Skye Collyer: Welcome to today’s special episode where we’ll be doing a deep dive on Canadian bank earnings for the third quarter of 2025. This is the 20^th episode of the series where we come back each quarter on this channel to help you break down and decode the latest quarterly Canadian bank earnings.

My name is Sky Collier. I’m an ETF Specialist at BMO Global Asset Management. Welcome. Today we’re joined by our longtime guest and trusted voice Sohrab Movahedi, Managing Director, Financials Research at BMO Capital Markets, and Bipan Rai, Managing Director and Head of ETF Strategy at BMO Global Asset Management. Sohrab and Bipan, thank you for joining us today.

Okay, so Canada’s big banks reported their earnings for the fiscal third quarter, covering the last three months, ending July 31^st, so Sohrab, before we dive into the results, let’s give our audience an earnings preview. Let’s take them back to Q2 where we saw the banks building up reserves to prepare for a potential slowdown within the backdrop of President Trump’s trade war tensions. Your mantra was, “the best offense is a good defense,” and this still remains, but overall, your outlook approaching Q3 earnings became more optimistic since we last spoke. So, talk to us about the year-to-date. Canadian bank index valuation multiples you observed at the end of August. So pre Q3 earnings, but tell us how that helped reflect some of your encouraged earnings outlook for banks.

Sohrab Movahedi: Yeah, for sure, and it’s good to be back, Skye. As we kick off September, and we look back a few data points, maybe just for the audience, as of last Friday. So, end of August, the calendar year-to-date, the bank index is a not too shabby — 22% total return. That includes dividends, and it’s outperforming the TSX by close to 500 basis points, maybe 460 basis points. So, I think if we had been having this conversation back at the peak of Liberation Day uncertainty, those numbers would have looked different. So in the past three months, for example, the bank index is up and not too shabby, 14% on a total return perspective.

So, you know, the uncertainty was something that we feared. The uncertainty would have weighed on valuation multiples as of Friday’s close. And obviously there’s been a couple of moving parts here. There’s the investor sentiment for sure, and then there is the yardsticks where you got out of the banks and earnings revisions, which tend to have been a bit more positive uniformly, so to speak, since those uncertain days of Liberation Day, you know, we see the bank index trading with about a low 12 times multiple on next year’s earnings. So, 2026, in and of itself, would give you cause for pause because historically, the typical range tends to be in the 10 to 12 times range, so we’re obviously near the upper end of that range.

But you know, I think just as importantly, when we talked about the total returns, we were talking about it relative to the TSX. So, when we think about the valuation multiples, we should also think about it relative to the TSX. And relative to the valuation multiple of the TSX, the bank index multiple is right in line with long-term averages, and that would be around 77%, and so the point here is that the banks have done well, but the valuation is less reflective of the outlook for the banks, maybe or as much reflective of the outlook for the banks as the byproduct of just a high tide. The markets are higher and the banks are commensurately higher.

So, you know, I think, as you know, and we’ll get into the conversation, I’m sure, today, but we may be past peak uncertainty. That doesn’t mean to say it’s a less uncertain, but indications are that the degree of uncertainty need not increase from here. And, we have some stuff in hand, and we have a government in Canada, and we have a set of priorities, and the focus is to make sure the economy is rebounding, and there’s economic activity and growth, and the banks will have an important role to play in that recovery of the of the economy. So, we’re increasingly less defensive and, at the margin more offensive, if you will. We’re offensive-minded as we think about the next phase for the banks over the next 4,6, 8 quarters.

Skye Collyer: Thanks, Sohrab. This quarter, we saw the biggest five Canadian banks set aside less money for loan-related losses. I’d say that’s probably one of the biggest headlines, or key takeaways, from the latest quarterly earnings. And overall, we saw five out of the six biggest Canadian banks beat expectations with some strong, across-the-board beats and one slight miss. So, give us your first take at the overall scorecard. What helped some of those across-the-board beats?

Sohrab Movahedi: So, I think you started off by talking about credit quality and reserve-building, or long loss-related-type reserves. Well, as it would be logical, last quarter there would be, as we said, a bit of a peak uncertainty related to the tariff uncertainties. And so, fast forward from Q2, where there was some reserve-building, to Q3, we see less need for that sort of aggressive reserve-building that we would have seen, relatively speaking, in Q2, and the impairments, or the portfolio quality continues to be as expected by the banks and their chief risk officers and the management teams. So, credit hasn’t quite turned into a tailwind, but it’s no worse of a headwind.

In fact, it’s less of a headwind relative to last quarter, and increasingly less of a headwind, if the narrative, if you will, kind of plays out with economic activity, and the like. We’re less worried about recession, for example, today than we would have been even three months ago. I think what really kind of stood out this quarter, though, is aside from credit, we actually had a very robust revenue picture for the banks. And think of that, you know, as your sales number. Think of that as the top line.

