Canada's banking stocks have delivered substantial gains to long-term shareholders. In the last 16 years, these financial companies have wrestled with several headwinds, such as the Great Financial Crisis, the COVID-19 pandemic, and multi-year high interest rates.

The Canadian banking sector is heavily regulated, which allows established players to benefit from entrenched positions. Moreover, compared to their counterparts south of the border, Canadian banks are fairly conservative, allowing them to maintain robust liquidity positions even amid economic downturns. For instance, several TSX bank stocks maintained their dividend payout during the Great Recession of 2008, while U.S. giants were forced to lower and even suspend these payouts.

The banking sector is cyclical and mature, which may not help shareholders deliver outsized gains over time. However, investing in undervalued bank stocks can still help Canadians generate steady returns in the upcoming decade. Here are two cheap TSX bank stocks you can consider buying right now.

Bank of Montreal stock

Valued at $68 billion by market cap, Bank of Montreal (TSX:BMO) trades 16% below all-time highs. The ongoing pullback has meant the TSX banking giant pays shareholders a forward dividend yield of almost 5%, given its annual payout of $4.59 per share.

In fiscal Q3 2024 (ended in July), BMO reported record pre-provision pre-tax earnings of $3.5 billion, an increase of 8% year over year. Its strong Q3 results were attributed to revenue growth in the Canadian Personal and Commercial Banking segment, stronger client activity in its market-sensitive businesses, and cost synergies and efficiency programs.

Its operating leverage in Q3 stood at 5.2%, which has improved steadily compared to the prior two quarters.

BMO emphasized that increased credit costs have resulted in higher loan loss provisions due to prolonged higher interest rates, changing consumer preferences, and economic uncertainties. The company stated that 15 accounts comprised almost 50% of impaired provisions in its wholesale portfolio in fiscal 2024. It expects loan loss provisions to remain elevated as the benefit of interest rate cuts will take time to transmit.

Priced at 11.7 times forward earnings, BMO stock is cheap, given its earnings profile should improve in the future, resulting in consistent dividend hikes.

EQB stock

Valued at $4 billion by market cap, EQB (TSX:EQB) has crushed broader market returns for over two decades. The stock went public in early 2004 and has since returned 1,220% to shareholders in dividend-adjusted gains.

EQB pays shareholders an annual dividend of $1.88 per share, translating to a yield of just 1.8%. However, the dividend payouts have risen by $0.12 per share in 2004, indicating an annual growth rate of over 14%.

With more than $125 billion in combined assets under management and administration, EQB is the seventh-largest bank in Canada. It recently acquired ACM Advisors, a wealth management company, which diversifies its revenue base.

EQB is a digital banking platform and the first Canadian bank to move to a cloud-based platform. Due to its diversified digital offerings, it aims to gain traction among new-age investors. The number of EQB customers increased to 485,000 in fiscal Q3 2024, up from 27,000 in 2016. In this period, its deposits rose from $1.1 billion to $8.9 billion.

Priced at 8.5 times forward earnings, EQB stock is relatively cheap and positioned to deliver inflation-beating returns in 2024 and beyond.