Money in the banks

Taking profits as record-breaking performance crests

The performance of the Big Six Canadian chartered banks in the past 12 months to mid-August has been truly record breaking. All the banks are up at least 55% (National Bank), and the best performers (CIBC and TD) are up 68% and 67%, respectively, all before taking into account dividends of 3%-4%.

This massive surge cannot be attributed to a sharp drop in interest rates. Short-term rates have remained essentially unchanged at 2.25% for the last year, while longer 10-year yields have actually risen 25 basis points, to 3.71%.

Furthermore, other sectors regarded as interest-rate-sensitive, such as utilities and REITs, have not risen by anything like the same amount. The iShares Capped Utilities Index ETF (TSX: XUT) is up only 18%, and the iShares Capped REIT Index ETF (TSX: XRE) is ahead a mere 4%.

Other financial stocks, such as life insurance companies like Manulife and Sun Life, have benefited too, up 46% and 40%, respectively. But property and casualty insurers, such as Fairfax, Intact, and Definity, are actually flat to down slightly.

Canadian banks outperform

The performance of the Canadian banks is almost double that of their U.S. counterparts, with the KBW Invesco Bank ETF up only 32% and US majors Bank of America and JP Morgan up 35% and 23%, respectively.

One partial explanation may be that the extensive provisions Canadian banks put in place in the second quarter a year ago following the shock of President Trump’s “Liberation Day” turned out not to be required, and most were reversed in the first half of this year.

The very strong performance of the Canada and U.S. stock market indexes over the last 12 months has seen the S&P/TSX 60 advance by 30%, Nasdaq by 26%, and the S&P 500 by 20%. Meantime, bond markets have been essentially flat. The combination has contributed to excellent results for the banks’ asset management arms.

The strong markets have encouraged takeovers and mergers, as well as a massive surge in initial public offerings (IPOs), culminating in the Space Exploration Technologies Corp. (NSD: SPCX) largest-ever IPO in June, raising US$75 billion. Additional secondary offerings from the Magnificent 7 large-capitalization technology companies generated massive fees for their investment banking operations.

Bank gains topping out

It would be correct to say that conditions over the last year have probably been as favourable as they could possibly have been for the banks, and it is difficult to see them getting any better. As the Iran conflict drags on, the possibility of higher energy prices feeding through into increased inflation gets ever more likely. Some central banks, notably the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, and the Reserve Bank of Australia, have begun raising interest rates to counteract inflationary pressures.

The Canadian banks’ sharp ascent has resulted in their valuations hitting levels rarely seen. The price/earnings ratio for the Big Six ranges from 16.5 for Bank of Nova Scotia to 23 for RBC; it averages 20 for the group as a whole.

Dividend yields, which were all above 3% 18 months ago, are now down to less than 3%, with the exception of BNS, at 3.6%. Three banks (CIBC, RBC, and National) yield less than 2.5% despite the fact all raised their dividends at least once in the last 18 months.

An old stock market saying is, “It’s never wrong to take a profit.” That obviously depends on individual financial circumstances, but in general when a relatively mature business closely linked to the progress of the underlying economy has more than doubled, it’s usually worth taking some profits while still retaining exposure to the stock.

One of the feebler excuses for not realizing capital gains is exposure to capital gains tax in non-registered accounts. But you have made a profit on the purchase, even after tax. More to the point, capital gains are the lowest-taxed form of income: Only 50% of the gain is taxable. Lastly, should investors have positions that haven’t done well and are trading below their purchase price, selling them will realize losses that can be offset against any gains, and can be carried forward indefinitely to offset against future gains.

Investment implications

Taking all these factors into account, investors with significant holdings of the big banks might consider lightening their exposure, especially if they’re sitting on double or triple gains. The one exception would be Bank of Nova Scotia (TSX: BNS), which I consider a hold. It has risen 65% in the last year as the market has recognized CEO Scott Thomson’s refocusing the business on North America. Before that, it had traded sideways for four years.

This is not a bearish call on Canadian banks, which remain amongst the most profitable and conservatively financed in the developed world’s bank universe. Rather, this is recognition that their recent price moves more than reflects strong fundamentals, which seem unlikely to improve further, and may deteriorate should inflation or interest rates begin to rise more quickly than expected.

Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management. He is currently Chief Investment Officer of Calgary-based Spire Wealth Management.

Notes and Disclaimer

Content copyright © 2026 by Gavin Graham. Excerpted from an article that first appeared in The Income Investor newsletter. Used with permission.

The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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