And the banks in Canada, the large banks, anyway, have diversified business models, and part of that is the business, traditional business of taking deposits, making loans and collecting a spread. But about half of that, and for some banks, a little bit more, would be fee businesses. These would be businesses where they are collecting above and beyond spread, underwriting fees. Maybe there is trading activity; there is market-related kind of wealth management type activities. And actually, the volatility was helpful to the trading businesses. I think less uncertainty perhaps fed into more deal activity in the markets businesses, certainly, equity markets moving up would have been net additive to their wealth management businesses. So, we actually had a pretty noticeable, I would say, revenue environment, and the banks are always focused on balancing the right equation between investments and managing expense growth.

And so, we saw positive operating leverage. And I think notably, all of the banks kind of delivered positive operating leverage this quarter. So, a lot of a lot of the levers were moving in favour. So, revenues were moving in favour. Operating leverage was favourable. Credit qualities, favourable. And then, of course, the banks have come into this period, well reserved, like we’ve talked about, well capitalized, like we’ve talked about, so all of the banks also have some buyback activity.

So, all of that, I would say, you know, we’ve got as good as a vibrant set of circumstances as we would want for the banks. And so, this kind of points back to valuation, which we talked about a little bit. But at the end of the day, if you think of banks as plays on the economy, there’s still some economic uncertainty, for sure, but the drivers of the income statement are all kind of the treadmill is moving in our favor as opposed to against us. And you know, you had to only look back to 2023 where a lot of these lines were moving against you, whether it was big reserve building or there was issuing equity under the dividend reinvestment programs, because the regulator had kind of increased capital requirements. So, I would say things are looking I wouldn’t say great, but things are looking much better for the banks as we sit here and think out over the next year, year and a bit.

Skye Collyer: Thanks so much. Sohrab. So, we saw the Canadian banks set aside less provisions for credit losses on loans. We saw robust revenue numbers. We saw operating leverage looking favourable. So, as you’d mentioned, the treadmill is running in our favour compared to a few years ago. Despite that, though, we still might be past peak uncertainty, but there is still an uncertain economic backdrop.

So, I’m going to turn it over to Bipan. Bipan, fly us out to your 20,000-foot view on the Bank of Canada’s path forward. So, as we wrapped up Q3 at the end of July, you noted the job market data and other official figures suggested the Canadian economy is on surprisingly steady ground, but other indicators were decidedly more bearish. What is your take on the most recent interest rate decision from the Bank of Canada within the backdrop of U.S.-Canada trade relations, and in your take, where do we go from here?

Bipan Rai: Yeah certainly, Skye, and hello everyone. In order to really understand the Bank of Canada’s path going forward, I think it’s equally important to understand where they’ve come from over the past year and a bit. Since June of last year, the Bank of Canada has eased its benchmark policy rate by over 225 basis points. Now, at the July Bank of Canada meeting, they left rates on hold. Put simply, that was sort of a nod in the direction of, “look we’ve eased quite a bit over the past year. Maybe it behooves us to sort of move towards more of a cautious and weight stance.” And again, that really reflects the data points that we have on the ground right now, right? So again, this is a point where everything is contingent on what the trade backdrop looks like. And of course, that has a heavy political bend to it, but also what incoming data is telling us as well, right?

You know, the bank’s mandate is obviously to control the or at least get inflation between the 1% to 3% band. Implicitly, that means 2%, but remember, there are offsetting factors that are really driving inflation at this point. For instance, what the bank is concerned with is if the downside pressures on inflation via the weaker economy and the excess supply that opens up whenever growth underwhelms relative to potential. If that exerts a greater effect than the upside pressures on inflation via tariffs and the reconfiguration of global trade. If that is the case, then they may need to cut again. You know, for the most part, given the fact that neutral, or at least the policy settings right now are close to neutral for the Bank of Canada at this point, it really feels like it’s either one or two cuts and then basically on an extended period of hold, given the current trade configuration and the current backdrop. And again, I think that’s an important qualifier and a big part of the reason why the Canadian economy has done as well as it has.

And again, I qualify that by saying that at the beginning of this year, and certainly towards the February to March phase, we would have anticipated the start of recession. The big reason why we’ve avoided that is that if you look at bilateral trade between the U.S. and Canada, a lot of it is still tariff-free. And because of the fact that outside of certain sectors, such as automotives and aluminum and steel, a lot of the goods that are passing into the United States from Canada are sheltered by the USMC Agreement. So again, that does bring that into important focus next year, as the trade deal does come up for renewal.

