Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions Saved Articles My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials HomeFinanceBankingInvestorBig Six bank valuations at all-time high, raising bar for earnings seasonVarious metrics suggest that the Canadian banks could be overvaluedLast updated 1 hour ago You can save this article by registering for free here. Or sign-in if you have an account.Investors are pricing in fairly high profit expectations for Canadian banks, which report earnings in the last week of May. Photo by Getty ImagesThe share prices of Canada’s biggest banks have surged over the past year as global investors look to diversify and park their money outside of the United States amid economic uncertainty, a falling U.S. dollar and high valuations, but some analysts are questioning whether that trend can help continue the rally.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an Accountor“While we remain constructive on the large banks’ medium-term outlook, we believe the set-up heading into (second-quarter) earnings season is a bit challenging,” Mike Rizvanovic, an analyst at Bank of Nova Scotia, said in a note on Thursday.That’s because various metrics suggest that the Canadian banks could potentially be overvalued.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againFor example, the Big Six’s price-to-earnings (PE) ratio, a key metric that compares a company’s share price to its profit, has surpassed historical highs.The PE ratio was about 13.7 on May 5, Rizvanovic said, meaning investors were willing to pay $13.70 for every $1 of earnings the banks are expected to generate, comfortably above the historical average of 11.2.In other words, investors are pricing in fairly high profit expectations, so the bank’s earnings being released next week may not give stocks much of a lift unless clearly beat analysts’ forecasts.The banks’ price-to-book value — what a company would be worth if it sold its assets and paid off its liabilities — is also trading above historical highs: 2.2 compared to the 10-year historical average of 1.6, according to Paul Holden, an analyst at Canadian Imperial Bank of Commerce.“We expect a strong set of earnings, predominantly based on capital markets activity,” he said in a note on Wednesday. “The credit outlook is incrementally worse and, given where valuation multiples sit, we question whether the stocks will trade higher on capital markets-driven beats.”Holden also said the banks’ dividend yields are less attractive than in the past, with an average yield of three per cent compared to the 10-year average of 4.4 per cent.But the Big Six have consistently beaten expectations in the past two years, so it may be unwise to bet against them, Gabriel Dechaine, an analyst at National Bank of Canada, said.“Barring a margin or credit surprise, the onus falls on the capital markets to deliver this outcome, which isn’t impossible considering several favourable market conditions,” he said in a note on Thursday.One of those favourable market conditions include global investors looking for ways to diversify away from U.S. dollar assets and AI-heavy U.S. stock market dynamics amidst economic uncertainty, Mehmet Beceren, a senior markets strategist at Rosenberg Research & Associates Inc., said.That search has led to investors towards metals, oil, gold and markets that offer a more tangible link to resources, which Canada has plenty of, he said.“Last year’s gold price and overall commodity rally has become a tailwind for the Canadian assets that tend to benefit from these kind of rallies,” he said, “Money flowed into the Canadian markets, which then inevitably flowed into the Canadian banks, which are the largest companies in the index.”As a result, Beceren said everything has been revalued since the banks and other sectors began benefiting from the new market conditions.That’s reflected in how well bank stocks have traded in the past year, with Canada’s biggest banks up more than 50 per cent.But Beceren said investors shouldn’t compare bank stocks to their historical norms because everything adjusts on a relative basis. A different way is to compare them with foreign lenders.Canadian bank stocks look expensive against U.S. and European banks, but their valuations are cheaper compared with banks in Australia, another commodity-driven economy.This provides hope for the Big Six, but Beceren said there are also other factors such as housing stress and the rise in unemployment that could test the banking sector’s quality premium. Get the latest from Naimul Karim straight to your inbox Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.