What Are Canadian Banks Multiples Pricing In?

Valuations May Be Reflecting an Optimistic Credit Outlook

Canadian bank equities are trading with a degree of optimism that stands out in today’s macro environment. At more than 13 times earnings per share, the group is valued at levels not seen since 2005 and 2006, a period when Canadian GDP growth was accelerating, credit demand was strong, and loan losses were declining rapidly. The market appears to be pricing in a similar dynamic today, despite the Canadian economy struggling with slower growth and higher unemployment. Currently, the sell-side consensus forecasts expect a meaningful decline in credit losses through 2026, 2027, and 2028, as noted in the table below. Embedded in these expectations is a clear assumption that the credit cycle has already peaked and that earnings growth will be supported by improving asset quality and renewed loan growth.

We believe this narrative deserves closer examination. While the market often focuses on headline trends, a deeper look at underlying consumer credit data suggests the cycle may not have turned yet. The path of credit losses matters because it is a central driver of earnings expectations across the sector.

Looking Beneath the Surface of Consumer Credit

When we analyze the underlying data, the signals appear more mixed. 90-day delinquency rates across key Canadian consumer products, including mortgages, credit cards, and personal lending, continue to trend higher on a year over year basis. From our perspective, the second derivative of delinquency growth is an important signal. When the year over year change stabilizes and begins to decline, it can indicate that credit stress is easing. At present, that inflection has not yet occurred.

Mortgage data reinforces this message. By analyzing covered bond disclosures and isolating mortgages that are both delinquent (DQ) and carry higher loan to value (LTV) ratios, our team can approximate the portion of mortgage books that may be more sensitive to credit deterioration. Although the absolute levels remain low, the trend has moved to historically elevated territory. This matters because mortgages often represent the final stage of consumer distress, as borrowers typically exhaust other sources of credit before missing a mortgage payment.

Recent reporting supports the idea that credit conditions may be more fragile than consensus assumes. For example, mortgage delinquency rates have been rising in several Canadian regions despite an otherwise resilient national picture, highlighting pockets of financial stress within the system, according to reporting from Mortgage Professional America.

Why Advisors Need to Look Beyond the Consensus

The implication for investors is not necessarily that Canadian banks face an imminent credit event. Rather, it highlights the risk embedded in current expectations. If improving credit losses are the primary driver of projected earnings growth, the path of consumer credit metrics could become critical.

We spend considerable time analyzing these leading indicators because they often reveal shifts in the credit cycle before they appear in reported earnings. By combining bottom-up company analysis with detailed credit cycle monitoring, we aim to identify the gaps between expectations and reality.

In markets where consensus narratives are powerful, the most valuable insights often come from examining the data beneath them. Those gaps between expectations and underlying fundamentals are often where the most meaningful investment risks and opportunities emerge.