But by and large, if we look at activity in the Canadian economy, we’re basically flat towards relative to where we are tracking at the end of last year. Yes, there are cracks appearing in the labour market. The unemployment rate is drifting higher, but at the same time, this is a much better backdrop than certainly most of the banks would have envisioned in the earlier part of this year. And, as a result of that, we do think that, again, dovetailing onto what Sohrab said earlier, everything operates at the margin here. So, if we’re talking about marginal expectations, especially when it comes to performing provisions for credit losses, those could have been dialed back to a substantial degree, and that’s what we saw. And don’t forget, that is important for growth in net income. And that’s, you know, again, one of the reasons why that’s this was such a supportive quarter for Canadian banks.

Skye Collyer: Thanks for that, Bipan. I want to ask you about something that’s on everyone’s minds — housing here in Canada. Just how big could the mortgage shock be in Canada? What could that mean for the Canadian banks?

Bipan Rai: Right. To provide some context, there Skye, if we look at the estimates that the Bank of Canada provides, so around 60% of existing mortgages are up for renewal between now and the end of 2026. Now remember that the majority of these mortgages were originated or refinanced when rates were significantly lower than where they are now. So, that means that, relative to the end of, say 2024, a lot of households are going to be facing higher interest outlays when renewing in the coming quarters. And the big risk there for the Bank of Canada is that a lot of households are going to be prioritizing deleveraging as opposed to consumption.

In fact, many times we’ve seen that in the past, generally, that’s been consistent with negative growth, and especially during this period, where there are obviously trade tensions that are bubbling beneath the surface that could have significant implications for the employment sector as well. But here’s the thing to remember, this is exactly why the Bank of Canada has been so proactive in getting the benchmark policy rate lower over the past year. Doing that means there’s less of a shock potential when we do see these mortgages come up for renewal between now and the end of 2026. So yes, there will be a little bit of pain in so far as, let’s say, for a lot of fixed rate mortgages, the payment is going to increase, but relative to where we were, say, in the early part of 2024 that outlay or that monthly payment increase is going to be substantially less.

So. Again, you know it is an important factor to consider if you’re looking at the Canadian economy on a go-forward basis, and also, of course, for the Bank of Canada. But we’d say that over the past year that this has been mitigated. What’s more is that a lot of banks have been proactive in reaching out to potential problem borrowers and making sure that there is some sort of path being laid there in terms of other potential levers that could be pulled in terms of making sure that the payment increases on a monthly basis are far more manageable.

Skye Collyer: Great. Sohrab, do you have anything to add to that from your lens and specifically how the mortgage changes in Canada, what they could mean for the Canadian banks, so our listeners can better understand?

Sohrab Movahedi: Well, you know, there’s a few things just to keep in mind. The Canadian mortgage asset class is a very important piece of the pie for the Canadian banks. It makes up a lion’s share of the balance sheets, so they are definitely on top of understanding the risks associated with that asset class. I think, as Bipan mentioned, they have an excellent track record and experience over time, but specifically coming out of the recent kind of spike in the interest rate environment. And so, of course, there’s always going to be some unfortunate kind of outcomes, but for the most part, the banks are not looking to become landlords, and I think when feasible, they’re always looking to come up with action plans with those stretched borrowers with an eye of keeping them in their homes and ensuring that the bank shareholders ultimately recover, basically, not only on the capital deployed, but also on the promised, I should say on the on the capital deployed.

So, it’s a risk for sure, but I would say from a bank earnings and balance sheet risk, a risk well in hand, barring, of course, any unexpected shocks. For example, the Bank of Canada is expected to maybe cut rates if they increased rate. Increased rates, that would be a shock that we would have to kind of try and rethink. But for the most part, the loan to values are very manageable for the banks, both in terms of the back book and in your originations. And so, it’s a risk we’re aware, but not one that keeps up keeps us up at night.

Skye Collyer: Thank you so much. And so, our listeners are aware BMO has the largest and most liquid bank ETFs in Canada. With the combined assets under management of $7.6 billion, we have the BMO Equal Weight Banks Index ETF — the ticker is ZEB — and the BMO Covered Call Canadian Banks ETF — the ticker there is ZWB — which are also available as Mutual Fund wrappers.

So, both ZEB and ZWB take an equal weight approach to minimize any concentration risk to a particular bank. So, when dispersions happen in performance with certain individual banks, the semi-annual rebalance brings the holdings back to approximate equal weight, which allows investors to take profits and add to other quality banks with the ETF embedding a natural buy low, sell high strategy.

So, Bipan, I’ll bring it back to you. How would you use ZEB and ZWB as building blocks in your investment portfolio right now, given, given where we’re at?

Bipan Rai: Sure. I mean, it’s a good question, and I think it’s something that everyone should really think about. But look, so far since Liberation Day, we’ve seen the outperformance of the ZEB, which, again, as you mentioned, is the BMO Equal Weights Banks Index ETF, relative to the ZWB. And I think that’s a trend that could continue, and that’s for a couple of reasons.

