The Decibel - Why Canada’s banks are doing so much better than the economy

Episode Date: July 9, 2026

Canada’s Big Six banks are doing very well financially – their stocks are up an average of 62 per cent over the past year. In previous years, five or 10 per cent increases would be considered good for the banks. Financial reporter and columnist Tim Kiladze says this development is “absurd” and “baffling”. Today, Tim explains why the banks are doing so well. (Spoiler alert: it’s connected to a red-hot stock market.) He’ll talk about whether this rise will last, the risks and what it says about the health of Canada’s economy. Questions? Comments? Ideas? Email us at [e-mail] Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

There are some stocks that have been all the rage recently, like Nvidia, the American AI and computer chip company, Elon Musk's Space X. Even gold stocks have been doing really well. And you know what else is on that list? Canada's big six banks. Their stocks have been soaring this year. You could use a lot of words that sum up the current situation. I like to say it's absurd. Canadian banks are praised normally for being stable, secure, and delivering good profits. Like, don't get me wrong, these things print a lot of money. But what has transpired over the last year is baffling.

They're some of the hottest stocks in Canada. And to be honest, in North America. And the real surprise to me has been, you know, for all the talk about Bitcoin and speculative stocks like SpaceX or even the gold sector, you don't have to dabble with these crazy things. You can just buy banks. Today, the Globe's financial reporter and columnist Tim Kallads is here. He's going to explain what's driving the success of the big banks, what the risks might be, and whether this rise can last.

I'm Cheryl Sutherland, and this is the decibel from the Globe and Mail. Hi, Tim, welcome back to the show. Hey, happy to be here. Okay, so we know the stocks for Canada's big banks, so that's RBC, CibBC, Scotiabank, T.D, BMO, and National Bank are doing. really well. How well are we talking? So over the last year, so going back to last summer, they're up 62 percent and the banks also pay dividends, which are kind of payouts each quarter that goes directly to their investors. When you put those in, they're up 68%. In the last year,

they're up basically 70%. We're in such a crazy world that I think we forget what normal returns are. Normally, let's say pre-pandemic or something, if you got five to 10 percent a year, that was seen as like really good. Like that was a reason to own a stock. And now you can just buy the banks blindly and be up 70%. That's wild. So you're talking about like a normal return being around 5% and we're talking here 70%.

Yeah. So are all the banks doing equally well? Yes. And that's what's also perplexing because they're not all equally good. And I'm sure they'd like to fight me on that. But there is some differentiation between them. but people seem to be just be buying them blindly, kind of like across the sector.

And so the rising tide has lifted all boats. Okay, so what you're saying is that it's not normal for all the banks to be doing equally well here. Yeah. Usually you see some differentiation, particularly because across the banks, they all have different specialties and geographies that they play in. Some have more U.S. exposure. Some are really focused or predominantly focused on Canada. But again, no one seems to be making a difference.

Everyone is just like, well, you know what? It's hot. I'll buy it. Okay, so let's talk about the main thing here because you mentioned that this is absurd. This is baffling. Why is this such a big deal? So like a lot of things in the markets, you need a bit of historical anchor to give you guidance as to whether or not we're so far from like a historical norm.

With the banks and with a lot of sectors, you usually use something called the price to earnings ratio. So the price per share divided by. the company's earnings per share. All you need to know is that historically for the banks, it's been around 10 times. So the price is 10 times what the earnings per share is. Now it is, it's about 15 times. So that means it's about a 50% increase above the historical norm. Now, these historical averages, you know, you normally have fluctuations above and below them, because that's just how life is. That's why it's an average. But what is so surprising right now,

baffling, absurd, whatever word you want to use, is that the Canadian economy, which is what really drives kind of the core profits of these banks, isn't exactly hot right now. It's not bad, don't get me wrong, but it's not like we're seeing lights out growth that will kind of drive future growth for the banks. Instead, we're seeing a few specific divisions of the banks kind of capitalizing or profiting off the hot markets. Interesting. Okay. So if I'm understanding correctly, banks are not mirroring what's going on in the economy. Yes, exactly. So right now, you know, the Canadian economy this year is projected to grow 1.1%.

That's the latest kind of Bank of Canada estimate. And the banks are up 62%. Yeah. So it's a big difference there. It's a big difference. If you want to switch to the other camp and you say, okay, well, like, well, what has been hot? You could look to their capital markets and their wealth management divisions.

In capital markets, they basically make money by, advising on deals, so like a company buying another company, or they take a company public, like it just happened with Apotex, a big Canadian drug maker. They also make a lot of money from trading, kind of like buying and selling stocks for large clients. And then in wealth management, you know, the banks have built out these big wealth management arms that effectively manage money for everybody. So you walk into a branch, you say, hey, I want to buy a mutual fund. They put you into one of their funds, they tend to make one to two percent a year off of that money that you've invested.

