No Banking Crisis in Canada—But Caution Is Required Into 2026
There is no banking crisis in Canada. Let me say this before you read anything below…
Canadian banks remain well-capitalized, profitable, and stable. But after a strong run and improving sentiment, it may be time for investors to be a little more cautious—not because something is breaking, but because the risk–reward may be shifting.
Canadian banks are considered some of the safest banks in the world.
Why?
It’s because they are extremely conservative by nature. On top of that, they are heavily regulated. And since there are only a handful of major banks, they don’t necessarily have to try very hard to make money—large market share, strong pricing power, and limited competition do most of the heavy lifting.
This structure also allows Canadian banks to treat shareholders very well.
Pick any of the top five banks in Canada and you’ll see a strong, long-term record of dividend payments, with dividends growing at an impressive rate over time. Their stock prices have also performed exceptionally well.
Royal Bank of Canada: A Long-Term Wealth Machine
Take Royal Bank of Canada (TSX: RY, NYSE: RY) as an example. (at the time of writing, December 17th, 2025, looking at daily price.)
- Up 153% over the past five years
- Up 727% over the past 20 years
- Up nearly 2,000% over the past 25 years
Canadian banks have been solid investments for decades.
But—and this is important—these banks do go through periods of sharp drawdowns.
Even the Best Banks Have Big Pullbacks
For RY stock, over the past 25 years, there have been multiple instances where the share price dropped more than 20%. In some cases, the declines were significantly larger.
For example:
- Between 2014 and early 2016, RY stock fell close to 38%
- Between 2022 and 2023, it dropped about 29%
- There were also large declines during 2008–2009, 2011–2012, 2018, and 2020
Make no mistake—I’m not picking on Royal Bank. I’m simply using it as an example because it’s the largest. Other Canadian banks tend to move in a similar fashion.
Why Canadian Banks Matter Right Now
So why am I talking about Canadian banks now?
Because after their recent resilience, it’s fair to ask: How much higher can they go? Or could they go lower?
Remember, the market is a forward-looking animal. It cares far more about what’s coming next than what already happened.
So far, Canadian banks are reporting robust financial results. Over the past few years, there were widespread fears that Canadian consumers and businesses would struggle as the Bank of Canada raised interest rates. Those fears never truly materialized into anything major.
Banks did increase their PCL (Provision for Credit Losses)—essentially expected bad loans. While PCLs declined sharply in fiscal 2021 as pandemic-era provisions were released, they have been rising meaningfully since fiscal 2022 as credit conditions normalized.
Again, the market is forward-looking. Don’t forget this basic point.
Mortgage Renewals: A Key Risk for 2025–2026
The years 2025 and 2026 are expected to be critical for Canada, as a large number of mortgages come up for renewal, while interest rates remain elevated.
It doesn’t take rocket science to figure out what happens next: Mortgage payments for many Canadians will go up.
If households were already struggling, they’ll now have even less cash left over.
I’m not trying to scare anyone or throw around big numbers, but let’s keep it simple. If a household sees its mortgage payment rise by $100 per month, that’s $1,200 less per year being spent elsewhere—or saved.
Sure, people will say, “But home equity is rising.”
Truth: feeling rich and having actual cash in hand are two very different things.
Economic Headwinds Are Adding Up
We already know:
- Grocery prices are higher and expected to stay elevated into 2026. An average family of four is expected to spend over $17,000 on grocery in 2026 – up $994 from a year ago. (Source)
- The unemployment rate is higher, and job growth has slowed. Unemployment rate was around five percent in early 2023. Now, it hovers around 6.5% – we have seen as high as 7.1% in recent months. (Source)
- Businesses are less optimistic, and hiring plans aren’t as rosy. (Source)
Even the Bank of Canada itself isn’t expecting anything spectacular from the Canadian economy in the coming years. (Source)
Wouldn’t all of this eventually impact bad loans at Canadian banks?
PCL Trends: A Warning Signal to Watch
Let’s come back to Royal Bank Of Canada. Once again, let me make it very clear, nothing against the bank. Just using this as an example. (Source)
- Between 2014 and 2016, its PCL increased roughly 33%
- Between 2022 and 2023, PCL jumped over 400%
- There were further increases in 2024 and fiscal 2025
- Overall, between fiscal 2022 and 2025, PCLs have grown about 76%
To be fair, some of the recent increases in PCLs are amplified by base effects, given how unusually low credit losses were in the year following COVID.
If Canadian banks keep on raising their PCLs, even modestly, the question becomes: Does the stock price take a hit?
History suggests it often does.
Not a Sell Call—But an Opportunity?
To be clear, this is not a recommendation to sell or bet against Canadian banks.
Go back to the bigger picture.
If Canadian banks go through a rough patch—which isn’t impossible in 2026—it could actually turn into a blessing in disguise for investors looking to initiate or add to positions.
One thing is very clear: Over the long term, Canadian banks have created massive wealth.
They remain conservative, they control a huge portion of the market, and there is very little threat from new entrants—at least for now.
Yes, many factors matter: ROE, deposits, loan growth, and more. But there’s also truth to a simple reality: Bank stocks tend to fall when PCL rises. The last two years as PCL grew, market ignored.
Final Thoughts: 2026 Will Be a Big Year
2026 is shaping up to be an interesting year for Canadian banks. 2025 has been a great year for those who owned the bank stocks. Could 2026 be the year where people who missed the gains get an opportunity to enter?
I am watching them closely.
If you’re looking for actionable trade ideas, not just macro commentary, make sure to visit the Trade Ideas page on ZulfiqarResearch.com. I am working on something where I break down specific setups, risk levels, and upside scenarios—so you’re not guessing when opportunity knocks.