Canadian bank stocks are some of the most prominent equities trading on the Toronto Stock Exchange. Two of the biggest TSX Index components by market capitalization are banks, and there are several other banks in the top 20.
It shouldn’t be surprising that banking is big business in Canada. Canadian banks are known for their prudent lending practices, which have enabled them to survive many financially turbulent periods that other countries’ banks did not. Also, Canadians have a lot of mortgage debt, which although an economic problem in many ways, does produce a lot of interest income for TSX banks.
2025 is shaping up to be an interesting year for Canadian banks. Interest rates are trending downward, which could reduce interest income, but on the other hand, investment banking is doing quite well. If history is any guide, then TSX banks have plenty of surprises in store for us in 2025. In this article, I share what I think will be the biggest drivers of the banking sector’s fortunes in 2025.
Interest rates declining
In 2024, the Bank of Canada started cutting interest rates after previously raising them in 2022 and 2023. This year, the bank’s policy rate fell to 3.5%, down from a peak of 5.5%. This fall in central bank rates is resulting in a corresponding fall in mortgage rates and deposit interest rates. For example, mortgages can now be found for 4.5% interest, down from a peak of about 6%, while Guaranteed Investment Certificate rates are about 3.8%, down from a peak of 5.5%. The “spread” between deposit interest and loan interest is actually largely the same as it was before, so the banks’ margins can still be healthy. However, interest revenue appears likely to decline.
Investment banking activity is picking up
One trend that should positively impact Canadian banks’ earnings in 2025 is increased investment banking activity in the U.S. market. U.S. merger and acquisition (M&A) is heating up this year, and many Canadian banks are big in U.S. investment banking. So, they should see increased fee income.
Consider Toronto-Dominion Bank (TSX:TD), for example. It is a Canadian bank that has major operations in the U.S. — both retail banking and investment banking. The company’s U.S. investment bank is a very promising segment. It recently acquired the boutique U.S. investment bank Cowen for US$1.3 billion. That’s a very well-respected bank with deep expertise in new and innovative sectors, and it should drive considerable growth at TD’s capital markets business as generative artificial intelligence-driven M&A heats up this year.
Housing market concerns
Last but not least, we have the state of the housing market. Canadian housing has been on a wild ride over the last few years, with prices crashing nationwide in 2022 and only partially recovering since then. Some specific market segments, such as the Toronto condo market, continue to be weak. Additionally, Canada’s homeowners are quite squeezed financially, with high levels of debt relative to income. This is one of the reasons why the Bank of Canada is cutting interest rates. Potentially, Canada’s stressed homeowner could be a challenge for TSX banks in the year ahead. So, the housing market will be a story to watch.