Canada's Big Six banks recently reported strong fourth-quarter profits.Nathan Denette/The Canadian Press
Canada’s bank stocks have been on a tear this year, leaving investors wondering if there’s more fuel to drive returns higher.
The S&P/TSX Composite Bank Index, including dividends, is up 44 per cent this year versus 31 per cent for the S&P/TSX Composite Total Return Index. And Hamilton Enhanced Canadian Bank ETF HCAL-T has outpaced both with a 53-per-cent total return.
Although some investment managers don’t expect a repeat of this year’s lofty gains, they’re upbeat on the banks because they expect rising loan growth and profits, as well as possible changes to bank regulation.
“We’re coming off a great year with a strong re-rating in the multiples of the banks,” says Robert Lauzon, chief investment officer and portfolio manager at Middlefield Ltd. in Toronto.
With valuations at the high end of their historical range, Mr. Lauzon says he thinks the stocks will now move with earnings growth. “We still like the banks.”
The Big Six, which recently reported higher fourth-quarter profits, should grow earnings between 7 and 10 per cent next year, he says. “With their dividends, I expect a total return of 10 to 12 per cent.”
From mid-2022 to mid-2024, Canadian bank stocks were range-bound amid loan-loss concerns as the Bank of Canada hiked interest rates to 5 per cent. Bank shares began their ascent again after the central bank began slashing its key rate en route to 2.25 per cent.
Bank stocks should get a lift from a strong stock market in 2026, which would help their capital markets business, such as investment banking, and wealth-management services, Mr. Lauzon says.
The market should also benefit from earnings growth helped by U.S. Federal Reserve Board interest rate cuts, easing lending standards by financial institutions and more merger-and-acquisition activity, he adds.
Mr. Lauzon oversees Middlefield Canadian Dividend Growers Class fund, which holds Royal Bank of Canada RY-T, the largest domestic bank, and National Bank of Canada NA-T.
RBC has the highest return on equity (ROE) – a measure of profitability – and targets 17 per cent for fiscal 2026. National Bank, which bought Canadian Western Bank and Laurentian Bank’s retail assets, is a story about consolidation and squeezing synergies, he says.
Canada’s big banks, which also own U.S. assets, have surplus capital beyond regulatory requirements so they can buy back stock, fund growth projects and raise dividends, he adds.
These banks should also benefit from rising mortgage activity and loans to firms involved in Prime Minister Mark Carney’s nation-building infrastructure program, Mr. Lauzon says.
Mark Rutherford, a portfolio manager at Mawer Investment Management Ltd. in Calgary, says the odds of repeating the 2025 returns are low, but the banks are still well-positioned for growth.
“They are earning a much higher return on equity than they have historically,” says Mr. Rutherford, co-manager of Mawer Canadian Equity Fund, which holds several banks.
Ottawa’s “policy shift toward growth and wealth creation has helped the narrative on bank stocks,” he says. “We are looking for evidence that these changes translate into real economic activity.”
One positive early sign is that the Office of the Superintendent of Financial Institutions is looking at reducing the capital requirements for lending in areas such as infrastructure and real estate, he says.
Still, the banks face a key risk from changes to the North American free trade pact, he says. The United States-Mexico-Canada Agreement (USCMA) is up for renewal next year, and “experts we speak with indicate that tariff levels above 10 to 15 per cent are concerning.”
However, the banks have set aside provisions in 2025 based on tariff risk, he says, and a favourable outcome from the 2026 review could see them release these provisions into earnings.
His Mawer Canadian Equity Fund owns shares of RBC, Toronto-Dominion Bank TD-T, Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T. Its largest weightings are in RBC and TD, the most dominant players in deposits and retail banking.
“RBC is leading the peloton from our perspective,” says Mr. Rutherford. TD has faced challenges from its U.S. money-laundering issues, but “we’re very impressed with its CEO and think TD is taking the right steps by focusing on reinvesting in Canada.”
Robert Wessel, executive chairman and co-founder of Hamilton Capital Partners Inc. in Toronto, is also positive on Canadian bank stocks, saying he still expects their returns to normalize after this year’s strong rally.
“The market consensus for the Big Six is for earnings per share to grow 10 per cent a year for the next two years,” says Mr. Wessel, a former bank analyst. “If the banks can achieve this growth, it is likely the sector will benefit from double-digit returns for each year.”
The macro outlook is improving with unemployment trending down and gross domestic product growth providing a favourable backdrop for the sector, he adds.
“Capital markets have been strong, credit loss provisions are improving, margins are expanding, and banks are buying back their own stock. That supports rising bank earnings.”
His firm runs three Canadian bank-focused funds, including the $764-million Hamilton Enhanced Canadian Bank ETF. Since April, 2023, it has held Hamilton Canadian Bank Equal-Weight Index ETF HEB-T, which equal weights the six banks, in addition to using a “modest cash leverage at 25 per cent,” he says.
For the five years ended Nov. 28, Hamilton Enhanced Canadian Bank ETF has posted an average annual total return of 21.5 per cent.
If an investor expects Canadian bank stocks to rise over their investment time horizon, Mr. Wessel says, this ETF should outperform, providing higher monthly income with only a modest increase in volatility.
For example, if bank stocks go up 10 per cent, the enhanced ETF should gain 12.5 per cent (less tax-deductible financing costs), he says. If the banks fall 10 per cent, the ETF would decline by a similar amount.
“The ETF has the risk profile similar to an individual Canadian bank stock,” Mr. Wessel says.