Canada’s bank stocks might have gotten off to a flying start this year, but analysts suspect the tide may be turning against the Big Six as they prepare to report first quarter earnings starting this week.

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“Yes, bank shares started off the year on the right foot, but we don’t believe that this Fast and Furious rally can last,” Scotiabank analyst Meny Grauman and co-author Felix Fang wrote in a Feb. 16. note to clients. “To quote the great Vin Diesel in Fast and Furious 4: Tokyo Drift, ‘You know this ain’t no 10-second race.'”

Grauman said the rally, which saw the banks outperform the market by 220 basis points, was largely driven by investor fervour as market sentiment improved rather than any fundamental strength to support the bank stocks. He added that the market’s excitement over the central bank’s message of a rate-hiking pause was misplaced and is only growing more complicated due to the robust labour market, particularly after January’s jobs report showed 150,000 new positions were added to the economy.

The employment strength is a sign that the economy is still experiencing excess demand and that the pause Bank of Canada’s Tiff Macklem alluded to in January may be shortlived. Because of this uncertainty, Grauman said his team prefers life insurance companies to Canada’s banks.

The Scotiabank team also flagged a more challenging capital and regulatory environment in which the banks will be hit with a higher tax rate as the federal government’s tax on excess profits kicks and be forced to pay the Canada Recovery Dividend, another post-pandemic measure.

Grauman thinks Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce stand the best chance of outperforming during earnings season due to above-average loan growth. His team is more cautious on the Bank of Montreal and National Bank, which they expect fall behind the pack in terms of earnings growth from loans.

Analysts at Canaccord Genuity also struck a less sanguine tone on the banks, lowering their first quarter adjusted earnings forecasts by three per cent because of softening capital markets and credit expectations.

Canaccord Genuity analyst Scott Chan said in a Feb. 17 note that the “higher for longer” attitude around interest rates in Canada and the U.S. could add to those credit concerns. The headwinds could drag into next year, too, leading Chan to revise estimated full-year earnings for 2024 down by one per cent.

Given the uncertain environment, neither Scotiabank nor Canaccord are anticipating dividend hikes this quarter.

Capital requirements will also be on the radar of analysts after the Office of the Superintendent of Financial Institutions raised the domestic stability buffer to three per cent in December.

John Aiken, senior analyst and head of research at Barclays Bank PLC, has been a more optimistic voice, arguing that the banks had some leeway to absorb negative economic developments in the first quarter and that the markets have largely priced them in, so the results aren’t likely to come as a surprise.

“We can nitpick forever and a day on the banks because they’re so beholden to the economy that anything that happens is going to impact them,” Aiken said. “However, a lot of the issues that the banks are facing this quarter are well-known in the marketplace and so I don’t think that any of these negatives will be overly surprising.”

Aiken added that the banks have already shored up their reserves after plugging a gloomier economic outlook into their models. He was optimistic that first quarter performance would be decent, though not fully reflected in share prices because investors are looking further out at a potential for a recession.

First quarter bank earnings kick off on Friday morning before the market opens when the Canadian Imperial Bank of Commerce reports its results.

• Email: shughes@postmedia.com | Twitter: StephHughes95