Canada’s Big Five banks have rarely looked more secure and they also look expensive. After a steady climb that lifted the sector off last year’s lows, valuations now assume a clean soft landing, benign credit and resumed capital returns.
This is a tight needle to thread with consumer budgets under pressure, commercial real estate still healing, and the mortgage renewal wave only partway through the system.
In that context, talk of releasing loan loss reserves feels early, the risk reward does not favor fresh buying, even for high-quality Royal Bank of Canada.
TD’s retail and U.S. franchises, BMO’s diversified fee income, Scotiabank’s international footprint and CIBC’s retail core all give the group multiple levers to pull if growth steadies.
Momentum signals are improving too, but technicals alone are not a valuation anchor. TD Bank’s RS rating has improved in recent months, as reflected in TD Bank’s RS rating, yet price strength without a matching reset in macro risks can lull investors into extrapolating calm.
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During the last downshift, banks layered macro overlays on top of expected credit loss models to guard against a harder landing.
Reversing those buffers before delinquency data and corporate defaults settle into a clear trend would front load earnings that may be needed later.
The shape of unemployment through year end, small business bankruptcies and CRE maturities argue for patience. None of that precludes positive surprises.
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OSFI’s domestic stability buffer offers flexibility, and internal capital generation remains healthy. Even so, buybacks, reserve releases and higher dividends compete for the same margin of safety.
A quick pivot to aggressive capital returns makes more sense when late cycle signals fade, not while they remain mixed.
Wealth does not eliminate cash flow stress from higher interest costs, data this summer showed that Canadian household net worth advanced in the second quarter, a tailwind that could temper losses if growth holds.
Funding markets have occasionally flashed warning lights as quantitative tightening bites. September’s bout of repo market strains in Canada was brief, but it was a reminder that plentiful liquidity can ebb without much notice.
Ottawa named Gina Byrne acting CDIC chief, underscoring stable oversight of deposit protection that backdrop supports confidence in the system, but it does not change the earnings math when the cost of deposits stays elevated and competition for quality borrowers remains intense.
Net interest margins are unlikely to surge unless policy rates fall meaningfully or loan growth reaccelerates. Neither is a sure thing.
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RBC remains the class of the group with diversified earnings, premium wealth management and a long record of risk discipline.
It is also the reason not to chase it now. When quality is already priced dear, the entry point matters most, a better valuation or more clarity on credit is the more conservative path.