Okay, so you're mentioning two things here that I think is driving why the banks are doing so well. So one of them is wealth management, right? So can you explain that a little bit more? Like, why is it that wealth management is kind of driving the success of the banks at this moment? At the end of the day, it comes down to hot markets. And we've had hot markets for like over a decade now.

If you just look at the TSX or the S&P 500 for the last 15 years, it's just been as crazy rise. And the banks in wealth management tend to make their money by just charging a fee. So let's use simple numbers. They charge a 1% fee for like, you know, you give them money. They put it into a TD mutual fund, a CIB mutual fund. Because it's a percentage, if the actual value of the stocks in that fund go up, they automatically earn more money. Because it's now instead of, you know, you gave them $100,000, I'm making these numbers up, They earn 1% off that. They made $1,000 off of you for the year.

But if that fund went up to $200,000, they now earn $2,000 a year. So it's kind of just been like easy money that just pours in. Obviously, the opposite could happen. You know, markets drop the dollar amount falls, but markets haven't dropped. We're in this moment where markets are not dropping. And so what you're saying here is that because everything is so hot on the market, they're just automatically making more money. So that percentage of money they're making from a person or from wealth management,

it stays the same, but the amount of the stock is so much higher that they're making more money. Yes. Very interesting. So another big thing here, and you talked about this trading part of it, let's get into that, that volatility and big events have an impact on how the banks are doing. Can you explain that part of it? Sure. So on their trading desks, which at some banks are quite large, I mean, they do a lot of different things.

So it's hard to simplify, but to give you one example, you know, they move money around and buy and sell for large. investors. And so there might be an investor that has like $100 million invested in something and they want to sell this huge chunk. So they go to a bank and they say quietly, go find me a buyer for this position. The bank does it and basically earns a fee in the middle for setting up the trade. Even though markets have gone up quite a bit or cut up a lot over the last few years, there has been volatility within those moves. So you think recently around, you know, the U.S. attack on Iran and what that did to oil markets. You think back to Liberation Day and Trump and tariffs. There were these huge drops and then there were these quick rebounds in many cases.

The banks made so much money off of these crazy gyrations in the market. I've been told from people very in the know that for a number of banks, Liberation Day was one of the most profitable days ever when it comes to trading certain types of things like stocks or whatever. And that's just because people were, the banks were just busier when it comes to trades. Like people were treating things more. Yes. Interesting. And there's just so much chaos, volatility that no one knows what to think.

So the people kind of like moving in and out of positions really quickly. Because if you remember with Trump, it'd be like tariffs are on, tariffs are off, tariffs are kind of on, you know. And so everyone's just constantly kind of moving around. And the banks are just these giant machines that touch so many aspects of the markets and our daily lives now. Of course, everything goes through the banks, I guess, right? Yeah. In a way, they are the economy, you know, which is why tying this back to like how they typically somewhat follow economic growth, it's because they are so intrinsically linked.

And right now we just have this disconnect between what's actually happening in the underlying economy and what's happening with the banks. I'm curious because these two things we're talking about wealth management and also trading and volatility, that that's something that's kind of a global thing that's happening. But we're talking about Canadian. banks. Is this happening for other banks? Like, are U.S. banks also doing really well right now? Yeah. If I had to summarize it, I'd say that big banks are doing well right now. And that has been one of the justifications that people who still believe that the banks should be trading like this

have been using. They say, you know, you look at kind of a top-tier bank in the U.S. or a top-tier wealth manager, Morgan, Stanley, JP Morgan. Like, they trade at higher price to earnings multiples. And therefore the Canadian banks should too. The other thing you mentioned was companies going public. How does the banks factor into that and make money from something like that? So the banks effectively earn what's called an underwriting fee for taking a company public. So we'll use Appetects because it's a great success story. The stock's gone up quite a bit since it's gone public.

You know, there's a lot of work that goes into preparing kind of all the financial documents and kind of taking this private company, which doesn't have as great sometimes financial systems and controls in place, and translating them or moving them into what is required of public companies. Because once you're a public company, there's so much more scrutiny, you also have public investors that need to be protected,

all these kinds of things. So it tends to be this like months-long process, sometimes years of taking a company public. And for that, you might earn, say, a 5% to 6% fee somewhere in that range. So Apotex was a $1.3 billion deal. I can't remember the exact percentage, but let's just use 5% of a billion dollars. I guess that would be $50 million. That's a lot of money. Yeah. Now that's spread across banks that they'll kind of, there's usually a group of them that take it public. But it's just a lot of money from a single deal.

