Podcast Transcript: Q4 Canadian Bank Earnings

Skye Collyer: Welcome to today’s special episode where we’ll be doing a deep dive on Canadian bank earnings for year end, fourth quarter of 2025. This is the 21^st 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 Skye Collier; I’m Director advisor sales at BMO global asset management. Today, we are 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 and alternatives at BMO global asset management. Sohrab and Bipan, thank you for joining us today. 

Since Q4 wraps up the fiscal year for us for 2025, let’s take a quick look back on the year behind us before diving in. So a year ago, when we spoke, we were talking about potential mid-single-digit earnings growth and potential stronger returns on equity for Canadian banks and Sohrab, you had just called an inflection point earlier in April 2024, urging investors who were underweight banks to take a more constructive view, which was a well timed call and coincided with your shift towards more cautious optimism. And fast forward to today, it’s been quite a ride. In Q1, we saw all Big Six banks posted first quarter profits that beat analyst estimates, which hadn’t happened since Q1 of 2022, and then, of course, to navigate the uncertainty of President Trump’s trade tensions, we saw the Canadian banks building up reserves to brace for a potential slowdown. But once we moved past peak uncertainty, the outlook had become noticeably less defensive, and at the margin more offensive, looking ahead to the next phase for the banks over the next four, six and eight quarters. 

So, this past Q3 so three months ago, when we last chatted, credit was less of a headwind for the banks. As provisions for loan losses came down, we saw revenues were strong and operating leverage was favorable. So, now in Q4 we had another clean sweep. All big six banks beat consensus with year over year, revenue growth between 12 to 15%, so that hadn’t happened since Q1 of earlier this year. So Sohrab, that’s a quick look back, but what else stands out to you about the journey the Canadian banks have taken over the past year?

Sohrab Movahedi: Skye, thank you for the intro, and it’s good to be back for the 21^st session of this podcast. Yeah. I mean, when you kind of replay the year, it has been quite the year for the banks, right? I mean, I think as you, as we think through the year, our tone may have even shifted from cautious to constructive optimism, I would say, as we kind of come through the fourth quarter, certainly after the April Liberation Day volatility. The banks have actually navigated the macro uncertainty, both with respect to the trade tensions and reserve requirements, reasonably well and and they’ve done that at a time that there’s been a bit more muted balance sheet growth opportunities here, I’m thinking specifically long growth. But when there has been an opportunity, they’ve also seized that. 

And so, as we went through Q3 where it was a little bit more around operating leverage improvements, into Q4, I think we kind of capped it off with pretty strong revenue growth and resiliency in their underlying operations. So if I had to kind of summarize it, I would say, yeah, as I look back, there was reason to be optimistic, ever, ever so cautiously at the beginning of the year. We went through the midpoint of the year with the fiscal year anyway, with the Liberation Day and trade stuff, that caused a bit of a, I’ll call it a detour. But we seem to be all systems go again. The uncertainties haven’t lessened, but the banks have shown durability and resiliency in their underlying operations, which I think bode well for Canadian bank investors, quite candidly, and so everyone was able to report higher ROEs, and in many instances, even provide guidance commentary that would suggest those ROEs could further improve from here, notwithstanding all the uncertainty.

Skye Collyer: Thanks, yes. My next question, I wanted to peel it back a little bit further on, the main drivers behind all big six banks reporting higher than expected profits and earning beats this quarter. You already called out, you know, overall, we saw strong revenue growth and that resiliency for the banks, for their underlying operations, all reporting higher ROEs, potential for that to continue. Was there anything else that that really helped drive that beat across the street for the Big Six this quarter? And you’d mentioned we had a bit of a detour with Liberation Day, right? So Q1 all the banks beat, then we had our detour, and now we’re back at the end of the year, where all big six beat again. What’s different this time in Q4 versus that clean sweep in Q1

Sohrab Movahedi: The quick answer to your last question is, it’s human nature. I guess we all develop a little bit of tenacity, right? Like the skin gets a little bit thicker. I think if you look beyond that, I think businesses have learned, I’m not saying uncertainty is normal, but the businesses have learned to acclimatize to the uncertainties. Decisions are getting made even when there is not absolute certainty with certain outcomes. The fourth quarter strength, we call that revenues, I think you know that was fairly broad-based. We are continuing to benefit from good investment banking environments. The markets, businesses, whether it’s trading or wealth businesses, are continuing to generate basically shareholder-friendly type returns.

