Canadian Banking Sector Resilience: Why BMO and Scotiabank's Earnings Beat Signals a Strategic Buying Opportunity

The Canadian banking sector has long been a cornerstone of defensive investing, but recent earnings reports from Bank of Montreal (BMO) and Scotiabank (BNS) reveal a compelling twist: strategic undervaluation amid macroeconomic normalization. With reduced credit loss provisions, disciplined capital allocation, and proactive risk management, these institutions are not just surviving—they're setting the stage for a long-term rebound. For investors, this is a rare opportunity to capitalize on a sector that's poised to outperform in a post-recessionary environment.

The Credit Loss Story: A Tale of Two Banks

BMO's Q2 2025 results highlight a meaningful moderation in credit risk. Total credit loss provisions fell to $1.1 billion (63 basis points), with impaired provisions dropping 20 basis points year-over-year. This reflects a combination of proactive risk management and a stabilizing U.S. commercial loan portfolio, where losses have declined sharply. Meanwhile, Scotiabank's provisions rose to $1.4 billion (75 basis points), driven by trade-related uncertainties and weaker GDP forecasts. Yet, this increase is not a red flag—it's a strategic recalibration. By building a $4.7 billion performing allowance, BMO has created a buffer against near-term volatility, while Scotiabank's CET1 ratio of 13.2% ensures it can absorb shocks without sacrificing capital ratios.

Trade Risk Normalization: A Hidden Catalyst

The Canadian federal election has ushered in a government committed to eliminating interprovincial trade barriers, a move that could unlock $150 billion in economic growth over a decade. For banks like BMO and Scotiabank, this means reduced exposure to fragmented regional markets and a more cohesive domestic economy. BMO's CEO, Daryl White, emphasized that the bank is already optimizing its U.S. deposit mix, reducing higher-cost funding, and boosting net interest margins (NIM) by five basis points. Scotiabank, meanwhile, is leveraging AI-driven tools to enhance client engagement and operational efficiency, a critical edge in a sector where margins are razor-thin.

Earnings Beat: A Signal, Not a Fluke

BMO's adjusted net income rose 1% to $2 billion, with ROE climbing to 10.6% year-to-date. While this falls short of its 15% long-term target, the bank's 5.7% operating leverage and 13.5% CET1 ratio position it to accelerate returns. Scotiabank's EPS miss ($1.52 vs. $1.57) was offset by a 9% revenue increase and a 30-basis-point CET1 improvement. Both banks are prioritizing capital preservation—BMO has completed 50% of its NCIB buyback program, while Scotiabank announced a 20 million-share repurchase. These moves signal confidence in their ability to generate returns even in a low-growth environment.

Why This Is a Buy Opportunity

The market's reaction to these earnings—Scotiabank's stock down 1.9% premarket—reflects short-term pessimism. But history shows that Canadian banks trade at a discount to their intrinsic value during periods of macroeconomic uncertainty. With credit loss provisions stabilizing and trade risks normalizing, the sector is entering a phase where earnings growth will outpace expectations. BMO's 5% dividend hike and Scotiabank's long-term ROE target of 14% further sweeten the deal for income-focused investors.

Final Take: Position for the Long Game

For those seeking capital preservation and steady returns, BMO and Scotiabank offer a rare combination of defensive strength and strategic agility. While near-term GDP forecasts are cautious, the banks' proactive risk management and capital discipline mean they're well-positioned to capitalize on the next upcycle. Investors should consider adding these names to their portfolios, especially as valuations remain attractive relative to their U.S. counterparts. In a world where volatility is the norm, Canadian banks are proving that resilience isn't just a buzzword—it's a business model.

Bottom line: Buy BMO and BNS with a long-term mindset. The sector's undervalued earnings growth and robust capital structures make them ideal hedges against a slowing global economy—and potential powerhouses when the cycle turns.