The Q3 performance of Canada's six major banks remains strong! Bank of America: EPS upward trend continues, valuation still attractive.

Bank of America Securities released a research report stating that the six major banks in Canada - Royal Bank of Canada (RY.US), Toronto-Dominion Bank (TD.US), Canadian Imperial Bank of Commerce (CM.US), National Bankshares, Inc., Bank of Montreal (BMO.US), and Bank of Nova Scotia (BNS.US) - have announced solid third-quarter performance for 2025. The bank believes that despite macro headwinds, the upward trend in earnings per share (EPS) for these six major banks continues. Bank of America pointed out that the average EPS of the six major Canadian banks in the third quarter exceeded expectations by 8.1%, with Royal Bank of Canada performing the best (exceeding expectations by 15.7%), leading to a 2.0% upward adjustment in the market's consensus expectations for the 2026 EPS of these banks compared to before the third-quarter earnings were announced. Strong capital market performance and rising net interest margin offset rising but controllable credit costs. Bank of America believes that with excess capital deployment (average CET1 capital adequacy ratio of 13.3%) and faster GDP growth, the EPS of these six major banks still have 5%-10% upside potential in 2026, meaning that current valuations are relatively reasonable. Bank of America stated that the overreaction in stock prices triggered by the "good but not outstanding" third-quarter performance of these six major banks validates its previous view that investors were underweight in these bank stocks. Looking ahead, if the US-Canada trade agreement is finalized, it will serve as a positive catalyst, shifting the focus from waiting to actual hiring/investment. In addition, the market's attention is on whether the Carney government can fulfill its promise of prioritizing a pro-business policy made during the election campaign. Bank of America believes that global fund inflows and improving macroeconomic prospects will support bank stock valuations. The bank stated that there is global fund inflow into bank stocks - each bank index in developed markets has risen by at least 10% year-to-date. Therefore, before the improvement in GDP growth expectations, being overly critical of valuations (which are currently still rooted in fundamental prospects) could miss out on opportunities to achieve excess returns. Bank of America's economic team predicts a 1.5% year-on-year GDP growth in 2026, which should make Canadian bank stocks a preferred choice to capture macroeconomic rebound exposure. Investors may be concerned about whether the six major Canadian banks can outperform their European and American counterparts. Bank of America stated that for global investors seeking to seize regulatory/interest rate/capital market improvement themes, European bank stocks are the preferred choice due to their cheap valuations, with a 2026 P/E ratio below 8 times, while Canadian bank stocks have a 2026 P/E ratio of 12.1 times, and Bank of America Corp stocks it 12.5 times; in terms of P/B, European bank stocks are 0.8 times, Canadian bank stocks are 1.6 times, and Bank of America Corp stocks are 1.7 times. However, global asset management companies looking to increase their allocation to the Canadian market could be a positive factor, as bank stocks account for 20%-25% of the TSX index in Canada. Bank of America added that there is potential for mergers and acquisitions, but macro clarity is needed. The bank pointed out that the improvement in ROE, combined with excess capital levels, has sparked discussions in the market about the possibility of mergers and acquisitions. The bank believes that there is indeed potential for mergers and acquisitions, but the US-Canada trade agreement may need to be finalized first. Royal Bank of Canada has expressed interest in expanding its wealth management business (including in the European market). Bank of Montreal is digesting the acquisition of Bank of the West in California, focusing on improving ROE in the US market but also remaining open to acquisitions within its footprint. Canadian Imperial Bank of Commerce under new CEO leadership is unlikely to engage in large-scale transactions, but "bolt-on acquisitions" to supplement its US business may be possible.