Canadian bank stocks have had a strong rebound lately, and there are good reasons to think the rally isn’t finished yet. After nearly two years of sluggish performance caused by high interest rates, weak loan growth, and concerns about bad debt, the backdrop is finally improving. The Bank of Canada has dropped the key interest rate to 2.25%, and the broader economy is showing resilience. For the banks, this combination means better loan demand, lower credit-loss provisions, and stronger margins ahead.
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More to come
One of the main reasons the rally may continue is that earnings are stabilizing. The major banks all reported results that surprised to the upside this year. Even as consumer spending slowed, their diversified business models cushioned the blow. Wealth management, insurance, and capital markets helped offset weaker lending. The most recent earnings showed net income growth returning across several banks, a strong sign that the worst of the profit pressure from 2023’s slowdown is behind them.
Valuations also remain attractive. Most of the Big Six are still trading below long-term average price-to-earnings ratios, even after the rally. Investors can buy high-quality franchises with global reach and dividend yields. Those yields alone make bank stocks appealing, especially as bond yields start to fall. And unlike speculative tech or resource plays, Canadian banks have a long track record of paying and increasing dividends through recessions, financial crises, and pandemics.
Over the past year, Canadian banks raised capital buffers to meet tougher regulatory requirements. This left them more resilient and well-funded to handle loan losses or make acquisitions. With those buffers now in place, management teams have more flexibility to deploy excess capital through dividend hikes, share buybacks, or targeted growth investments.
Consider CIBC
Canadian Imperial Bank of Commerce (TSX: CM) doesn’t always get the same spotlight as other larger banks, but lately, it’s been quietly offering one of the most compelling combinations on the TSX. CIBC’s dividend currently sits around 3.3%, and that payout looks well supported by its improving fundamentals. Unlike some high-yield names that stretch their payouts, CIBC’s dividend is comfortably covered by a payout ratio around 46% of adjusted profits. This leaves plenty of room for sustainability and even increases.
Beyond income, there’s genuine upside potential in the share price. Analysts expect profit growth to accelerate through 2025 as the Bank of Canada begins easing monetary policy. That shift would lift mortgage activity, business lending, and overall credit demand, areas where CIBC has been regaining market share. Meanwhile, the bank’s U.S. operations are starting to deliver steadier earnings, helping diversify away from Canada’s slower housing market.
Meanwhile, CIBC’s focus on cost discipline and balance-sheet strength provides even more upside. Over the past two years, management has tightened lending standards, strengthened capital buffers, and reduced exposure to higher-risk real estate segments. Its common equity Tier 1 (CET1) ratio, a key measure of financial strength, now sits well above regulatory minimums. That strong capital position gives CIBC room to grow, raise dividends, or buy back shares without putting its balance sheet at risk. The market has started to notice this improvement, and as confidence builds, the valuation gap between CIBC and its peers could narrow significantly.
Bottom line
In short, CIBC offers a rare mix of income and recovery potential. Investors get one of the best dividend yields among Canada’s major banks, backed by improving fundamentals and a clear runway for growth. With the broader financial sector entering a more supportive environment, CIBC’s blend of value, safety, and income could make it one of the best buys for patient investors looking to benefit from both steady dividends and long-term upside.
