Analysts Forecast Strong Q1 Earnings for Canada's Big Six Banks Amid Market Optimism
Canada's major financial institutions are entering first-quarter earnings season this week with analysts expressing confidence in their performance outlook. Despite facing persistent economic headwinds, the Big Six banks are positioned to deliver solid results, according to industry experts.
Favorable Capital Markets Environment
Financial analysts anticipate that robust capital markets activity and wealth management income will serve as primary drivers for bank earnings in the quarter ending January 31, 2026. Paul Holden, an analyst at CIBC Capital Markets, noted in a February 12 research report that "we are expecting another set of strong results across the group, supported by a favourable capital markets backdrop." He emphasized that while macroeconomic uncertainty persists, sector fundamentals remain constructive and should generate positive earnings momentum.
Matthew Lee of Canaccord Genuity Corp. reinforced this perspective, stating that "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." His February 12 analysis highlighted the banks' solid financial foundations despite challenging economic conditions.
Return on Equity as Key Performance Indicator
Analysts identify return on equity (ROE) expansion as a critical factor in bank stock performance. Holden explained that "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." Most major banks either increased or accelerated their ROE targets during fiscal year 2025, setting the stage for potential upside in the current reporting period.
Economic Challenges and Market Performance
Gabriel Dechaine, an analyst at National Bank of Canada, pointed out the remarkable nature of bank performance in 2025 given the difficult economic environment. "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 noted in a December 17 research memorandum.
Despite these challenges, bank sector valuations have reached new highs that "defy conventional thinking," according to Dechaine. He observed conflicting signals in the market environment, with strong equity markets supporting capital markets businesses while elevated unemployment and low GDP growth present counterarguments to higher valuations.
Valuation Considerations and Future Outlook
Mike Rizvanovic of Bank of Nova Scotia addressed valuation concerns, noting that historical multiples are "far less relevant today." In his February 19 analysis, he cautioned 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."
Lee provided additional context on valuation metrics, explaining that while the Big Six banks' multiples are "far above historical levels," the group still trades at 0.6 to 0.7 times the multiple of the S&P/TSX composite index, which remains largely within its historical range.
Ongoing Economic Uncertainties
Bank executives continue to monitor several economic factors that could influence performance throughout 2026. These include:
- The uncertainty surrounding trade negotiations
- The upcoming review of the Canada-United States-Mexico Agreement (CUSMA) scheduled for July
- The impact of monetary policy decisions
- Government fiscal support measures
- Ottawa's stimulative spending programs
These factors will collectively affect labor market conditions, consumer credit availability, and broader economic growth patterns that directly influence banking sector performance.
As earnings season commences, analysts maintain cautious optimism about Canada's major banks, expecting solid results driven by capital markets performance while acknowledging the complex economic landscape that continues to present both challenges and opportunities for the financial sector.
