Royal Bank is trading at 12.2 times forward earnings as of mid-2025. That's a 15% premium to its ten-year average multiple.
Jefferies Securities stopped the music last week. After watching Canadian bank stocks climb 66% since their 2022 lows, the firm downgraded the sector. Not because the balance sheets look shaky or because credit losses are spiking. Because the math ran out.
Valuations have moved ahead of what the fundamentals support. Toronto-Dominion, Bank of Montreal, Scotiabank, all of them are trading at multiples that already embed the optimistic growth case. The rally priced in the recovery before the recovery finished delivering.
How the multiples moved
The Big Six banks bottomed in October 2022, when rate-hike fears and a slowing housing market had driven valuations to multi-year lows. From there, the stocks climbed in lockstep with a narrowing credit spread, stabilizing real estate prices, and an improving outlook for net interest margins. By early 2025, the average forward price-to-earnings ratio across the group had expanded roughly 200 basis points above historical norms.
That's not a small move. A 200-basis-point multiple expansion on a $50-billion market cap is real money, and it reflects real optimism. The problem is that the earnings growth needed to justify those valuations hasn't shown up yet. Loan growth across Canadian retail banking has been flat to slightly negative for four consecutive quarters. Wealth management fee income is holding, but it isn't accelerating. Capital markets revenue has been lumpier than the Street expected.
You can make the bull case: Canada avoided a recession, unemployment stayed below 7%, and the banks emerged from 2023 with stronger capital ratios than their U.S. peers. All true. But those facts are now in the stock prices. Jefferies' concern is not that the fundamentals will deteriorate, it's that they won't improve fast enough to support the multiples investors are paying today.
What changed in the last 18 months
The rally was front-loaded with multiple expansion, not earnings growth. Between late 2022 and mid-2024, the S&P/TSX Capped Financials Index gained 58%, but aggregate earnings per share for the banks grew only 11%. The rest was re-rating. Investors decided the sector deserved a higher valuation, and they bid it there.
Re-ratings work when the story is still unfolding. Once the re-rating completes, returns depend on actual earnings growth. Canadian banks are now in that second phase, where the multiple has normalized and the next leg up requires either faster loan growth, better fee income, or a surprise drop in provisions. None of those look imminent.
Mortgage origination volumes are down year-over-year. Commercial real estate exposure remains an overhang in certain markets, particularly in Toronto and Vancouver, where office vacancy rates are still climbing. Consumer credit quality has stabilized but hasn't improved, charge-offs on unsecured lending are flat, not falling.
The timing problem
Downgrading after a 66% rally sounds like shutting the barn door late. It isn't. The valuation stretched gradually, and for most of the run, it was defensible. The Canadian banks were coming out of a deep discount. They had been oversold in 2022 on recession fears that didn't materialize. The first 40% of the rally was catch-up. The last 26% was anticipation.
What Jefferies is saying now is that the anticipation has been fully expressed. The stocks are no longer pricing in risk. They're pricing in the base case, maybe better. If earnings disappoint or if loan growth stays weak into 2026, there's limited multiple cushion to absorb it.
Royal Bank is trading at 12.2 times forward earnings as of mid-2025. That's a 15% premium to its ten-year average multiple.
Jefferies Securities stopped the music last week. After watching Canadian bank stocks climb 66% since their 2022 lows, the firm downgraded the sector. Not because the balance sheets look shaky or because credit losses are spiking. Because the math ran out.
Valuations have moved ahead of what the fundamentals support. Toronto-Dominion, Bank of Montreal, Scotiabank, all of them are trading at multiples that already embed the optimistic growth case. The rally priced in the recovery before the recovery finished delivering.
How the multiples moved
The Big Six banks bottomed in October 2022, when rate-hike fears and a slowing housing market had driven valuations to multi-year lows. From there, the stocks climbed in lockstep with a narrowing credit spread, stabilizing real estate prices, and an improving outlook for net interest margins. By early 2025, the average forward price-to-earnings ratio across the group had expanded roughly 200 basis points above historical norms.
That's not a small move. A 200-basis-point multiple expansion on a $50-billion market cap is real money, and it reflects real optimism. The problem is that the earnings growth needed to justify those valuations hasn't shown up yet. Loan growth across Canadian retail banking has been flat to slightly negative for four consecutive quarters. Wealth management fee income is holding, but it isn't accelerating. Capital markets revenue has been lumpier than the Street expected.
You can make the bull case: Canada avoided a recession, unemployment stayed below 7%, and the banks emerged from 2023 with stronger capital ratios than their U.S. peers. All true. But those facts are now in the stock prices. Jefferies' concern is not that the fundamentals will deteriorate, it's that they won't improve fast enough to support the multiples investors are paying today.
What changed in the last 18 months
The rally was front-loaded with multiple expansion, not earnings growth. Between late 2022 and mid-2024, the S&P/TSX Capped Financials Index gained 58%, but aggregate earnings per share for the banks grew only 11%. The rest was re-rating. Investors decided the sector deserved a higher valuation, and they bid it there.
Re-ratings work when the story is still unfolding. Once the re-rating completes, returns depend on actual earnings growth. Canadian banks are now in that second phase, where the multiple has normalized and the next leg up requires either faster loan growth, better fee income, or a surprise drop in provisions. None of those look imminent.
Mortgage origination volumes are down year-over-year. Commercial real estate exposure remains an overhang in certain markets, particularly in Toronto and Vancouver, where office vacancy rates are still climbing. Consumer credit quality has stabilized but hasn't improved, charge-offs on unsecured lending are flat, not falling.
The timing problem
Downgrading after a 66% rally sounds like shutting the barn door late. It isn't. The valuation stretched gradually, and for most of the run, it was defensible. The Canadian banks were coming out of a deep discount. They had been oversold in 2022 on recession fears that didn't materialize. The first 40% of the rally was catch-up. The last 26% was anticipation.
What Jefferies is saying now is that the anticipation has been fully expressed. The stocks are no longer pricing in risk. They're pricing in the base case, maybe better. If earnings disappoint or if loan growth stays weak into 2026, there's limited multiple cushion to absorb it.
That's the wall.
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