If you’re thinking about investing in Canadian bank stocks this August, there’s much you should be aware of.
While Canadian banks have delivered strong performances over the last two years, many of them near-doubling in that period, the banks are now more expensive than in recent memory. Canada’s big six banks, which historically traded at eight to 10 times earnings on average, now trade at around 15 times earnings. That might not sound like an extraordinarily high P/E ratio, but remember that banks have absolutely unbelievable amounts of leverage and have to invest particularly defensively in order to manage the risk that comes with that.
In the case of a bank, equity could easily be wiped out with a few asset prices going in the wrong direction by just 10%. So banks are expected to have lower price/book and PE ratios than other companies.
In light of this, Canadian banks’ P/E ratios are not as low as they look. In fact, taking into account the peculiarities of the banking sector, Canadian banks actually look pricey right now. On top of that, macro risks appear to be elevated due to a recent uptick in the uncertainty surrounding Canada’s biggest trade relationship. In this article, I will explore these and other matters Canadian bank stock investors need to know in August.
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Why 15 times earnings is arguably a problem
As mentioned previously, Canada’s big six banks trade at close to 15 times earnings now. By banking standards, this is pretty high. As mentioned previously, banks are extremely leveraged and their equity can evaporate easily. Investors demand low multiples from banks for this reason. Additionally, we’re seeing a relatively high multiple at a time when inflation pressures are running high and unemployment is a concern. In this kind of environment, you wouldn’t expect banks to have an easy time. So the high-ish multiple now being observed is arguably a source of increased risk.
The trade war
A big development that Canadian bank investors will want to watch in August is the apparently renewed US-Canada trade war.
Last week, after months of negotiations that appeared to be going well, US-Canada trade negotiations fell apart. A new round of 50% US tariffs went into effect shortly afterward. Prime Minister Carney vowed to retaliate with “dollar-for-dollar” tariffs of his own.
The situation described above could have some implications for Canadian banks. These banks lend money to Canadians, some of whom work in industries that depend on strong trade ties with the US. Additionally, it’s not impossible that the banks could become direct casualties of the trade war. Many TSX banks are active in the US market, while US banks have a minimal presence in the Canadian market – Donald Trump has complained about this situation in the past.
If you take a bank like The Toronto-Dominion Bank (TSX: TD), you can see clearly that the risks stemming from this trade war are many. First, TD lends money to Canadians, some of whom work in auto manufacturing, steel, aluminum, and other sectors that have been impacted by tariffs. The renewed trade war puts employees in those sectors at risk, and TD’s loan book along with them. Secondly, Canada’s retaliatory tariffs pose the threat of elevated inflation, which when not accompanied by wage growth, is bad for virtually all Canadians. Third and finally, TD is far and away the most Canadian of American banks, with 30% to 40% of its profit coming from the US market. Should Trump’s trade war tactics expand to target Canadian banks in the US, then TD will be at risk. To one extent or another, the overall Canadian banking sector faces the same risk.
The bottom line
While Canadian banks are certainly investable in 2026, they’re also riskier now than in the recent past. Owing to the banks’ high multiples, macro risks and the renewed trade war, investors might want to tread cautiously here.
