TORONTO, Feb 23 (Reuters) - Canada's largest banks are expected to report another quarter of strong earnings, supported by strength in their capital markets and wealth management businesses, but slow loan growth and consumer weakness could put pressure on the lenders' profits.
The big six banks will report their first-quarter results for fiscal 2026 after a blockbuster year in which three in the group beat analysts' profit estimates in all four quarters, while the other three lenders posted better-than-expected earnings in three out of four quarters.
Those results, along with normalizing credit and strong earnings from wealth management and capital markets, helped banking stocks surge an average of 38.6% last year, outpacing the broader Toronto Stock Exchange's 28.3% gain. So far this year, banking stocks have gained between 1% and 12%.
"We suggest approaching the group with caution ahead of results," said Darko Mihelic, an analyst at RBC Capital Markets, who noted that bank valuations are elevated and recent economic data for Canada has been on the weaker side.
Canaccord Genuity analyst Matthew Lee said consumer weakness and a softening residential real estate market could put pressure on Canadian credit.
A slowdown in loan growth, fewer opportunities to grow in the domestic market and a loaded piggy bank, however, have pushed the banks to deploy capital through share buybacks.
Bank of Nova Scotia (BNS.TO), will kick off the first-quarter earnings on Tuesday, with analysts forecasting a 7.7% decrease in its loan loss provisions and a 10% increase in net income, according to LSEG data. Bank of Montreal (BMO.TO), and National Bank of Canada (NA.TO), are expected on Wednesday to show a similar pattern. The country's biggest lender, Royal Bank of Canada (RY.TO), will report its results on Thursday, along with peers TD Bank (TD.TO), and CIBC (CM.TO).
BANK SHARES ARE EXPENSIVE, LIKE EVERYTHING ELSE
Canadian banking stocks are trading at a premium, with valuation multiples hovering around levels last seen in 2009 for most of the country's big six banks, supported by strong earnings and balance sheets.
Analysts remain optimistic about the banks' potential to grow, citing their strong earnings, but some say the valuation multiples have priced in future optimism.
"I don't see a big red flag for this particular quarter, but it's going to be at some point if things change on the credit front, or you see a significant pullback in stock markets," said Shalabh Garg, a research analyst at Veritas Investment.
"Those would be, in my view, the biggest challenges for the banks in the coming quarters."
Reporting by Nivedita Balu in Toronto; Editing by Paul Simao
