Tariff wars between the U.S. and its trading partners are rattling markets thus far in 2025. Investors are scrambling for shelter, and Canadian banking stocks – traditionally seen as safe harbours — are in the spotlight. But here’s the catch: Not all banks weather storms the same way. Bank of Montreal (TSX:BMO) and Bank of Nova Scotia (TSX:BNS) (or Scotiabank) are sailing through these choppy waters with very different strategies. Let’s unpack which bank stock (or both!) might deserve a spot in your portfolio.
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Dividends: High yield vs steady growth during a trade war
BMO stock serves up a 4.6% dividend yield – solid, but not eye-popping. The real magic? Its earnings payout ratio sits at a comfy 58%, meaning it’s reinvesting nearly half its earnings back into the business to sustain a high earnings growth rate. BMO stock achieved an 11% annual dividend growth streak over the past three years. The bank stock retains ample room to keep hiking those payouts and fund expansion.
Scotiabank stock, on the other hand, dangles a juicy 6.1% dividend yield. But there’s a catch: Its payout ratio is a sky-high 84%, leaving little wiggle room for dividend hikes or reinvestment. While that fat yield might tempt passive income hunters, BNS stock’s slower 4.6% dividend growth rate (vs BMO) over the past three years hints at a tighter leash.
If you’re after reliable, growing income, BMO stock is your pick. If you need cash now and can stomach less flexibility, BNS stock could be tempting.
Growth engines: U.S. muscle vs emerging markets gambles
BMO is betting big on the U.S., where it gets 33% of its revenue. With American GDP growth outpacing Canada’s (2.7% vs 2% in 2025), that’s a smart play – especially as tariff wars threaten cross-border trade. Recent U.S. acquisitions helped BMO’s revenue pop 21% last quarter. Plus, its 12.3% historical return on equity (ROE) means it’s turning retained earnings into growth like a pro.
Bank of Nova Scotia has been chasing growth in Latin America and the Caribbean (41% of revenue). Sure, the IMF forecasts show the region’s economy warming up, but emerging markets are a rollercoaster – think currency swings, political drama, and sudden rule changes. BNS is trying to simplify by ditching markets like Colombia and Central America while building U.S exposure through a recent KeyCorp deal, but its lower ROE (11.4%) and thin earnings retention suggest slower organic earnings growth.
Organic earnings growth rates are a key driver of future capital gains on a stock.
BMO stock’s U.S. focus feels safer; BNS’s international bets are a “high risk, maybe high reward” story.
BMO stock vs BNS stock risks: Macro storms vs self-inflicted wounds
BMO stock isn’t bulletproof. Those U.S. operations? They’re still exposed to tariff spats and increasingly uncertain interest rates. But with a Common Equity Tier 1 (CET1) ratio of 13.6% (a measure of financial strength), it’s got a hefty capital cushion to absorb shocks.
Scotiabank stock faces a double whammy: Its emerging-market bets are inherently risky, and its recent 62% quarterly earnings plunge (thanks to exiting markets and higher loan provisions) shows how quickly things can unravel. Its CET1 ratio of 12.9% is decent, but not as robust as BMO’s.
In short: BMO’s risks are about the economy; BNS’s are about its own prior choices.
Valuation: Cheap vs too cheap?
BMO stock trades at 11.9 times forward earnings, with a price-earning-to-growth (PEG) ratio of 0.7 – hinting it’s undervalued given its earnings growth potential.
BNS stock looks like a bargain at 9.6 times earnings, but its PEG ratio of 1.8 suggests the market doubts its growth plans. That juicy yield might be priced in already.
Translation: BMO’s stock could have more upside; BNS’s “cheap” tag might be a trap.
Why not buy both bank stocks?
Sometimes you don’t necessarily have to choose. BMO stock offers stability and growth; BNS stock brings passive income and a turnaround narrative. Together, they balance U.S. exposure with international diversification – a smart hedge if tariff wars escalate or emerging markets surprise to the upside. Investing in both bank stocks could offer diversification benefits.
Happy investing – and keep your portfolio ready for whatever 2025 throws at it!
