Canadian banks fully valued ahead of Q4, says Jefferies downgrading RBC and TD

Investing.com -- Jefferies downgraded Royal Bank of Canada and Toronto Dominion to Hold, saying a sharp rally through the fall has left the sector fully valued at a time when revenue growth is thin and credit risks have not cleared.

The brokerage lifted its price targets on both lenders but said current valuations leave more downside risk than upside as the group trades at about 13 times forward earnings.

Jefferies said it expects a solid fourth quarter in the context of the broader environment. Credit costs should be steady, with flat early stage provisions and modest increases in later stage impairments, while lending volumes remain positive but subdued.

It said capital markets and wealth management should provide most of the top line support and highlighted National Bank and Bank of Montreal as the banks with the strongest relative exposure to those businesses.

The bank said the slow growth backdrop and the sector’s strong run mean even a modest earnings miss could hit valuations, while beats are unlikely to move shares higher in the near term.

Jefferies said visibility on earnings and valuation improvement is more likely in the second half of 2026. It added that any rise in credit losses over coming quarters could create a more attractive entry point.

The broker said it still views RY as a high quality, diversified franchise and TD as a name with improving sentiment as it progresses through its anti money laundering remediation. But it said both stocks now fully reflect their upside potential.

Jefferies said National Bank is a name to watch this quarter, citing possible updates on revenue synergies from its Canadian Western Bank integration and capital relief from moving loan portfolios to its internal risk model.

It also expects banks to emphasize returns on equity, supported by buyback programs as capital levels fall below a 13% threshold. Dividend increases are expected to broadly match earnings growth.

Jefferies said expense discipline remains a key differentiator. It expects typical fourth quarter cost increases, driven partly by variable compensation in capital markets and wealth, but said overall operating leverage should remain positive.

It noted that TD’s remediation costs should ease in 2026 and that National still has further room to capture cost synergies from CWB.