Analyst Updates: Monday’s Stock Upgrades and Downgrades

Recent analyst updates highlight significant actions regarding Canadian bank stocks, specifically their performance and outlook as they approach the first quarter of 2026. TD Cowen’s Mario Mendonca noted that while bank valuations are nearing peak levels, the fundamentals of the sector remain robust. He stated that the equity risk premium (ERP) stands at 4.2%, which is below the average of 6.6%. This cautious outlook is coupled with strong fundamental performance, suggesting that elevated valuations may persist.

Analyst Insights on Canadian Bank Performance

According to Mendonca, Canada’s large-cap banks have outperformed U.S. money centers and life insurance companies over the last 6 to 12 months, performing nearly twofold compared to these sectors. He cited that Sun Life’s performance has lagged, which may affect its relative valuation moving forward. Heading into Q4 2025, he emphasized the importance of reserve management for Sun Life.

Bank Earnings Projections

For the upcoming quarter, analysts anticipate a 7% year-over-year increase in cash earnings per share for Canadian banks and solid performance in capital markets. Mendonca also projected “good” pre-tax growth supported by strong net interest income and positive operating leverage. Despite some concerns in consumer credit, other credit metrics are expected to remain stable, underscoring the strength of underlying fundamentals.

Target Price Adjustments

Analysts have revised target prices for several major Canadian banks:

• Bank of Montreal (BMO-T): Increased to $219 from $209
• Bank of Nova Scotia (BNS-T): Raised to $112 from $104
• Canadian Imperial Bank of Commerce (CM-T): Adjusted to $142 from $134
• National Bank of Canada (NA-T): Reduced to $175 from $181
• Royal Bank of Canada (RY-T): Upped to $260 from $246

The average target price across analysts for these institutions also reflects optimistic growth, with favorites notably being BMO and RY due to their strong capital markets operations.

Market Reactions and Outlook

Desjardins Securities’ Doug Young noted the significance of various factors that will shape the reporting period for Canadian banks. Analysts expect slight increases in total provisions for credit losses, yet do not anticipate major surprises from defaults. Concerns regarding CUSMA negotiations remain a topic of discussion, further influencing market sentiment as banks adapt to economic shifts.

Overall, despite reaching valuation peaks, the outlook for Canadian banks remains positive as they continue to manage strong fundamentals effectively.