be shrinking, with mortgage losses historically low and unsecured‑loan losses too small to move the earnings needle.

Key data include IFRS 9‑driven performing‑loan reserves now at 80‑85 basis points—well above pre‑pandemic levels—and a domestic loan book composed of roughly 50% secured mortgages. Mondanka notes that while credit‑card losses have spiked, they remain a minor share of total assets. The primary lingering risk lies in commercial lending, especially if the USMCA trade framework stalls, which could pressure corporate borrowers.

If credit cycles continue to moderate and capital remains abundant, Canadian banks may trade at 13‑15 times earnings, a step up from the historic 10‑12 range but still below non‑cyclical sectors. Investors should recalibrate expectations, focusing on banks’ relative resilience while monitoring commercial‑loan exposure and cross‑border trade developments.

Original Description

The big six Canadian banks are up more than 50% over the last 12 months, outperforming the closest comparable sectors. Mario Mendonca, Managing Director at TD Cowen, explores why Canadian banks are outperforming and may not be as vulnerable to credit cycles as in the past.

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