What’s driving the TSX’s 33% return over the past year?
Jeff Bradacs, CFA, Co-Head Equity Strategies, Head of Portfolio Management & Trading
Can Canadian Banks Keep Earning Their Premium Valuations?
Rob Poole, CFA, Co-Head Equity Strategies, Head of Fundamental Equity Research
Banks at their core are levered plays on the Gross Domestic Product (GDP) growth in the country or countries in which they operate, and bank multiples tend to reflect the anticipation of future earnings and profitability estimates.
When estimates are being revised higher and profitability is improving, multiples tend to re-rate higher, and when the opposite is happening, multiples tend to de-rate lower (see chart 1). Thus, inflections in GDP growth and estimate revisions are very powerful tools in identifying the direction of travel for bank multiples. Currently, estimate revisions for Canadian bank stocks have been moving in the right direction and will need to sustain this momentum to justify multiples at current levels, which are the highest they have traded at in over two decades.
Source: Bloomberg Inc. and Picton Mahoney Asset Management Research from Nov 11, 2016 to July 31, 2026
Source: Bloomberg Inc. and Picton Mahoney Asset Management Research from Nov 30, 2016 to May 31, 2026
So, what are the key drivers needed to sustain estimate revisions from here:
Loan growth picking up momentum in Canada
Market-sensitive businesses continuing to shine, with wealth assets under management at record levels and capital markets fee pools building steam
Artificial intelligence-driven efficiency improvements flowing through to the bottom line
Credit quality improving across both consumer and commercial clients.
Each of these is currently supportive, and together they explain why estimates have been moving higher. But any of the above not panning out has the potential to hurt estimates, and multiples are currently very susceptible to any "not-so-great" news. Bank estimate revisions remain positive and they will likely need to continue being so, in order to sustain valuation multiples. History offers a caution here: since 1985, paying over 13.5x forward P/E has never preceded a positive 2-year forward share price return. At ~16x, can this time be different?
Source: Bloomberg Inc. and Picton Mahoney Asset Management Research from Oct 18, 1985 to Aug 7, 2026
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All data sourced from Picton Mahoney Asset Management Research unless otherwise cited.
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