Canadian bank stocks are having a bit of a moment in 2025. At a time when US equity markets are getting hammered, TSX banks are doing fairly well. As a class, they are down by lesser percentages than their dividend yields – some of them are even making nice gains for the year. More importantly, TSX banks are doing better than the US markets this year. So, for most of the investing public, an investment in TSX banks at the start of this year would have been a relatively good bet.
In this article, I will explore the outlook for Canadian bank stocks in 2025, taking into account macroeconomic, political, and other factors.
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Earnings may have peaked
One negative for Canadian banks this year is that their earnings may have already peaked. The Bank of Canada has been lowering interest rates lately, and it may still have one or two more rate cuts in store. These cuts will reduce the amount of interest that Canadian banks can charge on loans, which in turn will lower their net interest income.
We can illustrate the point above by looking at The Toronto-Dominion Bank (TSX: TD). In its most recent quarter, TD did slightly negative growth in net income (though EPS was slightly up because of the offsetting effect of a large buyback). The bank’s earnings declined mainly because of weakness in its US business – the American subsidiary was affected by a fine and asset cap. The earnings growth was slightly positive in the Canadian business, but the growth rate was down from in prior quarters. I expect the trend in TD’s Canadian retail business to be one of low or slow growth. The bank already said in an earnings call that growth would be tough this year, and I think that that’s about right.
Valuations low compared to the TSX, but high by historical standards
Another factor that Canadian banks have going for them this year is the fact that their valuations are low compared to that of the TSX Index. At today’s level, the TSX is at about 20 times earnings. TSX banks on the other hand are at about 15 times earnings. So, they are cheaper than the TSX index.
Take Royal Bank of Canada (TSX: RY) for example. It’s a Canadian bank stock that trades at 12.4 times earnings, 4 times sales, and 1.9 times book value. All of these multiples are far lower than those of the TSX index. To top it all off, Royal Bank even grew rapidly in its most recent quarter, with earnings up 43%! The combination of value and growth here is far better than that of the TSX Index. So, Royal Bank will continue being one to watch in the year ahead.
It’s important to remember that while TSX banks are cheaper than the TSX Index, they are pricier than they were in the past. Historically, P/E ratios between 8 and 10 were the norm for banks. So it may be that banks are due for a pullback. For my money, that will be another opportunity to accumulate more shares.
Final verdict: Canadian banks are decent buys
Taking into account everything I’ve looked at in this article, I think Canadian banks remain decent buys. There are some issues, like slowing growth, but not all TSX banks are affected by that. Also, the big banks are cheaper than the TSX. So my outlook is comparatively bright.
