Canada’s biggest banks delivered another round of earnings beats this week, extending a run of strong results driven by capital markets and other business segments. But with valuations near decade-highs, large share buybacks and loan growth still subdued, analysts are questioning how long the rally can last.

Lofty valuations: Heading into the second quarter, analysts warned that Canadian banks were facing unusually high expectations already baked into their share prices. Their price-to-book ratios—or what they would be worth if they sold their assets and paid off their liabilities— are at their highest level in a decade, according to data from S&P Global Market Intelligence. 

Ahead of earnings, Scotiabank analyst Mike Rizvanovic warned that while stronger balance sheets, tougher risk management and more diversified businesses justified a slight premium, “current multiples are looking frothy,” leaving little room for further upside unless results substantially exceeded expectations. The warning proved correct with National Bank shares slipping 2.4 per cent after their results, even as the lender beat analyst estimates.

The valuation debate carried into earnings calls, where analysts pressed executives on whether investors were effectively betting that Canadian banks had become less cyclical than in past decades. 

TD Cowen analyst Mario Mendonca questioned whether markets now assume banks no longer face the same credit swings that historically justified lower multiples. BMO chief executive Darryl White argued the industry is fundamentally different today, pointing to stronger underwriting standards, technology-driven risk management and more diversified portfolios as reasons credit outcomes may prove more resilient during downturns.

“We may not be in a recession, but we are treating the softness as one in terms of helping our customers and de-risking wherever we can,” BMO’s Chief Risk Officer Piyush Agrawal said during the bank’s earnings call, adding that he doesn’t see the situation as a “stress scenario.”

Still, the banks largely delivered this week. Strong fee income from wealth management and capital markets once again offset sluggish loan growth, extending a pattern that has driven earnings beats for several quarters. Analysts had cautioned that capital markets strength alone might not be enough to keep lifting share prices at current valuations. 

Can it last? Maoyuan Chen, an analyst at Morningstar DBRS, said current valuations assume banks can sustain elevated capital markets activity and earnings growth, and may be justified if those conditions persist. But if profits eventually revert to more normal levels, as she expects, bank stocks would look expensive. She said she continues to view all six major Canadian banks as overvalued, even after repeatedly raising her forecasts for capital markets revenue and earnings growth in recent quarters.

Meanwhile, Peter MacKenzie, a senior policy analyst at the C.D. Howe Institute, said that while bank valuations are unusually high by historical standards domestically, he’s less convinced that Canadian bank valuations have become excessively stretched. Investors may still be willing to pay a premium for stability during economic and geopolitical uncertainty, with some treating Canada’s largest lenders as a relative safe haven that can continue to deliver strong results, he said.

“The banks aren’t the problem in these scenarios; they’re almost like victims to these geopolitical problems,” he said. “Right now they’re priced for perfection, but to continue this going forward, they have to [continue to] be perfect.”

Capital returns: Canada’s largest lenders are also increasingly returning excess capital to shareholders through buybacks. RBC announced plans to repurchase up to 45 million common shares, or roughly 3 per cent of its outstanding stock, while CIBC authorized a buyback of up to 30 million shares, equivalent to about 3.3 per cent of shares outstanding. National Bank also repurchased nearly seven million shares for $1.2 billion during the first half of its fiscal year.

MacKenzie said the buybacks could be the banks’ way of rewarding shareholders while they continue to generate strong earnings, while partially reflecting a lack of attractive opportunities to put that capital to work in an uncertain economic environment. 

While the federal government has encouraged Canada’s largest investors to invest more domestically, Chen said loan growth ultimately depends on demand from borrowers. Banks may have the capacity to lend more, but weak demand means growing their loan books more aggressively could require taking on riskier borrowers, she added.

Emerging risks: Bank executives warned that trade tensions, geopolitical risks and signs of consumer stress continue to cloud the outlook. On an earnings call, RBC chief executive Dave McKay said he remains “impressed” by the resilience of the Canadian economy despite slower real estate and commercial activity, but urged investors to keep their “eyes wide open” to the effects of tariffs on specific industries. 

CIBC’s chief risk officer Frank Guse told analysts the bank does not currently see “material” credit concerns, although some parts of its loan portfolio are facing more pressure than expected earlier in the year.

Meanwhile, Scotiabank’s chief risk officer Shannon McGinnis pointed to elevated energy costs, trade uncertainty and higher unemployment as ongoing pressures on consumers and businesses, while TD chief risk officer Ajai Bambawale warned of potential pressure on credit losses from “trade and tariff actions, potential impacts of the Middle East war and the macro environment, particularly in Canada.”

Looking ahead, MacKenzie said geopolitics could cut both ways for bank earnings. A worsening conflict in the Middle East could support interest income by keeping inflation and rates higher, while weighing on capital markets activity. An easing of tensions could produce the opposite effect. In such an environment, he said, the outlook remains difficult to predict.

“Canadian banks are well capitalized, and they’re well prepared to handle any kind of economic fluctuations,” MacKenzie said. “The banks have the ability to keep going at the pace that they’re going right now if things play out in a favourable way.”