The new year could mean more of the same for the big Canadian bank stocks. And while the past month of gains has been rather sluggish, with BMO Equal Weight Banks Index ETF (my preferred way to gauge the performance of Canada’s Big Six banks) flatlining for January thus far, investors might be growing a bit worried about things getting a bit toppy.
Of course, whenever you have an explosive multi-quarter run in a stock and things begin to move sideways to slightly lower, things could have the potential to rollover. And while it certainly feels like a slow-motion retreat in the works, investors should know that the latest consolidation might not be anything to hit the panic button over.
After all, a new year doesn’t mean that all of the big fundamental strides made in 2025 are suddenly going to vanish. What does matter for investors looking to punch their ticket to the banks in 2026, though, is the higher price of admission. There’s really no way around the higher multiples in the broad basket of bank stocks. They’ve had a run, and there is now a premium to pay. The big question is whether investors should pay it, especially as yields look to fall on the lower end.
Source: Getty Images
Earnings potential justifies higher multiples
Personally, I think the Canadian economy is hot enough to justify buying the bank stocks at a slight premium. And while there’s no more deep value to be had, I think that yields are pretty good, especially when you consider how much rates have fallen in the past year. In this piece, we’ll look at three factors that the banks could continue to run, even as higher valuations and growing macro worries (think Trump’s 100% tariff threats after Davos) look to cause a rise in volatility from here.
The big bank earnings have been pretty impressive over the past year, and there’s no reason to think that things will reverse course in the new year. Undoubtedly, solid net interest margins, higher loan growth, and lower provision for credit losses have been the perfect formula for a stunning rally.
As interest rates look to steadily inch lower (or stay around the same), the big banks might have another good year or two up their sleeves, especially if net interest margins (NIMs) find their footing at a rather comfortable level.
Peak provisions and higher fee-based income bode well for earnings growth
Combined with healthy activity in the capital markets and wealth management, fee-focused income sources might also have what it takes to rise further. If peak provisions really are already on the books, the focus could stay on growth through 2026.
And if Canada’s banks really are ready to kick earnings into high gear, I see no issue with paying a slightly higher price for the big banks. Bank of Nova Scotia (TSX:BNS) really does stand out as a great pick right here, especially as earnings momentum picks up.
At 18.2 times trailing price to earnings (P/E), shares do seem a tad pricier, though. Any way you look at it, the banks are picking up speed. And with a still-respectable 4.3% yield on shares of BNS, I’d not hesitate to buy at new highs, even as the big banks run into higher expectations in 2026. In short, the big banks are worth paying more for, and investors should stick with them for the long run, especially as tailwinds intensify.
