Key Takeaways:
Canada's six largest lenders are expected to report double-digit earnings growth this week, but rising provisions for bad loans threaten to cap further stock gains.
Canada's six biggest banks are set to report an average 16% increase in adjusted earnings per share for the fiscal second quarter, though rising provisions for credit losses threaten to overshadow the results, according to consensus forecasts compiled by FactSet.
"We would not be surprised to see the banks report EPS beats again this quarter but perhaps, like the U.S. banks, capital markets-driven beats will no longer be good enough to drive the stocks higher," said Paul Holden, an analyst at CIBC Capital Markets.
Bank of Nova Scotia, Bank of Montreal and National Bank of Canada report Wednesday, followed by Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank on Thursday. The banks are expected to benefit from elevated trading volumes and strong investment-banking revenue, which help offset soft loan growth. But provisions for credit losses are expected to rise modestly from the first quarter as the economic backdrop weakens. The jobless rate has climbed to a six-month high, the housing market in the Greater Toronto Area remains sluggish, and about 37,000 Canadians filed for insolvency in the first three months of 2026 — the highest since 2009, according to the Office of the Superintendent of Bankruptcy.
The deteriorating credit outlook is prompting analysts to push back expectations for lower provisions. "PCL improvements now feel like a fiscal year 2027 story," said Matthew Lee, an analyst at Canaccord Genuity Corp. CIBC's Holden, who previously expected impaired provisions to peak in the second quarter, now sees them remaining elevated through the second half. Darko Mihelic of RBC Capital Markets expects higher quarterly credit-loss provisions for each bank other than TD, driven mainly by a rise in provisions for performing loans.
Credit Quality Takes Center Stage
The shift in analyst sentiment marks a reversal from earlier this year, when several forecasters expected provisions to improve in the second half. Higher energy prices after the start of the war on Iran, knock-on inflationary effects and rising borrowing costs have put incremental pressure on consumer credit, Holden said. Jefferies analyst John Aiken said any move toward more conservative commentary from management after previously arguing for a better second half would likely be viewed negatively by investors.
Capital buffers remain healthy, with common equity Tier 1 ratios expected to run roughly 2 percentage points above the regulator-set minimum of 11.5%. The earnings growth and expansion in return on equity support potential dividend increases, analysts said, since each of the banks except CIBC reviews its payout with second-quarter results.
Valuations Tested by Risk Outlook
Canadian bank stocks have collectively outpaced the broader Toronto market on a three-month, year-to-date and 12-month basis, and have materially outperformed U.S. bank stocks over the past three months, according to TD Cowen analyst Mario Mendonca. But he cautioned that investors need to see positive EPS revisions to push stocks higher from current levels. "We expect second-quarter results to remain healthy, but we believe investors need to see positive EPS revisions to push stocks higher," Mendonca said.
If investor attention shifts toward credit risks, bank valuations could become vulnerable, he added. The last time Canadian bank stocks faced a similar credit cycle — during the 2008-2009 financial crisis — the S&P/TSX Composite Banks Index fell more than 30% from peak to trough before recovering over the following 18 months, though the current environment lacks the systemic leverage that drove that downturn.
This article is for informational purposes only and does not constitute investment advice.