I think the banks, one of the things they would have done last year is they would have pulled on the expense levers, so they’re getting good expense management. And the long growth is muted, but it’s not zero, which is, I think, providing a little bit of ability to grow the net interest income line, but without necessitating, because of volume growth or book size growing and need to add to the reserve. So, you know, you have this unique situation right now, where the income statement is primarily accruing, I would say, to the bottom line, to the earnings, you know, some of these banks, for every dollar of revenues, close to 28-30 cents fell to the bottom line in 2025. So the combination of all of this, some margin stability and upward sloping yield curve, like these are all, I think, conspiring together to help drive kind of these bank earnings in a very shareholder-friendly direction.

Skye Collyer: Thank you, Sohrab. Bipan, take us through your macro lens. So what stood out to you in this quarter’s Canadian bank earnings? And if you had to boil it all down to one overarching theme across the Big Six in Q4 what would it be?

Bipan Rai: Well, thanks Skye. And a lot of the notes that I took away from it were very similar to Sohrab, and that just tells me I’d do a good job, because I think Sohrab is one of the best in the business. So you know, a couple of things that I’ll take away from this quarter’s earnings releases. First, you know, there’s strong results from capital markets, primarily trading and also Wealth Management, which really carried the quarter, I would say, for banks, mostly. Secondly, you know, there was still this element of struggling when it came to lending in personal and commercial space, particularly in Canada, I think that’s reflective or emblematic of a patchier backdrop here, obviously in Canada. And again, you know this, this theme continues to remain persistent is that CAD banks, you know, still retain very strong capital positions. And you know that allowed a few of them to increase dividends and conduct share buybacks this quarter, and even even after that, you still have banks retaining that strong capital position. But you know, if we’re talking about a single unifying theme, it’s this, it’s resilience through diversification, right? 

So, Canadian banks have become especially adept at generating revenues outside of traditional retail banking, and I think that’s one aspect that’s still somewhat underappreciated. And Sohrab hit the nail on the head, I mean, this was not a very strong year for loan growth in Canada, for Canadian banks, but nonetheless, you still had strong revenues, right? So that tells you that, you know, banks are becoming resilient through this diversification process. I’m not quite comfortable saying that they’re all weather, but it still tells us that this is a fairly constructive backdrop for a lot of banks heading into 2026. And you know the strong capital position element of it is still going to be important, right? 

Keep in mind that what that effectively does mean, is that it does provide banks with more room for capital deployment further on into 2026, and we know that there’s going to be a tremendous amount of fiscal easing, not just next year, but in the years to come, that’s going to open up more opportunities, let’s say, for the private sector to engage in some of these infrastructure, defense, spending projects that are being implemented by the federal government. If that is the case, then again, there’s going to be demand for capital, and banks are particularly well positioned to take advantage in that environment.

Skye Collyer: Thanks Bipan. Sohrab, back to you. I want to talk about one of your recent reports titled ​“Strong results, lingering uncertainties, constructive outlook”. We talked about some of the items that drove those strong results. Let’s dig a little bit into the uncertainties, and you and Bipan already touched on this. You noted that provisions for credit losses remained elevated, suggesting this could be a plateau rather than a peak, so how can investors interpret that?

Sohrab Movahedi: We still have an unresolved trade situation. We do have the Kuzma renegotiations or negotiations or renewal. I’m not sure exactly how this is going to go next year, ahead of us, I would say there is a non-zero chance, that this may get renegotiated, perhaps as something other than a tri-party contract or trade agreement. So all of that does create a degree of uncertainty, mostly with respect to the outlook for the economy, and I think some of that is probably reflected in the economists forecasts, both for GDP, growth, and unemployment rate. And so while the banks are signaling credit quality is stable, as you said, at an elevated level, I mean, the macro uncertainties do warrant some caution. And so I would say investors should probably interpret this as unusual times, requiring extra conservatism, if you want to call it that, on the part of the banks, before they right-size the reserve levels that they have in place. But as Bipan noted, the risk buffers go beyond the reserves for the banks. I mean, obviously these capital levels are quite healthy, and the first line of defense for all of these remains their earnings capacity, right?

