11:33 AM EDT, 08/15/2025 (MT Newswires) -- In its third-quarter preview of Canadian banks, National Bank notes that credit outlook is the primary source of forecast uncertainty for Big-6 bank stocks.

Banks added a collective $1.8 billion (16 bps) to performing provisions during the second quarter (after "Liberation Day"). While the outlook remains highly uncertain and while rising Canadian unemployment bodes poorly for future credit performance, National Bank does not believe a single event during the third quarter would spur another period of elevated performing provisions. Analyst Gabriel Dechaine has trimmed the performing PCL forecast to 5 bps from 7 bps, but left the impaired PCL forecasts largely unchanged.

After reporting 2 bps of sequential NIM expansion (all-bank, excl. trading) during the second quarter, banks guided to stable margin performance. The benefit of higher securities re-investment yields, deceleration of low margin mortgage origination volumes and a favourable trend of deposit inflows should lead to better than guidance margin performance. Dechaine has lifted the all-bank NIM forecasts, in line with last quarter's performance.

CET 1 ratios were flattish Q/Q during the second quarter (excluding TD SCHW sale impact). On average, internal capital generation (+26 bps) was consumed by RWA growth (-19 bps) and buybacks (-11 bps). National expects a similar outcome this time around, especially considering banks were more active with buybacks this quarter (i.e., with the exception of TD). With organic growth limited and the regulatory burden potentially lessening, buybacks are a default option for banks looking to reduce the burden of excess capital, Dechaine writes.

Big-6 bank stocks have outperformed the market by ~100 bps (or underperformed by 300 bps excluding TD) so far this year. This performance has resulted in a forward P/E multiple of 12.2x (~15% above the historical average) for the group. "In our view, this combination is at odds with what has traditionally been a bad thing for bank stocks: weak domestic GDP growth and rising unemployment."

One narrative Dechaine keeps hearing is that the market is "looking ahead to 2027", ostensibly when economic growth has improved. While that may materialize, "until we gain confidence that the current credit cycle has stabilized (i.e., "peak PCLs" timing has been pushed out three times over the past two years), then we remain neutral on the sector, at best."

Top pick is BMO, on the basis that the ongoing turnaround of its credit performance and the revival of U.S. commercial loan growth are positive stock drivers (though the second component may not be evident this quarter).

Price: 157.25, Change: -0.35, Percent Change: -0.22