Canada's largest financial institutions are approaching their fourth-quarter earnings announcements with cautious optimism, navigating a complex landscape of geopolitical tensions and credit market uncertainties. Despite expectations for improved year-over-year performance, analysts warn that trade negotiations and economic headwinds could dampen the sector's outlook.
Earnings Expectations Amid Economic Uncertainty
The Big Six Canadian banks are projected to report higher earnings per share for the quarter ending October 31, 2025, compared to the same period last year. However, these results are anticipated to fall short of the record-breaking performance demonstrated in the previous quarter, when institutions defied economic uncertainty to achieve unprecedented profits.
According to financial analysts, this quarter's growth will primarily stem from strength in capital markets, wealth management divisions, and relatively stable credit conditions. The banking sector has experienced what John Aiken of Jefferies Inc. described as an "exceptionally strong run in the fall," leading to current valuations that might be considered "fully valued."
Geopolitical Tensions Cloud Banking Outlook
Banking executives remain guarded in their outlooks, particularly concerning the future of the Canada-United States-Mexico Agreement (CUSMA). This trade agreement has protected Canadian businesses from the worst impacts of U.S. President Donald Trump's tariffs on Canadian exports, but its future remains uncertain.
The situation intensified in October when President Trump announced he was ending "all trade negotiations" with Canada following an Ontario government advertisement opposing tariffs. Although threatened additional tariffs haven't materialized, the two countries have yet to reengage, with Prime Minister Mark Carney scheduled to visit Trump the following week.
Royal Bank of Canada CEO Dave McKay emphasized in August that "should current CUSMA-compliant goods largely maintain their qualified exemption to tariffs, Canada's effective tariff rate should remain low and the economy should remain resilient."
Analyst Perspectives on Reserve Management
Financial analysts anticipate that bank executives will maintain a conservative tone during earnings calls. CIBC Capital Markets analyst Paul Holden noted on November 18 that "we expect a relatively conservative tone given uncertainty with U.S. trade negotiations and lacklustre economic growth in Canada."
Canaccord Genuity Corp analyst Matthew Lee suggested on November 20 that if the geopolitical situation improves and CUSMA is "extended with relatively little strain," banks might "give back" some of their "large reserve build" - funds set aside during the fiscal second quarter to cover potentially bad loans.
While provisions for credit losses are expected to remain stable, investors are monitoring the sector's exposure to private credit markets with heightened caution. This concern follows recent incidents where U.S. banks revealed loan fraud accusations against borrowers connected to other lenders.
John Aiken of Jefferies Inc. warned that "any miss on earnings in the fourth quarter could have significant negative consequences for valuation multiples with near-term upside likely constrained, even under a modest beat scenario." He further noted that in the current slow economic growth environment, downside risk appears greater than upside potential for Canadian banking stocks.
