Canadian investors tend to have plenty of exposure to bank stocks, whether they deliberately seek it out or not.
Broad-market exchange-traded funds (ETFs) often allocate heavily to banks because these companies are among the largest on the Toronto Stock Exchange and therefore receive substantial weight in market-cap-weighted indexes. Dividend ETFs can be even more concentrated because Canada’s major banks have long histories of paying and increasing dividends.
I’m generally not a fan of excessive sector concentration. But if you have conviction in Canadian banks and deliberately want to overweight them, that’s your decision.
My main suggestion is to keep yourself apprised of developments affecting the industry rather than assuming the banks will continue performing as they have historically. Here are two things I’d be watching through the remainder of 2026.
Source: Getty Images
Capital requirements are getting less restrictive
One potentially favourable development came from the Office of the Superintendent of Financial Institutions (OSFI), Canada’s federal banking regulator.
In June, OSFI lowered the Domestic Stability Buffer from 3.5% to 3.0% of risk-weighted assets. It also lowered its supervisory common equity tier-one capital expectation for Canada’s systemically important banks from 11.5% to 11.0%.
Think of the buffer as additional capital banks must maintain to absorb potential losses during periods of financial stress. Higher requirements provide greater protection but also constrain how much capital banks can deploy elsewhere. Lower requirements give them greater flexibility to lend and invest, potentially supporting profitability and returns on equity.
Importantly, OSFI did not make the change because Canadian banks suddenly looked undercapitalized. As of April 30, the major banks averaged common equity tier-one ratios of 13.5%, comfortably above the new 11% supervisory expectation. OSFI specifically cited their resilience and the desire to give banks more capacity to support the Canadian economy.
Watch out for rich valuations
The other side of the equation is what you’re paying for the projected growth. For banks, I generally pay more attention to price-to-book than price-to-earnings ratios.
Banks essentially make money by managing financial assets and liabilities, so the relationship between the market value of their shares and the accounting value of shareholder equity can provide a useful indication of how much investors are paying for their balance sheets.
A higher price-to-book multiple can be justified when a bank consistently generates a strong return on equity, maintains excellent credit quality, and grows book value. But the higher the valuation becomes, the more future success investors are already pricing in.
That’s particularly worth remembering after a strong run for Canadian bank shares. Canada’s economy still faces challenges from household indebtedness, housing, trade uncertainty, and credit conditions. OSFI itself continues to identify elevated vulnerabilities even while describing the major banks as resilient.
So, I wouldn’t buy Canadian banks simply because they’ve performed well recently. I would pay close attention to book-value growth, return on equity, loan-loss provisions, and the valuation being paid for those fundamentals.
Diversify your bank exposure
If you’re bullish on Canadian banks, I prefer owning the group rather than trying to predict which individual institution will outperform. BMO Equal Weight Banks Index ETF (TSX:ZEB) provides a straightforward way to do that.
Rather than weighting the banks according to market capitalization, ZEB gives them equal representation. Periodic rebalancing therefore trims relative outperformers and adds to relative laggards instead of allowing one or two banks to dominate the portfolio.
It’s still an extremely concentrated sector ETF, so I wouldn’t mistake it for a diversified portfolio. But if you’ve already decided that you want additional Canadian bank exposure, I think spreading that bet across the industry makes more sense than trying to identify a winner.
ZEB charges a 0.28% management expense ratio, currently offers a 2.29% annualized distribution yield, and pays monthly.
