Posthaste: Canadian investors lean on the Big Six banks more than is good for them, this adviser says

Canada’s

big banks

have posted a strong year on the stock market so far this year, but investors need to look across the Atlantic to find the real stars of the financial sector, says one adviser.

“The true outperformance story belongs to European financials, which have led the pack on the back of a rising rate environment and restructuring efforts,” Craig Basinger, chief market strategist at Purpose Investments Inc., said in a note.

Canadian banks are up approximately 40 per cent on the

S&P/TSX composite index

in 2025, but those gains pale against the 90 per cent gain by their European counterparts and the 60 per cent gain by bank stocks in the United Kingdom. Financials in the United States are only up 23 per cent on concerns about regional banks and commercial real estate worries.

There are a few keys to the European banks’ success on the markets this year, including a shifting interest rate environment.

“The (European Central Bank)’s bias is increasingly shifting toward a neutral-hawkish stance,” Derek Holt, vice-president of Scotiabank Economics, said in a note.

That central bank has held

interest rates

three times since June and policymakers are expected next week to hike the outlook for the eurozone’s economy.

Major restructuring financing, especially in Germany, is expected to boost the region’s economy, with the industrial giant poised to unleash 52 billion euros’ worth of military purchases next week, according to a Bloomberg story.

Macro factors aside, shares of

Canada’s Big Six banks

don’t present a good deal for Basinger.

“What’s clear is that despite growth challenges around the globe, valuations do matter,” he said. “The low valuation starting points for international banks presented significantly higher upside potential.”

That leaves Basinger worried about where the Big Six go from here since they are trading at price-to-earnings ratios that have moved off their long-term average, leaving them “historically expensive.”

He said Canada’s banks are also trading at a 20 per cent premium to their global banking peer average. Yields for the banks are also getting “increasingly skinny,” he said, highlighting Royal Bank of Canada’s yield, which is currently 2.85 per cent, the lowest since 2007.

By comparison, the yield on Canada’s 10-year bonds is 3.4 per cent.

“Canada is typically at a premium, but at current levels, Canadian banks are trading richer than American peers,” he said.

Still, other analysts like the prospects for the Big Six.

“The large Canadian banks put up another stronger-than-expected set of results in the fourth quarter, pushing forward expectations modestly higher coming out of earnings season,” Mike Rizvanovic, an analyst at Scotia Capital Markets, said in a note.

He and other analysts have hiked price targets for all Big Six banks.

But Basinger thinks the overseas banks offer a better opportunity.

“Simply put, the risk/reward proposition for Canadian banks is less attractive on a relative valuation basis,” he said.

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Today’s Posthaste was written by Gigi Suhanic, with additional reporting from Financial Post staff, Canadian Press and Bloomberg.

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