Earnings Preview: Can Canada's Big Banks Sustain Their Year-Long Momentum?

In 2025, Canada's banking sector demonstrated impressive performance with a year-to-date increase of 31.14%, fueled by their diversified business models and robust capital positions, even in the face of certain challenges.

As Canadian banks near the release of their Q4 2025 earnings, year-over-year comparisons are expected to be positive due to less challenging conditions in the previous year. However, investors are likely to focus beyond these historical figures, concentrating on future guidance as the industry deals with domestic economic challenges, slow loan growth, and ongoing trade uncertainties. The central question remains: Can the banks show enough resilience to finish the year strong?

In the third quarter, five out of the six major banks exceeded expectations, with only National Bank slightly missing its target. Despite challenges from trade uncertainties, the banks effectively managed risks by setting aside provisions in the second quarter, and the market outlook has significantly improved since early in the year.

As Canadian banks enter the Q4 earnings season, investors are likely to concentrate on how strong annual profit growth interacts with short-term margin pressures. Additionally, the sector's strategic shift towards operational efficiency will be crucial in evaluating its future path. Several key themes are anticipated to be highlighted below:

The sector is expected to see a 3–6% quarter-over-quarter decline in core EPS, mainly due to seasonal revenue softness and high operating costs. However, on a year-over-year basis, EPS is projected to grow substantially by 20–24%, largely driven by a return to normal levels of credit loss provisions compared to the elevated levels in 2024.

Net interest income growth remains sluggish, particularly in the latter half of the year, as benefits from lower funding costs are countered by weak loan demand and ongoing pressure from a declining interest rate environment, where loan yields are adjusting faster than deposit costs.

Provisions for credit losses are believed to have peaked in previous quarters and are expected to stabilize or see a slight increase in Q4. Residential mortgage portfolios continue to perform well, providing a stable foundation.

However, analysts are monitoring potential stress in unsecured consumer credit, such as credit cards and personal loans, as well as in the commercial real estate sector in both Canada and the U.S. Any unexpected deterioration in these areas could affect investor sentiment, especially given current provisioning levels.

The sector remains well-capitalized, with an estimated CAD $58 billion in excess CET1 capital, supporting ongoing shareholder returns through dividend increases and share buybacks. In an environment of low revenue growth, achieving positive operating leverage is a key focus. Banks are carefully managing expenses, including rising technology investments and seasonal compensation costs, while striving to maintain profitability through operational efficiency and disciplined spending.

With more than 90% of transactions now conducted through self-service channels, the initial wave of digital efficiency gains has matured. Customer satisfaction with digital services has plateaued, prompting a shift from expanding basic digital functionality to enhancing user engagement and delivering more personalized experiences. Future technology investments will need to be strategic to achieve measurable efficiency benefits, particularly as banks navigate ongoing macroeconomic and trade uncertainties.

Analysts strike a cautious tone on the Canadian banking sector, noting that premium valuations leave little room for share price appreciation unless results significantly exceed high expectations. This view is detailed in a Jefferies report, which describes the sector as fully valued after a strong rally. While anticipating a solid Q4, Jefferies warns that thin revenue growth and lingering credit risks could pressure valuations, with even minor earnings misses potentially impacting stocks. The firm identifies capital markets and wealth management as key revenue drivers, favoring National Bank and Bank of Montreal for their exposure, and sees a more attractive entry point unlikely before the second half of 2026.

Consequently, investor focus has shifted from the backward-looking Q4 results to how bank managements will navigate ongoing macroeconomic challenges. Factors such as U.S. trade policy and consumer credit trends are now seen as more critical to market confidence. The sector's ability to justify its current valuation levels will depend heavily on demonstrating effective strategy in this complex environment.