So the ability to earn your way through this first, before you and have to tap your balance sheet resources. So it’s exactly that, I would call it conservatism, a degree of caution, perhaps more so, with a bit of an eye to the tail-risk type, downside scenarios, as opposed to the belly of the curve downside scenarios, I think, from a belly of the curve, we will likely, albeit at maybe a slower growth rate, we will look past this, and the banks over cycles. The Canadian banks I’m talking about over the cycles have shown an ability to try and find ways to continue to matter to shareholders and generate profitability and pay their dividends, and so we would expect that will continue.

Skye Collyer: Thanks for that perspective. I want to talk a little bit about the valuation of the banks overall. How are the Big Six Canadian banks trading now as compared to last quarter, and where do they sit within the long term average?

Sohrab Movahedi: One of our clients, I think, characterized it beautifully, and it was the first time I had kind of heard it characterized exactly in this fashion. And he said that, and he’s a Global financial PM, and he said, you know, banks tend to be either worryingly cheap or encouragingly expensive. And I think we are in an environment where the valuations, certainly relative to history, from a Canadian bank’s perspective would be, for example, on a price-to-earnings perspective, are at the upper end, you know, around 12.4 times, 12.5 times, something close to that, north of 12 times anyway, on any given day of two year forward earnings. And so that would be usually the upper end of the channel, but my sense is that, as we speak with clients, that’s not lost on them, but I think for the for the foreseeable future, they are aware of the valuation, but not deterred by it. 

And so I think the confidence maybe they have in the earnings outlook for some of these banks, and the drivers of that earnings keeps them constructive here. And you know, the one point of reference I would share is on a relative to the TSX perspective, the forward PE of the Canadian banks, you know, it’s probably around 80% eight zero of the forward PE of the TSX. I think if we look over the longer term type averages, it would be more in the it should be more in the mid 70s, maybe in the 75 to 77% range. So, maybe it’s a little bit higher on a relative basis, but I guess it’s a polite way of saying the banks have done well, but the markets have done well, and the banks have kind of drifted up with the markets as well. A little bit of outperformance relative to the markets, but not so much that arguably has made them expansive beyond ownership.

Bipan Rai: I think you characterized it perfectly there; encouragingly expensive, right? But also take into consideration the fact that valuation should really be the last thing you look at before you adjudicate whether or not you’re an increase or decrease your positioning. And the reason why I say that is because the fundamentals still matter, right? So if we look at the guts of earnings, you know what? Yes, a lot of it has been driven by the non-retail aspect of banks, so there’s been a greater degree of reliance on capital markets and wealth management operations. 

But you know, as I mentioned earlier, into 2026, there’s still some room for capital deployment by increasing lending, right? And that really ties to potentially an evolving macro backdrop that’s a little bit more constructive in Canada, than perhaps say 2025 was, right. So, you know, here we are sitting in late 2025, and you know we’re talking about, potentially, the bank Canada increasing rates as soon as later next year. You know that is not something that was in the the window of observations that I would say, heading into the second half of this year. So again, it does feel like the backdrop is becoming a little bit more constructive, and we could be heading into an environment potentially, we do see loan demand start to increase, and that will be constructive for banks. Then we can sort of look at the relative degree evaluation and ask ourselves whether or not this makes sense. 

But you know, the other aspect to this as well, Skye, and I did mention this in my note as well, is that we have different ways of playing this within the ETF space. I mean, certainly we could take the equal weighted approach and look at a product like ZEB, and of course, that’s been the popular play over the last couple of years. But if you are worried about valuation and you are still somewhat constructive on the fundamentals, then look at a covered call strategy, right? I mean, because you are still getting some degree of participation to the upside, but guess what? You also get that additional yield kicker as well. On an annualized basis. I mean, you get north of 5.8% and I think that’s going to be something that should attract a lot of our listeners out there that are a little bit concerned about bank valuation and still constructive on the fundamentals.

