Love. Hate.

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   By Guest Blogger Ryan Lewenza

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Love them or hate them, Canadian banks are profit machines and should be core holdings in any Canadian portfolio. The banks just reported stellar results for their third quarter, despite all the headwinds in our economy, further proof of their incredible earnings power. Today let’s review those results and why we remain long-term bulls on the Canadian banks.

It was a great third quarter for the Canadian banks, which saw their share prices surge on the results. We reviewed the ‘Big 6’ bank earnings and on average earnings rose 14% yoy, with Bank of Nova Scotia, Bank of Montreal and Royal Bank seeing the largest yoy profits gains.

Five of the six beat analysts’ estimates, and by an average of 10%. National Bank was the only one to see earnings decline yoy and miss analyst estimates. So, the banks delivered big earnings growth and handily beat analyst estimates. Very impressive, especially considering our economy contracted by 1.6% in the second quarter, the same period for the bank earnings.

There were a few key factors for the strong results. First, the retail banking divisions performed better than expected. For example, TD Bank had its best quarter ever from its retail bank with profits of $1.95 billion, up 4% yoy. Second, loan loss provisions declined, a sign that bank CEOs and management are feeling better about the economy and their loan books. Third, the banks’ capital markets divisions did well largely due to higher trading revenues. So, it was an across-the-board strong quarter for the banks.

A big reason we like the Canadian banks is their strong earnings and consistent growth, which is illustrated in the chart below. Here we chart the combined earnings of the ‘Big 6’ banks. Note that: 1) the ‘Big 6’ banks combined made roughly $10 billion in profits in 2000 and today it’s around $50 billion; and 2) earnings have grown at an average 12% annually over the last 20+ years. That’s a lot of cheddar!

‘Big 6’ total earnings

Source: Bloomberg, Turner Investments

Another reason we like Canadian banks is simply their historical returns. Results don’t lie. As seen below, the Canadian bank index has returned 18.9% and 13.7% annualized over the last 5 and 10 years, respectively. Since inception they have returned 12.6% annualized. Comparing that to the overall TSX, banks have consistently outperformed the broader Canadian market. A key reason for this is their strong and consistent earnings.

Now, as the saying goes, ‘past performance is no guarantee of future returns’, but given the impressive long-term track record, we have confidence that the banks can continue to deliver these steady returns in the years and decades ahead.

Canadian bank stock performance

Source: Bloomberg, Turner Investments

The third reason we’re big bank fans is they spit off a lot in dividend income. Currently, the Canadian bank index yields 3.6%. Banks make a lot in earnings and pass these earnings on to shareholders in the form of dividends. In 2003 the Canadian banks net dividend was $29/share. This has increased consistently and today is up to $195/share. This equates to an average annual growth rate of 8%. Banks are the gift that keep on giving.

‘Big 6’ dividends per share

Source: Bloomberg, Turner Investments

So that’s the long-term case for investing in Canadian bank stocks. If you added to them today, we feel confident that they will be higher in a few years. But, like any investment the price you pay will be a big factor in one’s overall return. Warren Buffett famously said, “Price is what you pay, value is what you get,” so we should review current valuations for the banks.

Currently, the Canadian bank index is trading at a P/E ratio of 13.3x, which is above the long-term average of 12x, as seen in the chart below. In fact, they are currently trading 1 standard deviation above the long-term average, so they are not screaming buys right now. If markets were to experience a drop and the banks get back down to the long-term average or below, then load up the truck.

For now, we’re sticking with our current bank exposure, but we’ll be monitoring those P/Es closely and could look to add to them if we see a better buying opportunity. Basically, Canadian banks should always be on your buy list and if they go on sale, then start buying.

S&P/TSX bank index forward P/E

Source: Bloomberg, Turner Investments

Sometimes banks upset me whether it’s them nickel-and-diming over fees, aggressive sales tactics in the branches, or banks having to be bailed out due to their risky lending and investments. But how I make peace with this is by investing in the shares of the banks and benefiting from those juicy dividends and strong long-term returns.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/09/06/love-hate/