Head of Canadian strategy explains that strong Q1 is more indicative of banks’ safeguards than economic strength
Q1 earnings reports have now wrapped up from Canada’s big six banks, and Canada’s financial giants posted collective profits of $19 billion, up from $14 billion in Q1 of 2025. They’ve achieved this earnings growth during a period of economic uncertainty and even malaise. Q4 GDP numbers were negative, and a combination of US tariffs, low productivity, and layoffs in key sectors have all pointed to a slowing Canadian economy. Despite their traditional role as an economic bellwether, the big six have once again demonstrated their capacity to outpace Canada’s economy.
BeiChen Lin characterizes the quarter as “solid.” The Director and Head of Canadian Strategy at Russell Investments sees this performance as more a product of methodical, planned discipline on the part of the banks. He explained how the banks have managed to tighten lending standards as signs of economic weakness emerged. He outlined other drivers of profitability and highlighted how this quarter’s earnings stress the crucial point that Canada’s stock market and its economy remain very distinct.
“We’re not seeing a Wile E. Coyote moment with respect to the Canadian banks. Yes, it's true that the Canadian economy has been slowing down, but there were plenty of signs along the way, starting with the unemployment rate rising, with what we're seeing with the GDP data. There were plenty of signs that Canadian banks could look to to say, okay, this might be a time where they need to be a little bit more cautious,” Lin says. “Even though, generally speaking, banks tend to be a little bit more cyclical from our perspective, because it was a more spread out period of a slowdown in the Canadian economy, the banks have gotten plenty of time to react to this, and that's one of the reasons why we think they were able to still have a good outcome despite that slowing in the economy.”
Lin notes that compared to 2025 Q1 earnings, provisions for credit losses at the banks have actually declined somewhat, thought there was a bit of an uptick from Q4. He also highlights that across the big six, the Common Equity Tier 1 (CET1) ratio has been maintained at well above the mandated minimum, meaning the banks have capacity to absorb a potentially deeper economic slowdown.
While disciplined lending standards and prudent maintenance of capital reserves has been a key part of Canadian banks’ stability, Lin also notes that capital markets divisions of the banks have driven profits thanks to strong equity markets through 2025 and into much of Q1. Lin returns to discipline, however, when he outlines the prospects for Canada’s banks against its economy.
Economic headwinds and uncertainty will continue for Canada, in Lin’s view, especially when contrasted against the United States. Until the overhang of US trade policy is removed through the settlement of CUSMA negotiations in the summer, there is likely to be subdued hiring and capital spending by Canadian businesses. Lin also notes that while banks are sometimes seen as a cyclical bellwether, the financial sector represents a much smaller per centage of the Canadian economy than it does the Canadian stock market.
Lin notes that if these bank earnings can reinforce a wider narrative, its that Canadian equities can still deliver strong returns despite weakness in the underlying economy. He stresses the relative valuation discount of between 20 and 25 per cent for many Canadian stocks when compared to US equities. In his view, that valuation gap can offset any cyclical headwinds that a Canadian investment would be exposed to.
Looking forward, Lin says he will be watching the domestic stability buffer (DSB) to assess future bank performance. The DSB is an additional capital requirement for the large Canadian banks that can be adjusted between zero and four per cent based on economic circumstances. DSB levels are currently on the higher end of their range and Lin sees it as possible that OSFI would lower that requirement to provide a countercyclical support and keep banks lending even if we see a further slowdown in the economy. Advisors may be fielding questions about challenges to the Canadian economy, but bank earnings can prove a useful way to demonstrate the differences between the economy and the stock market.
“The key messaging point with respect to the big banks is that they have had really robust earnings, and this is one of the reasons why the TSX as a whole has seen strong earnings growth, despite the fact that the Canadian economy has been relatively sluggish” Lin says. “I think the main thing for advisors to continue to bring up to their clients is this notion that the Canadian economy looks very different than the Canadian markets. And so, even when you're seeing some of these headlines about Canada's GDP contracting, it doesn't necessarily mean that Canadian equities have to suffer.”
