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Canada’s banks have a reputation for being the “responsible adults” in the world of global finance. Canadian bankers believe in the nobility of risk aversion, showing up in starched shirts, button‑down collars, and trousers so secure they’re held up by a belt and suspenders.
While it may not be the Manhattan power suite vibe, for Canadian banks, it seems to work. At least based on last quarter’s earnings parade, where the big six Canadian banks showed off their well-endowed capital adequacy ratios, better than expected profits, stronger net interest margins, and a return on equity that would make even the Gordon Gekko’s of the world blush. Translation: Canadian banks are making oodles of money while pretending not to enjoy it.
As we move into 2026, Canadian banks are positioned to maintain solid financial profiles, but they must navigate a complex macro-economic environment of shifting monetary policy, consumer leverage, and global uncertainties, all of which are beyond their control.
From the Canadian perspective, the minutes from the Bank of Canada’s (BOC) December policy meeting made it clear that Canada’s present yield curve aligns with what it describes as the Goldilocks framework – balanced conditions that are neither overly restrictive nor excessively slack.
The U.S. yield curve paints a different picture. Economists are mixed in terms of where they think U.S. rates will settle during 2026. Some argue that additional cuts are likely, especially with the U.S. administration preparing to appoint a new Federal Reserve chair who is expected to push for more aggressive easing in the name of supporting economic growth. But that creates its own set of problems.
Politically motivated rate cuts tend to trigger unintended consequences. Easing policy at the short end of the yield curve – central banks’ primary arena – can ignite fears of future inflation. That, in turn, can push up mid-to-longer‑term rates that matter most to consumers, driving up the cost of mortgages (and by extension, rent), car loans, and financing for major durable goods. Those unintended consequences haven’t gone unnoticed, as an expanding chorus of U.S. economists is warning that rates may climb in 2026, albeit primarily in the second half of the year.
For Canadian consumers, any talk of rate hikes inevitably circles back to the elephant in the room… leverage. If debt were an Olympic event, Canadians would sweep the podium. According to recent data, Canadian consumers have the highest household debt-to-GDP ratio among G-7 countries. While much of this debt is tied to “secured” mortgages, the risk is clear: Elevated leverage leaves credit quality vulnerable, especially if housing prices take a serious tumble.
Fitch Ratings has flagged geopolitical trade tensions as a looming challenge for Canadian banks in 2026. Ongoing uncertainty around tariffs, supply chains, and global trade could weigh on corporate lending and investment banking revenues. The wildcard is whether Canadian trade negotiators can navigate President Trump’s unpredictable, “madman‑style” bargaining tactics and manage to reset USMCA (or CUSMA) to lock in tariff stability. That outcome is, at best, a coin toss – but if successful, it would be a clear win for Canadian banks and the broader economy.
One of the most striking developments has been the Big Six banks’ embrace of artificial intelligence. Their ongoing investments in fintech and digital platforms are designed to boost efficiency and, ideally, deepen customer engagement. The results were on display as all six banks reported improvements in return-on-equity.
Royal Bank of Canada (TSX: RY) stood out. Since acquiring HSBC’s Canadian assets, it has steadily expanded its profit margin. In the latest earnings call, management revealed that they are ahead of schedule – posting a 16% margin as they push toward their target of 17%. That is a remarkable achievement, particularly when viewed within the context of global peers. In the U.S. for example, JPMorgan Chase & Co. (NYSE: JPM) has long been the benchmark, posting a 15% return on equity.
Also of note was the continuing trend towards diversification into U.S. and international markets. As the international heavyweight among the Big Six, Bank of Nova Scotia (TSX: BNS) has long benefited from its international reach, particularly through its strong presence in Latin America. More recently, however, BNS has been trimming some of its weaker Latin American holdings while steadily expanding its footprint in the United States.
The Big Six banks also hold a commanding position in Canada’s wealth management industry, although their sheer scale often makes it challenging to foster deep, personal relationships with clients. Fortunately, this gap creates opportunities for smaller players to serve clients with a range of financial tools (insurance, tax preparation, estate and retirement planning), which are critical given the demand for personalized advisory services driven by the multi-trillion-dollar wealth transfer expected to move to the next generation over the coming decade.
Sticky inflation could force more aggressive rate hikes, raising credit risks. Any sharp downturn in the housing market would test banks’ resilience. Trade disputes or geopolitical crises could disrupt capital flows.
The outlook for Canadian banks through 2026 is one of cautious resilience. Strong capital positions and stable profitability provide a buffer against challenges, but consumer debt, housing market risks, and potential rate hikes remain key vulnerabilities. Regulatory oversight will continue to reinforce stability, while opportunities in digital banking and wealth management offer growth potential. In short, Canada’s banks are ready for 2026, but it’s going to feel less like smooth sailing and more like curling on thin ice.
Richard Croft is Founder, Chief Investment Officer, and Portfolio Manager of R.N. Croft Financial Group Inc.
Disclaimers
Content © 2026 by R.N. Croft Financial Group Inc. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently, and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
R N Croft Financial Group Inc. is a Licensed Discretionary Portfolio Management and Investment Fund Management company serving investors and investment professionals across Canada since 1993.
Image: iStock.com/robertprzybysz
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