Canada's Big Two Banks Just Crushed Earnings—But Wall Street Has Cold Water Ready

The Headlines

Two of Canada's largest banks just delivered the kind of earnings reports that make investors sit up and pay attention.

TD's net income rose 45% year-over-year to C$4.04 billion in Q1 2026, and revenue climbed 10.6% to C$16.63 billion. But here's the kicker: the bank's earnings per share of C$2.44 beat the consensus estimate of C$2.26.

Meanwhile, RBC posted record Q1 net income of $5.8 billion, up $654 million or 13% from the prior year. Its adjusted diluted EPS of $4.08 beat the forecast of $3.85 by roughly 6%, and revenue hit CAD $18 billion versus the expected CAD $17.36 billion.

Both announcements landed on the same day: February 26, 2026. Both beat expectations. Both looked strong.

So why is the market treating this like a warning bell?

The Backstory

To understand what's happening now, you need to know where these banks have been.

TD has spent the last few years in remediation mode. After settling money-laundering (AML) violations and receiving a $434 billion asset cap on its U.S. operations, the bank faced a hard limit on growth south of the border. It has since reduced U.S. assets to $382 billion, well below the regulatory cap, and expects to spend roughly $500 million (CAD) in 2026 on U.S. AML remediation.

Despite that constraint, TD has been aggressive with shareholder returns. On January 16, 2026, it received regulatory approval for a new $7 billion share buyback program—this comes after completing a prior $8 billion buyback. The bank also raised its quarterly dividend by 2.9% to $1.08 per share.

RBC, by contrast, has had no such regulatory headwinds. Instead, it's been firing on all cylinders. Its return on equity hit 17.6% in Q1, and gains were concentrated in Personal Banking (net income up 18%) and Wealth Management (net income up 32%). The bank even made an acquisition play: on March 11, 2026, RBC announced it had acquired Toronto-based fintech Pinch Financial, which offers digital mortgage qualification technology.

Both banks have strong capital positions. TD's CET1 ratio was 14.5%, and RBC's CET1 ratio rose to 13.7%. These are well above regulatory minimums—think of it like having extra cash in the bank in case things go wrong.

The Takes

Here's where the conversation gets interesting. On the surface, both earnings reports are unambiguous wins. But the market's reaction—and the analyst commentary—tells a different story.

The Bull Case:

Several firms raised price targets on TD following Q1 results: Scotiabank raised its target to C$132 from C$125; BMO Capital raised to C$128 from C$120; UBS raised to C$126 from C$122. RBC Capital's analyst raised his core EPS estimates for TD to $9.54 (from $9.19) in FY 2026 and $10.46 (from $10.08) in FY 2027.

National Bank Financial holds an "outperform" rating on both RBC (target C$235) and TD, citing RBC as the sector's quality leader.

The earnings themselves are telling: both banks posted improvements in core profitability. TD achieved an improved return on equity of 14.2%, and RBC's return on equity was 17.6%—these are solid numbers that suggest good execution.

The Bear Case:

But here's the caution: Jefferies downgraded both RBC and TD to "Hold" from "Buy" in late November 2025, citing valuation concerns, stating the banks were "fully valued."

What does that mean? It means the stocks—despite the strong earnings—may already have a lot of good news priced in.

TD trades at a forward P/E of approximately 13.1, slightly below RBC's 13.7. For context, a P/E ratio is basically how much you're paying per dollar of the bank's profit. It's not outrageous, but it's not cheap either.

There's also the U.S. cap question for TD. Most analysts do not expect TD's U.S. asset cap to be lifted until at least 2027—meaning growth on that side of the border will remain constrained for at least another year.

Real Talk

Here's the pattern that emerges when you lay out all the facts:

Both banks just delivered earnings surprises. That's genuine. But their stock prices have already reflected a lot of that optimism. TD shares reached an all-time high of C$132.74 CAD in early March 2026, and RBC was trading at approximately C$221.79 as of March 6, 2026, having pulled back 3.9% over the prior ten days from its February all-time high of C$240.34.

In other words: the market already knew these were good banks. The question now is whether the good news is already in the price.

Also notice this: only RBC and TD have disclosed financial returns from their AI strategies among the Big Six Canadian banks; analysts expect other banks to follow suit in 2026. That's a competitive advantage for now, but it probably won't last long.

There's also a buyback story worth following. The Big Six banks repurchased $15 billion in shares in 2025, the biggest buyback year ever; analysts expect 2026 activity to be at the same level or slightly lower. That's bullish for shareholders—buybacks support the stock price—but it's also a reminder that banks are returning cash to shareholders instead of investing it in new growth.

The Bottom Line

TD and RBC both crushed Q1 2026. The earnings are real, the capital ratios are strong, and management is executing.

But Jefferies' "Hold" rating isn't cynicism—it's a reminder that strong earnings and attractive valuations are different things. TD's forward P/E of 13.1 and dividend yield of 3.3% look reasonable, and RBC's forward P/E of 13.7 and dividend yield of 2.92% are in the same neighborhood.

Here's the real question: if you own these stocks, did you buy them expecting earnings surprises and dividend growth? Or did you buy them because you thought they were undervalued?

Because based on the source material, the first story has already happened. The second one—whether the stocks are cheap relative to their future earnings potential—is what matters next.