The new year could mean more of the same for major Canadian banking stocks. And while gains have been quite slow over the past month, with BMO Equal Weight Banks Index ETF (my preferred way to measure the performance of Canada’s Big Six banks) While January rates are leveling off so far, investors might be a little concerned that things are being pushed a bit.
Of course, when you have an explosive multi-quarter run in a stock and things start moving sideways to a little lower, things have the potential to turn around. And while it certainly feels like a slow retreat in the making, investors should know that the latest consolidation may not be something to panic about.
After all, a new year does not mean that all major fundamental steps made in 2025 will suddenly disappear. However, what does matter for investors who want to punch their ticket to the banks in 2026 is the higher entry price. There is really no escape from the higher prices in the broad basket of bank shares. They’ve had a run and now there’s a premium to be paid. The big question is whether investors should pay this, especially as yields appear to be falling at the bottom end.
The earnings potential justifies higher multiples
Personally, I think the Canadian economy is strong enough to justify buying bank stocks at a slight premium. And while there’s no deeper value to be had, I think the returns are pretty good, especially considering how much interest rates have fallen over the past year. In this piece, we’ll look at three factors that banks could continue to adopt even as higher valuations and growing macro concerns (think Trump’s 100% rate threats post-Davos) appear to be causing a rise in volatility from here on out.
The big banks’ profits have been quite impressive over the past year, and there’s no reason to think things will change course in the new year. Undoubtedly, solid net interest margins, higher loan growth and lower loan loss provisions have been the perfect formula for a stunning rally.
With interest rates looking steadily lower (or staying around the same level), the big banks could still have a good year or two behind them, especially if net interest margins (NIMs) end up at a reasonably comfortable level.
Peak provisioning and higher fee-based revenue bode well for earnings growth
Combined with healthy capital markets and asset management activity, fee-oriented revenue streams could also have the potential to rise further. If the peak facilities are actually already in the books, the focus could remain on growth until 2026.
And if the Canadian banks are really willing to kick profits into high gear, I see no problem with paying a slightly higher price for the big banks. Bank of Nova Scotia (TSX:BNS) really stands out as a good pick here, especially as earnings momentum increases.
However, with a price-earnings ratio of 18.2 times, shares seem a lot more expensive. Any way you look at it, the banks are moving faster and faster. And with BNS stock yields still respectable at 4.3%, I wouldn’t hesitate to buy at new highs even as the big banks have higher expectations in 2026. In short, the big banks are worth paying more for, and investors should hold on to them for the long term, especially as tailwinds increase.
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