The Canadian bank stocks are on a magnificent run, but it’s still hard to be sanguine about the names, even as their fundamentals and earnings power look to improve over the year ahead. Indeed, it wasn’t all that long ago when the Big Six Canadian bank stocks were down and out.
Provisions for credit losses (or PCLs) were a problem, and their earnings power seemed to be quite a large question mark. Now that the tables have turned, the big question is when the banking cycle will reverse course again. Indeed, nobody wants to be a net buyer of shares after the big gains are in the books, only to catch shares at their peak to suffer a downturn and prolonged period of sub-optimal returns. Of course, there’s no doubting that the valuations are getting up there.
The Canadian banks are not cheap, but they could still be worth buying
If you’ve been in the Canadian markets for more than a decade, you’ll know that it’s not all that often you see a bank stock going for more than 19.5 times trailing price-to-earnings (P/E). Historically, bank stocks tend to trade in the low-to-mid teens when it comes to P/E, not border on 20 times. While the recent sideways action could serve as a brief breather that precedes the next leg higher for the banks, I do think that investors should get just a bit more selective when it comes to the individual names.
Some are far pricier than others, but, of course, the broad basket is historically expensive, but that alone does not mean that they’re a sell, especially as the Canadian economy looks to move past recent setbacks.
Who knows? Maybe we’ll move on from the tariff talks and a new USMCA (or CUSMA) deal will be struck as AI productivity gains spread across the broader economy while rates move lower with oil prices. Indeed, in such an ideal climate, each one of the six banks in the Big Six may still be the horses to bet on.
TD Bank or BMO?
But, for now, I do think that Toronto-Dominion Bank (TSX:TD) and Bank of Montreal (TSX:BMO) look the most compelling when it comes to fundamental strength and relative value, especially as the stakes get higher for the big banks, which, like it or not, is one of the new momentum trades in Canada.
While I’m not against owning both TD and BMO together (more diversification isn’t a bad thing), I do think that shares of BMO could outperform over the next two to three years. And it’s not just about the slightly lower trailing P/E (19.7 times versus 20.2 times for TD), either. BMO’s really been operating at a high level with its efficiency-driven efforts that are poised to keep paying dividends.
Add the ongoing industry tailwinds and the cleared runway to grow in the U.S. market into the equation, and I do think BMO is the more exciting growth story. Indeed, TD Bank faces more regulatory hurdles as it moves down its U.S. growth runway.
Meanwhile, BMO is moving in the fast lane, and as the commercial book looks to grow faster in an AI-driven economic expansion, let’s just say I like the BMO trajectory slightly more.
For the most part, BMO and TD trade at similar P/Es, with similar dividend yields (2.6% or so). Though, BMO wins by a hair in both categories (it’s a tad cheaper with a few basis points more yield, at least as of the time of this writing). So, in my view, the biggest factor is BMO’s growth momentum south of the border.
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* Returns as of July 30th, 2026
More reading
- Should You Forget TD Stock and Buy This Dividend Stock Instead?
- Here Are 5 Dividend Stocks I’d Add to an Income Portfolio
- This Is My Top Canadian Dividend Stock, and I’m Never Selling
- Here’s How I’d Build a Paycheque Portfolio With Just 5 Stocks
- Hereâs Why Iâll Never Sell My Favourite TFSA Stock
Fool contributor Joey Frenette has positions in Bank Of Montreal and Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.