Going into 2026, Fitch Ratings Inc. had a “deteriorating” outlook for the Canadian banking sector as the country grappled with declining economic growth and trade tension uncertainties.

But that outlook was upgraded to neutral last month after Canada’s Big Six posted higher-than-expected profits during the first half of 2026.

“When we put out a sector outlook, it’s more on the business environment, not the credit worthiness of the banks themselves,” Maria-Gabriella Khoury, a senior director at Fitch, said. “We had them deteriorating, thinking the economy was going to slow at a faster pace, but that didn’t really materialize. We were also surprised when we saw the (bank) results.”

The change in Fitch’s outlook reflects how resilient Canada’s economy has been, which has helped the Big Six banks comfortably beat analysts’ earnings expectations and push their share prices even higher.

Bank of Montreal shares rose 40.2 per cent in the first half of 2026, followed by Toronto-Dominion Bank at 33.3 per cent and Canadian Imperial Bank of Commerce at 30.3 per cent. National Bank of Canada , Royal Bank of Canada and Bank of Nova Scotia followed, with gains of 28.9 per cent, 25.5 per cent and 21.7 per cent, respectively.

The resiliency shown by Canadian households also surprised Shalabh Garg, an analyst at Veritas Investment Research Corp. He expected to see a spike at the big banks in impaired losses, the money banks expect to lose on loans that are unlikely to be repaid in full, but that didn’t happen.

As a result, he said he no longer expects credit to be a big issue for the banks, at least in the next year, since the Big Six mostly cater to prime borrowers, who are typically from high-income households that are saving up more money now than before.

“The higher-income households are saving more than they were pre-pandemic, and the lower-income households are saving less than pre-pandemic, or technically taking on more debt,” he said. “As such, a good chunk of the banks’ customers are managing the existing economic situation well.”

Besides the resiliency of mortgage holders, Khoury said the banks are a lot more efficient than before.

“Since 2022, the banks have been doing efficiency programs and improvements, investments in digitization,” she said. “There was a lot going on in the back end that helped curtail spending and improve their operating leverage.”

The capital markets sector in 2025 and 2026 also defied every expectation, she said, which further helped drive the banks’ earnings.

Garg said BMO’s earnings and subsequent share price gains suggest investors are focused on the near term and are confident the bank will improve its return on equity (ROE), which measures how much profit a bank generates from shareholders’ money.

On BMO’s Investor Day in March, management said it expected to hit its 15 per cent ROE target as the bank exits fiscal 2027, in part because it is trying to bolster its business in the United States, which accounts for 40 per cent of its overall earnings.

BMO has been looking to significantly reposition its U.S. business ever since it bought San Francisco-based Bank of the West in 2023. Chief executive Darryl White in May said BMO had gone through “six quarters of optimization” that had come to an end and that he expected the U.S. business to accelerate the lender’s overall profit.

Garg, however, isn’t as confident since BMO still needs to scale its market share in California, which is at just two per cent.

“Even the bank says they need to be at six to 10 per cent,” he said.

Still, BMO reported strong sequential loan growth in the U.S. during the second quarter, which caught analysts’ attention.

“BMO delivered the best quarter out of the group,” CIBC analyst Paul Holden said in a note on June 4. “We think the upside surprise with U.S. commercial loan growth (four per cent quarter over quarter) plus solid growth in Canada commercial (two per cent quarter over quarter) is exactly what the stock needed to turn sentiment.”

But despite the Big Six’s solid first half, questions about whether their stocks are overvalued remain since a key metric that measures valuations suggests they are trading at or near 20-year highs.

For example, the Big Six’s average price-to-earnings (PE) ratio was about 14.2 towards the end of May, well above the historical average of 11.2, according to Mike Rizvanovic, an analyst at BMO.

Their average price-to-book value of 2.3, as of June 4, is also higher than the 10-year average of 1.6, Holden said, and their average dividend yield of 3.3 per cent was well below the 10-year average of 4.2 per cent as of last month.

“On all metrics, the banks are trading richly relative to historical averages,” he said in a note on June 4, adding it was time to “rotate into laggards” or invest in companies with good businesses that have lagged the banks.

But Mario Mendonca, an analyst at TD, said the banks’ higher PE ratio may be the new normal since they are not as vulnerable to credit cycles as in the past.

The Big Six have strong capital, are returning more cash back to shareholders and aren’t open to doing “often dilutive” U.S. regional bank deals, he said in a note on June 1.

He also said their earnings are less cyclical than in the past since they are less likely to sharply rise and fall with the economy because the banks are better prepared than before. For example, they now rely more on secured loans such as mortgages as opposed to unsecured loans that are riskier.

But Garg said he doesn’t think the banks’ earnings are less cyclical today, but they do seem to be in a space that seems immune to all the economic negativity and geopolitical tensions.

“Right now, banks are in that sweet spot,” he said. “At some point, things will change and it could be a credit issue, it could be something else, but, right now, everything is a tailwind.”

John Aiken, an analyst at Jefferies Inc., said the banks still need to figure out new avenues to support their valuations because the tailwinds they enjoyed in the past six quarters, such as net interest margin expansion, strong capital markets and wealth management and improved efficiency, may be close to their limits. However, he remains optimistic in the short term.

“Our base case still looks for earnings growth for the group through 2027,” he said in a note on June 3.

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