Yeah. And that right there is one of the reasons why people should be cautious. I don't want to sound too negative because I actually think the banks have shown like great resilience, which is a big reason why they should be trading well. But historically, everyone has known, and we've seen this through cycles, like economic cycles, that capital markets revenues, these kind of deal fees are very chunky or spiky. So in hot markets, when companies feel good about going public or feel good about, you know, buying a rival, you earn a lot of money. But that the second the market drops, like IPOs and deals can just die. So you can't rely on this as kind of continuous revenue. It's not stable is what you're saying, right? Like this idea of chunky or spikes, it's going to happen

for a moment, but then it might just peter out. Yes. And the way that I've been making sense of current kind of trading valuations and all that is that investors are expecting that these chunky revenues will persist forever. And that's what scares me the most because we know they don't. This is just historical fact. But we're in these crazy times where we have these, they're called momentum trades, where you see investors of all stripes kind of cycle in and out of sectors. And right now the banks are just attracting more money, which just begets more money. But it can all change really quickly.

We'll be right back. Another thing I want to ask you about is something called a capital cushion. First of all, what is that? And what kind of impact is that having on how the banks are doing right now? So the capital cushion is kind of a boring idea, but it's actually arguably at the core of what has made Canadian banks so strong and resilient. So you go back to kind of the 2008 financial crisis. Canada's banks were held up globally for their stability and their resilience.

And part of that is because they had a good buffer, like a rainy day. fund so that if things went bad, if loans didn't get repaid, they had this kind of cash sitting there that could kind of plug the holes is the best way to think about it. And since then, around the world, regulators have required banks to hold more and more of this capital, of this kind of cushion of money that you can't even touch. It just has to be held for safety. Having that cushion, we now know just gives people more confidence. At the end of the day, the banking system is built on confidence and built on trust. So if you know that there's a good buffer there, investors are less likely to kind of cut and run at the first sign of like real trouble.

And part of this also just to kind of explain is that, you know, the cushion is there because banks don't have all this money sitting around, right? So this is kind of money to be like, we have this money in case people want to cash out. Yes. Got it. You know, that's just how the system is, how the system works. So it can get even more dire. when say you've had a lot of loan losses, like in a recession or bad economic times, the bank's ability to kind of repay people, their money becomes even more tough.

And that's why you need this cushion, ultimately to kind of give this confidence that my money is still there, you know? Now, fast forward to today. And, you know, over the past few years, especially since the pandemic, in Canada, especially, the regulator, the banking regulator, has required banks to affect build up the capital cushion in good times, basically meaning you're making so much money, just put a little bit aside. You know, like, let's just save some money here. And then in tougher times, they say, okay, you can release some of this capital and use it to go lend money, do whatever you

need to do with it to kind of help stimulate the economy. And that has just started. You know, the banks have been told they can release some of their capital. So the thinking is that, okay, this will allow more loans to be made, you know, new programs to launch, all these different things, and that could therefore generate more profit. That's the hope. Interesting. You mentioned earlier losses from loans. Was that a good news story for the banks this year? It's a mixed story because every media outlet, including us, has written about how, you know, loan losses are rising. And that's true. My take, though, is that if you look at the long-term picture of it all, we're still at incredibly low levels.

Don't get me wrong. There's some real pain out there, but the banks are so big, and for a good reason, they're diversified, that they've been able to kind of withstand these smaller pockets of pain. And so overall loan losses have not been a major concern.

And this ties into this broader idea that the proponents of these big bank share runs say, which is that everything that's been thrown at the bank, in the last five years, a pandemic, a trade war, you know, meme stock mania, a tech crash. They've just pushed through it all. And so there's this sense now that they're tanks. They can withstand anything. And that's what makes me worried because we have economic cycles.

Like that is just part of history. And the markets become so disconnected from economic on the ground reality. that you have money rush in and then money can quickly rush out. And so even if the banks continue to perform well, you can still have huge drops in the bank share prices. Something the bank CEOs also said was about the Canadian consumer being resilient, which means that Canadians are still continuing to spend money. And I think that might be surprising for some people to hear because, you know, we talk a lot about in the show about people feeling the pinch,

groceries remain expensive. Unemployment numbers are still high compared to pre-pandemic. How is it that we still have this resilient consumer that probably factors into how the banks are doing right now? In the broader economy, there's been a lot of talk of what's called the K-shaped economy. So think about the shape of like a capital letter K. With I guess the right-hand side of the K,