One is going to be applicable for the sector writ large. And the second one is going to be more focused towards ZEB. So, the first thing to remember is that, as rocky as it is, the trade relationship between the United States and Canada, at the very least, is stabilizing. And remember, we have to operate in this sort of environment of everything moving at the margin. And for now, it does feel like both sides are interested in maintaining a tariff-free trade for goods that are compliant with the USMCA. That means the average effective tariff that the U.S. levies on Canadian goods will continue to be much lower than originally feared.

And again, that’s supportive for the Canadian economic backdrop, and it tells us that at least from a banking perspective, that things, or at least the solid backdrop, could continue for the next couple of quarters. With respect to ZEB, the one thing that we’ve noticed in our research is that short interest ZEB remains a bit elevated. Now, true, some of that reflects positioning and structured products. But again, it does not change the fact that continued rally in not just bank stocks, but in the ZEB could lead to a rise of volatility as investors cover shorts. And being long ZEB is where we would prefer to be in that type of scenario, and certainly we would regard that scenario as far more likely than the other scenario of potentially volatility remaining somewhat muted, and investors instead opting to choose the benefit of yield via the ZWB. To us, it still makes sense to be long ZEB in this environment.

Of course, you know the big risk there is, we talked a bit about valuation, and this is something potentially that Sohrab could answer, is what percentage of, or at least what was the sense of the pickup in loan demand from borrowers primarily to front run access to credit ahead of any potential tightening event. If the macro backdrop does deteriorate, that’s the key question, right? And if that does become an issue, then potentially ZWB could be, you know, the instrument that outperforms versus ZEB, but that’s certainly not my big base case at this point.

Skye Collyer: Sohrab, did you want to comment on that at all?

Sohrab Movahedi: I mean, I the only thing I would add is long growth is still something that we’re looking forward to, to be honest with you, across the banks, so I hear Bipan on it, but I would say it wasn’t like we had sizzling hot long growth this quarter that was driving the performance. In fact, as we look for trade-induced kind of uncertainties to settle, we’re excited that there will be a bit of recovery, I would say, in what I would broadly characterize as anemic-type loan growth at the large bank, Canadian banks, anyway, so that, I think is a tailwind that’s still to come, and probably a tailwind that could, all else equal, be supportive for bank earnings going into 2020 beyond 2026 anyway, we don’t have 2027 estimates, but we also don’t have much loan growth in 2026 and we expect that that is going to be a tailwind beyond 2026.

Bipan Rai: It’s great news for ZEB.

Skye Collyer: Then you bet. Okay, we’re going to close out today’s podcast, so I’ll ask Sohrab to leave us with a piece on the forecast for Canadian banks going forward.

Sohrab Movahedi: Well, I would say you were right. We were coming into this period with less offense, more defense, sort of a mentality as we finished the quarter. As we look ahead, we are encouraged by the prognosis for a variety of reasons. Bipan mentioned where we are increasingly more optimistic that there will be resolution on the trade uncertainty. I’m not suggesting it will be favourable or unfavourable, materially or otherwise. We just think the uncertainty will be less as we look ahead.

Certainly, we look at the Canadian banks, and we liked the revenue performance this quarter, and that’s without the tailwind of loan growth, like I mentioned, just yet. So that’s positive. We certainly saw positive operating leverage from all of the banks, so that tells us that they’re able to continue to make the investment to meet their investment agenda, and they have the revenue growth to support that, and still some, if you will, falling towards the bottom line. The credit narrative, from a credit quality perspective, I think rightfully so, remains cautious, but I think at the margin, less negative, and I wouldn’t say it’s increasingly more positive. You know, when we think about the shape of the credit curve, I’ll say less of a peak and a trough to follow shortly. Think of it as more of an elongated kind of top, but it’s still probably a top I think, you know, if you look at our published work, we think next year’s credit costs will be lower than this year’s, so that will be favourable. And then, as we’ve mentioned numerous times on prior podcasts, I mean, they continue to have very strong balance sheets. And here we’re thinking not only from a liquidity perspective. We’re thinking from a capital ratio perspective. Here we’re thinking about reserve adequacies. Think about the fact that they would have set aside reserves provisions in anticipation of an economic environment that may prove to be conservative relative to what will bear. And so those, I think, are all reason to believe that the balance sheets are strong. So, I’ll finish it off by saying the prognosis is encouraging, notwithstanding the valuation overhang, and here, I think they can continue to grow into those valuation multiples.

Skye Collyer: Thanks so much to Sohrab and Bipan for sharing your insights today, and to our listeners for tuning in. If you have any questions, please visit our ETF Centre at www.bmoetfs.ca, for research, news and insights. See you here next quarter when we look at the Q4 bank earnings to close out 2025 Take care everyone.

Podcast Transcript: Q3 2025 Canadian Bank Earnings