Canadian Banks

Research evidence excerpt

Canadian Banks

(D-SIBs).

OSFI is lowering both the DSB level and the top end of its range to provide the large Canadian banks

with greater flexibility to deploy capital, balancing continued financial system resilience with the need

to support the domestic economy (e.g., investments in defence and security, critical infrastructure,

resources, and advanced technologies including artificial intelligence, though capital deployment

decisions rest with the boards and senior management of our covered large Canadian banks). OSFI noted

it did not intend to communicate a high degree of risk aversion with the DSB and in turn lowered the DSB

and the upper end of the range to provide capital planning certainty and flexibility for the large Canadian

banks. OSFI also stated that while vulnerabilities in the financial system remain elevated, conditions

have been relatively stable for some time.

As of Q2/26, the large Canadian banks' average CET 1 ratio was 13.5%, and based on OSFI's calculations

this capital cushion versus the new supervisory expectation of 11.0% equates to roughly $74 billion

(~$45 billion prior to the announcement) or equivalently, an expansion in RWA of ~$673 billion. Our

current model estimates assume an average CET 1 ratio of 13.4% in Q3/26 for our covered large

Canadian banks, ranging from 12.8% at BMO to 14.3% at TD, remaining relatively stable throughout

the rest of our forecast period and landing around 13.4% by Q4/27, ranging from 12.9% at BMO to

13.9% at TD. We believe that if the large Canadian banks under our coverage could deploy this capital,

the lower DSB could allow the group to increase loan growth in the near to medium term. We are less

inclined to believe this will increase the ability to repurchase shares for most large Canadian banks we