Skye Collyer: As our listeners may already know BMO has the largest and most liquid bank ETFs in Canada, with combined assets under management of 8.3 billion. They’ve been mentioned BMO equal weight bank index ETF, which is the ticker ZEB, as well as our BMO covered call Canadian banks ETF, ticker is ZWB. 

Something interesting to note, there’s always been a very wide performance dispersion spread between the individual Big Six Canadian banks. The largest difference being as wide as 33% over the last 12 months, ending October 31. So our strategies are a great way to equal weight the basket, and that way you get a natural buy low, sell high strategy, not overweighting to any one bank. Let’s shift to the outlook. Sohrab, looking ahead, what’s the constructive outlook for Canadian banks as we go into the new year?

Sohrab Movahedi: I’ll start from the bottom, if you will, or from the balance sheet first. We have yet to see the tailwinds of a long growth or a vibrant, more vibrant long-growth environment. I think Bipan’s point is a valid one that certainly going into 2026, we should be feeling a bit more optimistic. We’ve got Canadian federal elections behind us, we have a budget that’s passed, there is a path forward. Obviously, we still have the uncertainties associated with the trade situation in US and Mexico, but we should have a more vibrant loan environment. I think, at the same time, certainly all the forecasts and expectations would suggest we’ll continue to have an upward-sloping yield curve, that should be supportive of the net interest margins for the banks. And so if you have good net interest margin, or stable to still improving interest margins, and you have some loan growth that should breathe continued kind of air, if you will, in your net interest income, which, depending on the bank, it’s 50, 55% of the overall revenues. And commentary from bank management teams would suggest that certainly there is still strength in their capital markets-related business pipelines, whether it’s from an investment banking underwriting new issue, M and A perspective.

And so if we continue to have this constructive, really revenue environment for the banks, and some are starting to get tangible benefits from AI and prior period investments that they’ve made, we should have another year of positive operating leverage for the banks, where revenues are growing faster than expenses. And to the extent we have some amount of constructive certainty or reduced uncertainty on the economy, it wouldn’t be surprising to see that for them to kind of bend the curve, if you will, on the PCLs. So we may be able to see some credit reserves, or some moderation in credit reserve building such that it could become a tailwind. And so you’re coming into this really, with all the line relevant line items, potentially pointing in a favorable direction. And of course, you have very healthy capital levels at the banks, and some of them this quarter would have increased their dividends. Many are on a semi annual dividend review pro, you know, those that are on an annual cycle have indicated that there is reason to believe you’re going to net, net, get high, single digit EPS growth here, certainly over the next year, possibly, you know, over the next couple of years, to kind of abide with your 12 to 18 month type timeframe here. And buybacks should continue to be a source of capital allocation or a lever that the banks are talking and I think that they’re using, and I think we’ve seen it in the US, we’re starting to hear about in the UK. 

From a regulatory body language perspective, it feels like things are becoming a little bit less muscular, a bit more bank-friendly. We may get a bit of I don’t know if regulation will ever become a tailwind, but we may actually get an accommodating regulatory environment, more so in Canada, than we have had in the past, which would say, you know, we’re embarking on a period where the sun, moon and the stars may actually be aligning favorably for the banks. But doesn’t change the fact that they’re cyclical businesses, you know, they’re, you know, they are sensitive to the economic cycles, but, but there’s reason to believe the outlook can can remain constructive and favorable over the next 12 to 18 months.

Skye Collyer: That is a nice way to start thinking about the next chapter in the new year for the banks, and I guess this kind of this new phase that we’ve slowly moved into over the course of 2025. Bipan, just your quick hit on latest outlook on the Bank of Canada’s rate decision. You alluded to it a little bit earlier on, if you could just ground our listeners in the news you’ve been hearing and what the data points are saying - what’s to come for 2026?

