Canadian banks are really killing it this year. For the year, the S&P Canadian banking index is up 24.5%, compared to just 21% for the S&P/TSX Composite Index. It has been a period of considerable outperformance for the nation’s largest financial institutions.
For the most part, this strong performance has been backed by the underlying banks’ earnings results. Over the last 12 months, Canada’s largest banks have posted substantial increases in revenue as well as earnings. For example, The Toronto-Dominion Bank (TSX: TD) has seen its revenue increase 21%, while the Royal Bank of Canada (TSX: RY) has seen its revenue go up 16.3% and its earnings increase 12.7%. It has been a pretty incredible showing considering that the economy has barely grown in the period.
The question investors need to ask themselves is, “Can the banks keep up the momentum?” Canada’s economy currently faces significant risks, including an ailing housing market, numerous labour disruptions, and Donald Trump’s tariff policies. It seems unlikely that the Canadian consumer will make it through the coming year without taking a hit. Nevertheless, the banks are certainly doing well now. In this article, I will explore the large Canadian banks’ stellar 2025 performance and attempt to gauge whether it can continue in 2026.
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Drivers of the banks’ strong 2025 performance
Canadian banks’ strong 2025 performance has been driven by several factors:
- A strong Canadian homeowner. Canada’s housing market is among the priciest in the world, and interest payments are stretching many homeowners, yet not to the point where they’re actually defaulting on their mortgages. Put simply, Canadian homeowners are financially strong enough to cope with their large and costly mortgages. So it should come as no surprise that both TD and Royal Bank showed healthy levels of mortgage income in their most recent quarterly reports.
- The rise of artificial intelligence (AI). Canadian banks have been actively using AI to improve efficiency in their operations, leading to lower costs and higher profits. Royal Bank has won awards for its AI leadership, and TD has a well-regarded mobile app with many AI features.
- International diversification. Most of Canada’s large banks are globally diversified, with many of them having U.S. operations and some having operations in Latin America and Asia. For example, TD has a large U.S. retail banking business, and RBC is big in U.S. wealth management. These operations are not affected by the sluggish growth in the Canadian domestic market.
- Relatively low defaults and charge-offs. Although defaults and charge-offs are trending higher, they remain comfortably low by historical standards.
The factors above collectively describe a situation that is very profitable for banks and other lenders – and that’s what we’re seeing.
Can this continue?
Having looked at the drivers of Canadian banks’ strong 2025 performance, we now need to ask whether they can continue.
Here, the picture is more mixed. Canadian banks’ international diversification will always be an asset for them, but the other three factors I described above seem unlikely to persist forever. If Donald Trump keeps his tariffs on Canadian exports, then we have to assume that unemployment will increase, and inflation will increase due to counter-tariffs. So I can’t forecast with confidence that Canadian banks like TD and RBC will keep earning high amounts of money in 2026. However, the banks are managing their risks well, as indicated by high capital and liquidity ratios, as well as sensible loan loss provisions. So, the very long-term picture remains favourable.
