Bank of America retained a favorable stance on Canadian bank equities on Tuesday, arguing that the sector's earnings momentum and capital actions could sustain growth even as the domestic economy faces short-term challenges.
The firm currently assigns Buy ratings to four of the six major Canadian banks and points to several strategic drivers: robust performance in capital markets, expanding wealth management franchises, and active share buyback programs. Bank of America also cites Canada’s resource-heavy economy and the pro-business orientation of the Carney government as supportive context for the sector.
Analysts at the firm emphasized the sector's weight within Canadian equity markets, noting that banks constitute roughly 23% of the TSX Index. That concentration makes the group difficult to overlook for investors looking to participate in any cyclical investment upswing in Canada. On a forward basis, the firm projects average earnings per share (EPS) growth of 13.1% for fiscal years 2026 through 2028.
Despite shares trading near all-time highs and commanding premiums relative to historical norms, Bank of America’s team believes that the expected double-digit EPS expansion and improving returns on equity could allow valuations to normalise over time. The analysts estimate that share repurchases will contribute about one-quarter of the forecasted EPS increase.
To test downside and capital flexibility, the firm ran a sensitivity on fiscal 2027 EPS assumptions using a 12.5% Common Equity Tier 1 (CET1) ratio and normalized impaired provisions for credit losses. That scenario implies an approximate 5% average EPS upside versus the baseline.
In terms of individual names, Bank of America identified TD Bank (TSX:TD) as its top pick ahead of second-quarter results. The recommendation reflects attractive screening metrics, favorable momentum in capital markets, excess capital above 14% CET1, and upside potential from improved efficiency, including through deployment of artificial intelligence.
Royal Bank of Canada (TSX:RY) received note of positive EPS revisions from the analysts; the report cautioned that the stock’s performance hinges on avoiding credit deterioration. Canadian Imperial Bank of Commerce (TSX:CM) was highlighted for its relatively high exposure to the domestic Canadian economy and for what the analysts described as best-in-class execution.
The analysts also acknowledged more challenging operational realities conveyed by management teams across the industry. These include rising pressure on credit costs, subdued loan growth in domestic personal and commercial banking, and competitive deposit pricing. Even so, Bank of America expects net interest margins to have room for another year of expansion and said capital markets activity remains a strong offset.
Reflecting the mixed near-term outlook, the firm adjusted its estimates to incorporate weaker expected loan growth and elevated provisions for credit losses. At the same time, price targets were raised after rolling valuation multiples forward to fiscal 2027 price-to-earnings and price-to-book levels.
Sector context and implications
- Bank of America’s stance underscores the importance of capital markets and non-interest revenue streams for Canadian banks’ near-term performance.
- Share buybacks are expected to be an influential component of EPS growth, accounting for about one-quarter of the projected increase.
- Credit cost trajectories and domestic loan growth remain variables that will materially affect bank earnings and investor sentiment.