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We recently received an enquiry from a reader about the Canadian banks. The reader writes, “The vast majority of our portfolio consists of financials, utilities, insurance companies, pipelines and various perpetual preferreds, so we feel reasonably comfortable. We have been fortunate enough to have experienced 2 to 5 times growth in our larger financials, like CM and RY. Would trimming stocks such as these be prudent even though it would substantially reduce our dividend incomes?”
The concern sometimes expressed by readers is the possibility of the banks imitating the telecom companies. They had reached premium valuations five years ago, on the back of the boom in internet services during Covid and high immigration, only to subsequently experience price erosion from increased competition and high capital expenditures to upgrade their networks.
Four of the five big telcos are off between 20% and 45% over the last five years, the exception being Quebecor. It’s up 65% on the back of its purchase of Freedom Mobile from Rogers (a condition of Rogers’ takeover of Shaw Communications). This enabled Quebecor to gain market share and expand geographically.
The situation for the banks is somewhat different, as there is no likelihood of a major new competitor disrupting the market. If there is one certainty in Canadian business, it is that the major chartered banks will remain a highly profitable oligopoly, with the government willing to restrict competition to ensure the stability of the financial system.
The contrasting experience of the Canadian and U.S. bank sectors in the Great Financial Crisis of 2008-09 reinforced the view that the authorities were willing to see consumers paying higher fees to ensure the banks’ profitability was sufficient to see them through the inevitable credit downturns without damaging their capital positions too severely and thus maintain the flow of credit within the economy.
In fact, the recent corporate activity within the sector has merely strengthened the position of the chartered banks, with RBC buying HSBC's Canadian operations in 2024 and National Bank taking over Canadian Western Bank and the retail operations of Laurentian Bank last year. This effectively meant the seventh-, eighth-, and ninth-largest banks were taken over by two of the top six.
Even a major misstep like Toronto Dominion’s US$3.5 billion fine for inadequate anti-money laundering controls in its U.S. network, with an associated hard cap on growth in its U.S. assets preventing it from expanding any further in the US, hasn’t stopped TD from being one of the better-performing banks. Over the last year, its shares were up 67%, although its share price was essentially flat over the previous three years.
In fact, the reason that bank price/earnings ratios are so high is that all the chartered banks have risen over 45% in the last 12 months. RBC is up 47%, BMO and Scotiabank 57% and 54%, and CIBC and National Bank 77% and 70%, respectively. This has left their p/es between 15.5 times for CIBC and Scotiabank, 16.5 times for RBC and BMO, and almost 20 times for National, the higher valuation for the latter reflecting its faster growth and geographical expansion. The outlier is TD, selling at only 11.5 times, reflecting its U.S. misstep, as well as new management focus on cost reduction to grow margins.
The most important factor driving the strong performance of the banks has been falling short-term interest rates over the last two years, as the Bank of Canada has cut rates to 2.25% from over 5%. Longer-term rates have also fallen but by a smaller amount (to 3.5% from 4.5% for the benchmark 10-year bond, to as low as 3.2% last year). This has led to what is known as a bull market steepening, as short rates have fallen further than the long end, widening the difference between them and expanding the banks’ net interest margin (NIM), the most important contributor to their earnings.
The banks have also been raising their dividends over the same period, although the strong price rise has meant their dividend yields are now below 3% for all of them except BMO (3.2%) and Scotiabank (4.5%).
This is unlike the telecoms, whose yields have risen to levels that indicate investors are anticipating a dividend cut. That occurred in the case of BCE last year.
Bank dividends are not exceptionally high, and in fact are near their lowest level for almost a decade. Banks were prevented from raising their dividends through the Covid period and have been targeting a payout ratio in the 40%-45% range for the last few years.
In conclusion, bank stocks have risen strongly over the last year. But this came after a period between 2021-23 when interest rates rose from multi-generational lows of below 0.5% to 5.5% in less than a year and bank shares traded sideways to down, reflecting the Covid-affected economy and then the very sharp rise in interest rates.
RBC, for example, was effectively the same price in late 2023 as it was in 2019, while TD’s share price lost 25% between 2022 and 2025 due to its U.S. problems. The same pattern of a peak in 2022 followed by two years of pullback is observable for the other banks, showing that interest rates remain by far the most important factor determining their performance.
With the Bank of Canada remaining on hold as far as short-term rates are concerned, given the uncertainty over how long the Iran conflict and subsequent high oil prices will last, and whether they will flow into generally higher inflation, there seems little likelihood of higher short-term rates in the immediate future.
Investors who are concerned share prices have risen too rapidly may consider trimming their holdings to lock in some of their gains, but until it’s apparent a new interest rate cycle of rising rates is underway or the combined effect of U.S. tariff policy and higher energy prices cause a recession, Canadian banks will remain highly profitable and attractive investments.
Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management. He is currently Chief Investment Officer of Calgary-based Spire Wealth Management.
Notes and Disclaimer
Content copyright © 2026 by Gavin Graham. Excerpted from an article that first appeared in The Internet Wealth Builder newsletter. Used with permission.
The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/Bet_Noire
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