Canadian bank stocks seen gaining as growth outlook improves – BofA

Bank of America anticipates Canadian bank stocks will benefit in H2 2025, citing improved GDP prospects, infrastructure stimulus, and policy optimism under Prime Minister Mark Carney, alongside a potential US trade deal. The firm highlights CIBC, TD, and National Bank for their risk/reward profiles, noting the sector's reasonable valuations ahead of potential EPS revisions. However, rising competitive pressures from US regulatory changes and challenger banks, coupled with unlikely US M&A until a trade deal is secured, present headwinds.

Analysis

Bank of America presents a moderately positive outlook for Canadian bank stocks in the second half of 2025, underpinned by a confluence of macroeconomic and policy-driven tailwinds. The primary catalysts include an improved GDP growth forecast, planned infrastructure stimulus, and easing interprovincial trade barriers under Prime Minister Mark Carney's administration. A potential US trade deal by the July 21 deadline is identified as a significant factor. The sector's valuations are described as being in "reasonable territory," suggesting potential for an upward earnings-per-share (EPS) revision cycle fueled by a recovering housing market, strong capital positions, and delayed peak credit losses. Bank of America specifically highlights Canadian Imperial Bank of Commerce (CIBC), Toronto-Dominion Bank (TD), and National Bank of Canada as offering the best risk/reward profiles. CIBC is noted for its valuation discount and leverage to a domestic rebound, TD has a potential catalyst in its September investor day, and National Bank is on a path toward an 18% return on equity (ROE) from deal synergies. However, the analysis is tempered by rising competitive pressures from looser US capital rules, the removal of Wells Fargo's asset cap, and the growth of challenger banks, which could compress margins. Furthermore, US expansion through M&A is deemed unlikely until a trade deal is secured.

Key Decisions for Investors

• Investors should consider the positive macro catalysts for the Canadian banking sector, but closely monitor the US trade deal negotiations as the July 21 deadline approaches, as this is a key gating item for M&A and broader sentiment.
• For targeted exposure, evaluate Bank of America's highlighted names: CIBC as a value play on a domestic recovery, TD for its potential re-rating post-September investor day, and National Bank for its distinct synergy-driven ROE growth.
• It is prudent to watch for signs of margin compression resulting from increased competition from both US banks and domestic fintech challengers, as this represents the primary headwind to the bullish thesis.