Canada's Big Bank Rally Hit 66%. Jefferies Says the Runway Just Ran Out.

The S&P/TSX Commercial Banks Index climbed from a 2022 low around 275 to roughly 457 by early 2025. That's the run. The question Jefferies is asking now is what comes after you've already priced in the recovery.

The firm's analysts published a note this month downgrading their outlook on Canada's Big Six. The core argument is simple: valuations have caught up to fundamentals. Price-to-book ratios across Royal Bank, TD, Bank of Nova Scotia, BMO, CIBM, and National Bank now sit near or above their ten-year averages. Forward price-to-earnings multiples have compressed back to pre-pandemic norms. The easy money from the rally, buying beaten-down financials in a rate-trough environment and riding the normalization, is behind us.

Jefferies didn't call the top. They called fair value. Those are different claims.

What drove the 66%

The rally had three engines. First, the Bank of Canada's hiking cycle from March 2022 to July 2023 rebuilt net interest margins after a decade of compression. Canadian banks earn the spread between what they pay depositors and what they charge borrowers. When the policy rate went from 0.25% to 5%, that spread widened sharply. Loan portfolios repriced faster than deposit rates climbed. Second, credit provisions that spiked in 2022 and early 2023, banks setting aside reserves for expected defaults, turned out to be too conservative. Household delinquency rates stayed lower than modeled, especially on mortgages. Those reserves got partially released back into earnings. Third, equity investors decided in late 2023 that the downside scenario, the one where Canadian housing craters and takes bank balance sheets with it, wasn't coming. That re-rating alone accounts for a meaningful chunk of the gain.

All three tailwinds have now either stalled or reversed. Net interest margins peaked in mid-2024 and have been flat to slightly down since. Provision releases are mostly done. The re-rating already happened.

Why the call matters now

Jefferies is not a perma-bear on Canadian financials. The firm had an overweight rating on the sector through most of 2023 and early 2024. This downgrade is a valuation call, not a macro one. The analysts are not predicting a recession or a housing crash. They are saying that the current stock prices already reflect a scenario where earnings grow modestly, credit stays clean, and capital gets returned to shareholders at the pace management has guided. There's no margin for error and no catalyst for re-rating higher.

That matters because Canadian bank stocks are widely held, especially by domestic pension funds and retail investors who treat them as bond proxies with dividends. The Big Six collectively make up roughly 16% of the TSX Composite by weight. When a sell-side firm with credibility says the runway is gone, it doesn't mean panic. It means recalibrating expectations.

The counterargument is that Canadian banks have structural advantages, oligopoly pricing power, a regulator that lets them earn through cycles, sticky retail deposit franchises, that justify a premium valuation in any environment. Jefferies isn't disputing that. They're disputing that those advantages justify a higher multiple than the one already in the price.

If you bought in 2022, congratulations. If you're buying now, you're paying for what already happened.