you have one land that starts at the middle and goes up and another that goes down diagonal. The economy is kind of, like that right now. You know, anybody from that middle, which would say, call it middle income and up, is doing pretty well. There will always be some pockets of weakness, et cetera, across the country, but for the most part, you know, if you have been somewhat invested in the market and you've had a stable job, like, you're probably doing pretty well. It may not feel that way because house prices are crazy, all these kinds of things that we know about, like affordability issues, but people are still

taking vacations. It's not necessarily the case for the bottom half of the K. Maybe you're a newcomer Canada. It's been really hard to kind of get into the housing market or even to find a place to rent because it's so expensive. It's been harder to find stable employment. Use unemployment is still quite high. There are people that are hurting, whereas the people that can contribute a lot from a spending perspective are doing pretty well. And the one group that I think we have completely forgotten about or that we don't factor into spending are boomers, basically. I always think look at my own parents who are, you know, they're retired. And, you know, they have some retirement savings.

And the market's been going up so much that, you know, literally, if you bought bank stocks, right, let's say these numbers may sound absurd to some people. But if you had a million dollars saved for you and your spouse, okay, for retirement, if you just had that money sitting there in bank stocks over the last year, you would now have $1.7 million. Your income one up or savings up by $700,000. You see what I'm saying? So they just don't know what to do with it. Like this group is like they're going on cruises and, you know.

That is wild to think about. Yeah. Sometimes like it's easy to get lost in numbers and all that. Sometimes it's like that simple. Right. So what it sounds like here is that there is still a cohort that's still spending. And the banks are able to profit off of them. Yeah, exactly.

Yeah, is there any issue with the banks relying on the market being so hot right now compared to other streams of income the banks rely on, like thinking about credit cards or mortgages? It's funny because I wouldn't say that the banks are relying on it. Like, they themselves and how they operate are not sitting here, like moving more money into these like hot divisions. They've just built these like broad, diversified businesses. And the ones that are hot right now just happen to be these certain divisions. But I would say that from an investor perspective, there is some trouble or fear in overly relying on these divisions. Because at the end of the day, the bread and butter of the banks is just plain old lending. And lending growth has been quite slow.

It's in like the low single digits. You know, you might have mortgages climbing 2% a year right now. Wow, so boring. So boring. And I mean, you are still seeing growth, which again is a good thing. It's not like we're having these huge contractions, but that ultimately is how banks make money. Just to end, Tim, as we've talked about,

the Canadian banking sector is seen as very stable, right? So, I mean, are they different from the stocks that have seen such sharp rises and falls? Like, are the banks immune to the worry of the prices crashing out? No, there's no way they're immune. And that is what is tricky right now. what we have seen in multiple areas of the market is that investors can get ahead of themselves and they get so delighted by strong growth that they kind of pile in just expecting that things will continue this way.

So an example I would use because it's so fascinating to me is if you look at Canadian engineering firms, so there's firms like WSP and Stantec, which had enormous share price rises over the last, say, five years because they really transformed into these kind global powerhouses in a way. And they had strong growth. And there was all this justification as to why they're going to keep growing. Well, in the last six to eight months,

the whole kind of narrative around them got popped because there's fears around AI and AI being able to basically do a lot of the engineering computer work they do. And the shares have just tumbled. And what's crazy is that these companies are still putting up growth. And so we live in these crazy times where a narrative almost matters more than reality. And I just fear that with the banks, the narrative will shift.

And the smart money that row these huge gains is going to get out quickly. And all the people that are just buying in now because they're just, they're kind of late to the trade are going to be sitting there and being like, well, what happened? This was looking so good. And all of a sudden you're down 30%. Okay. So I guess like the moral of the story here is, you know, don't be super optimistic at this point. Don't be super optimistic, but also don't be too pessimistic. It really is this weird middle ground right now where no one really knows what to make of it all.

Because I will say that, you know, the banks have handled a lot. But at the end of the day, there are warning signs. Look at the Canadian dollar. It's really hurting again lately. How can the Canadian dollar be hurting? But yet the banks, which drive a lot of the economy, are red hot. You know, not enough things are adding up. We got to get back to reality, basically.

Yeah, exactly. And just be a little bit more, you know, thoughtful in today's speak about where we are. Thoughtful. Okay, good point to end on. Tim, as always, great to have you in the show. Thank you so much. Appreciate it. Happy to be here.

That was Tim Kallads, the Globe's financial reporter and columnist. That's it for today. I'm Cheryl Sutherland. Tiff Lamb mixed this episode. Our producers are, Madeline White, Rachel Levy McLaughlin, and Mikhail Stein. Our editor is David Crosby. Adrian Chung is our senior producer,

and Angela Pichenza is our executive editor. Thanks so much for listening.