Which Bank Should You Choose: The Bank of Nova Scotia or Canadian Imperial Bank of Commerce?

There are three good reasons to prefer The Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) over Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM).

| More on:
The Motley Fool

When building a Canadian equity portfolio, it often makes sense to start with one of the Big 5 Canadian banks. After all, they operate with little competition, make plenty of money, and are well capitalized. It’s no fluke that they’ve all stood the test of time. But which is the right one for your portfolio?

Below, we take a look at two of them — The Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) and Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM). I’ll spare you the suspense: The Bank of Nova Scotia is the better option, and here are three reasons why.

1. Track record

Whenever you hear of a major financial blow-up, CIBC always seems to be caught in the middle of it. The most recent example was the financial crisis, which led to $10 billion in write-downs. Before that, there was the Enron debacle. And there are many other examples, too. It’s no surprise that CIBC has been dubbed the bank “most likely to run into a sharp object.”

Meanwhile, The Bank of Nova Scotia has mostly managed to avoid such mistakes. On occasion, it has been caught up in another country’s troubles, such as Mexico’s in the mid-1990s or Argentina’s in 2002. But the losses have been relatively minor.

It’s true that CIBC has made great strides in cleaning itself up. But over the long term, you want the bank with the better long-term track record.

2. Better growth prospects

In response to the mishaps, CIBC has dedicated itself to getting simpler. Put another way, that means focusing on Canada. To illustrate, last year CIBC made 65% of its net income from Canadian banking. When including other business lines, a total of 83% of net income came domestically. To the bank’s credit, it is now safer as a result, but growth prospects are very limited.

Meanwhile, The Bank of Nova Scotia is Canada’s most international bank. Last year, Canadian banking accounted for just 34% of total income, and Canada overall barely accounted for 50%. The rest mostly came from emerging markets, especially Latin America, so The Bank of Nova Scotia has much more ability and freedom to grow earnings than CIBC. Best of all, The Bank of Nova Scotia is focused on countries like Chile, Peru, Mexico, and Colombia, all of whom have healthy, growing economies.

3. Price

The Bank of Nova Scotia has a better track record and more growth prospects than CIBC, so surely the former is more expensive, right? Wrong.

According to Morningstar, CIBC trades at 12.9 times earnings, while The Bank of Nova Scotia does so at 12.3 times earnings. This is partly due to some weakness in emerging markets stocks early in 2014. Also The Bank of Nova Scotia’s most recent quarterly numbers were a bit weak.

These, however, aren’t acceptable reasons for The Bank of Nova Scotia to trade at a discount to CIBC. So when choosing between the two stocks, the choice should be clear.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Bank Stocks

Bank Stocks

Could Royal Bank Stock Reach $200?

Growing rate cut hopes and improving analysts’ expectations from Royal Bank’s financial results could help its stock maintain strong upward…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Bank Stocks

1 of the Best Dividend-Paying Bank Stocks to Buy Now and Hold Forever

Here’s a very reliable, dividend-paying Canadian bank stock you can buy at a bargain right now and hold for the…

Read more »

Prospects for TD Bank stock
Bank Stocks

TD Bank in Hot Water: An ‘Exceptional’ Opportunity

Is TD Bank stock a buy after its money-laundering regulatory problems?

Read more »

woman data analyze
Bank Stocks

Best Stocks to Buy in May 2024: TSX Financials Sector

Wondering which TSX financial stocks could see substantial growth in the future? Here are three stocks with BIG upside from…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

2 Canadian Bank Stocks to Watch in May 2024 (They’re Not the Big 5)

Watch National Bank of Canada (TSX:NA) and another top financial closely in May.

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

How Much Will Toronto-Dominion Bank Pay in Dividends This Year?

This long-term dividend payer could deliver double-digit returns going forward.

Read more »

Dividend Stocks

1 Dividend Stock Down 20% to Buy Right Now

Bank of Nova Scotia is a good income stock that's fairly valued and can deliver solid long-term returns.

Read more »

stock research, analyze data
Bank Stocks

Is Royal Bank of Canada Stock a Buy in 2024?

RBC (TSX:RY) stock looks strong heading into second-quarter earnings, so let's look at what's been happening with the biggest bank.

Read more »