Why Canadian Banking Stocks Remain a Strategic Buy in Q3 2025

The Canadian banking sector has long been a cornerstone of the country’s financial stability, and Q3 2025 is no exception. Despite a challenging macroeconomic environment marked by U.S. trade tensions and a fragile labor market, major Canadian banks have demonstrated earnings resilience and strategic adaptability. With interest rate cuts on the horizon and strong capital positions, these institutions remain compelling long-term investments.

Earnings Resilience Amid Macroeconomic Headwinds

The second quarter of 2025 revealed a mixed but generally robust performance from Canada’s Big Six banks. While adjusted earnings declined by 7.8% sequentially due to higher provisions for credit losses (PCL) on performing loans, several banks outperformed expectations. Royal Bank of Canada (RBC) led the pack with an 11% revenue increase and a 4% dividend hike, driven by digital transformation and disciplined cost management [2]. Bank of Montreal (BMO) also reported a 9% revenue jump, underscoring its ability to navigate economic uncertainty [3].

Critically, the sector’s capital strength remains a key differentiator. CET1 ratios for major banks are comfortably above 13%, providing ample room for strategic buybacks and balance sheet expansion into 2026 [4]. This resilience is further supported by proactive risk management, as seen in National Bank of Canada’s (NBC) $3.1 billion share buyback program and its ability to maintain stable credit quality despite rising mortgage delinquencies [3].

Macroeconomic Tailwinds: Rate Cuts and Trade Uncertainty

The Bank of Canada’s decision to cut the overnight rate to 2.25% by year-end is a pivotal tailwind for Canadian banks. Historically, rate-cutting cycles have benefited the sector by improving net interest margins and reducing funding costs [5]. While trade tensions and U.S. tariffs have dampened export-dependent sectors like manufacturing, the synchronized easing of monetary policy by both the BoC and the U.S. Federal Reserve has mitigated some of these pressures [2].

GDP growth projections for 2025, though modest at 1%, are expected to accelerate to 1.8% in 2027 as trade uncertainties ease [1]. This trajectory, combined with the anticipation of rate cuts, creates a favorable backdrop for banks to stabilize loan growth and reduce bad debt provisions. For instance, RBC’s Q3 2025 results showed a 21% year-over-year rise in net income, driven by strong performance across business segments and stable credit quality [2].

Strategic Positioning for Long-Term Growth

Canadian banks are uniquely positioned to capitalize on macroeconomic shifts. Their high CET1 ratios not only support shareholder returns but also allow for strategic investments in technology and risk mitigation. For example, RBC’s CET1 ratio of 13.2% and BMO’s focus on capital efficiency highlight their ability to adapt to evolving conditions [2]. Additionally, the sector’s undervalued valuations—15% above historical averages—suggest potential for upside as economic conditions stabilize [1].

However, risks remain. A deeper-than-expected recession or prolonged trade war could strain credit quality, particularly in the mortgage market, where delinquency rates have risen 71.2% year-over-year [5]. That said, the sector’s proactive approach to risk management and strong capital buffers provide a buffer against such scenarios.

Conclusion

Canadian banking stocks remain a strategic buy in Q3 2025 due to their earnings resilience, strong capital positions, and alignment with macroeconomic tailwinds. While trade uncertainties persist, the sector’s ability to adapt—through cost discipline, digital innovation, and proactive capital management—positions it for long-term outperformance. As interest rate cuts and economic stabilization gain momentum, investors should consider the Big Six as a hedge against volatility and a catalyst for growth.

Source:
[1] Canadian GDP Update - About RBC [https://www.rbc.com/en/thought-leadership/economics/featured-insights/canadian-gdp/]
[2] Royal Bank of Canada Q3 2025 slides: Record earnings [https://www.investing.com/news/company-news/royal-bank-of-canada-q3-2025-slides-record-earnings-and-strong-operating-leverage-93CH-4212480]
[3] Assessing National Bank of Canada's Mixed Q3 Earnings [https://www.ainvest.com/news/assessing-national-bank-canada-mixed-q3-earnings-share-buyback-strategy-competitive-banking-sector-dynamics-2508/]
[4] Canadian Banks as Strategic Plays in 2025: RBC's Resilience [https://www.ainvest.com/news/canadian-banks-strategic-plays-2025-rbc-resilience-fed-rate-cuts-trade-uncertainty-2508/]
[5] Our economic outlook for Canada - Vanguard [https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/vemo-canada.html]