Bipan Rai: So I mean, as we sit here today, this is December 9^th, 2025 and I look at the way the market is pricing the Bank of Canada for next year using the overnight index swap curve. Believe it or not, ladies and gentlemen, we are now pricing in rate hikes for the end of next year, by next October, the market thinks that the Bank of Canada is going to hike rates. Now, do I think that’s a bit of an exaggeration? Do I think the market’s getting ahead of itself? Yes, but I would also say the same thing in the United States too. But nevertheless, I mean, why is the market doing this? Well, it helps to sort of step sort of step back a little bit and parse through the data and and look at what effectively we’ve seen over the last little while. So if I look at the last three prints for the labor force survey, so the one that was released last Friday for November and also for October and September, I mean, we’ve gotten very, very strong job growth in this country, right? So we had 60k above 60k in both September and October, and we had close to 54k in November. Now you could argue that, you know, there’s a big caveat to the November number in the sense that a lot of it was part time work. And yes, you’re right. You’d be right in arguing that, but a lot of those jobs went to, you know, a long time sore spot for the labor market in the form of youth employment, or at least unemployment. So that is a step in the right direction insofar as that segment is concerned. The other angle to potentially look at here is the fact, if we look at the unemployment rate in this country, we’ve gone from 7.1% in September, and we’re at 6.5% as of November. That is a huge jump lower, and what that tells us is that this economy, at least the degree of slack in the economy, is a lot less than, you know, we had anticipated going into the fall. And I think yes, caveats aside, you know the bank Canada will look at that, and you know the market is expecting the bank to sort of reorient itself potentially, and you know, to a degree, they’ve already done that by suggesting that rates are at the right level for now. But if this improvement continues in the labor sector, what does it tell us about the real economy? No potentially that we could continue to see strong growth prints. And we did see one, of course, for Q3 albeit there are caveats towards that as well. A good chunk of that was really driven by a collapse in imports. Actual final domestic demand was relatively flat, so the degree of spending from the household, business, and government sectors and you know, but doesn’t necessarily mean that that will continue in the Q4 Q1 prints either, those could come in relatively strong if they do. I mean, the market’s taking the bet that the bank will probably elect to look, start looking at, least considering rate hikes towards the end of next year. But again, so much data ahead of that, and of course, the big unknown for next year is really what becomes of the USMCA agreement, because right now, a significant, or at least a substantial portion of the exports that Canada sends the United States is effectively not tariffed because it qualifies into the USMCA agreement, but we do know that that’s up for renegotiation next year. And look, I mean, we could do a lot of things on this podcast- one thing we can’t do is predict what politicians are going to do. We have to be very humble about that prospect. But that is the big unknown for next year.

Skye Collyer: and I’ll pass it back to Sohrab, as we wrap up today’s episode. Closing words for our listeners on what you’re watching and what you’d like investors to keep in mind about Canadian banks as we head into the new year.

Sohrab Movahedi: I would kind of point back to the Canadian bank’s history. They tend to be total return vehicles. They have historically had, I would even argue a legendary commitment to their dividends, and they’ve indicated that they’re going to grow those dividends. So I think dividends are going to be, continue to be, an important kind of ingredient in the return profile. We’ve talked about, you know, mid to high, I would say, single digit EPS growth, which would be probably above their typical medium-term targets. They come in with healthy capital levels, and we expect they’re going to continue to do buybacks, and so I kind of reiterated what I said.

I mean, I guess banks are encouragingly expensive, but there are certainly reason to be maintaining that encourage sentiment. Certainly if we’re going to end up getting, you know, I’ll say the flip side of bipins point, if we actually do get the Kuzma renegotiations done, then that would add to the level of certainty here as well. So the downside, of course, is always that maybe much too much excitement or optimism is factored in. But as we sit here today, we are probably also sitting in the more optimistic side of the boat for sure, on this December 9^th, as Bipan kind of reminded us. 

Skye Collyer: Wonderful. Well, that’s all for today. Thanks to Sohrab and Bipan for sharing your insights, and to our listeners for tuning in. If you have any questions, please visit our ETF Center at www.bmoetfs.com, for research, news and insight. We’ll see you here next quarter when we look at the Q1 bank earnings to kick off 2026. Take care, everyone.