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Toronto-Dominion Bank vs. The Bank of Nova Scotia: Which Is the Best Investment?

During the past few years, you could pretty much throw a dart at the Big 5 banks and simply buy the one that you hit, knowing that the dividend growth and capital appreciation would be adequate.

This certainly holds true for both Toronto-Dominion Bank (TSX: TD)(NYSE: TD) and The Bank of Nova Scotia (TSX: BNS)(NYSE: BNS).

The Canadian banks have pulled back a bit in the past few weeks, and investors looking to start a new position in the sector are wondering which bank deserves their hard-earned money.

Let’s take a look at Toronto-Dominion Bank and The Bank of Nova Scotia to see if one is a better buy right now.

Toronto-Dominion Bank

Primarily focused on the U.S. and Canada, Toronto-Dominion is betting on North American growth to carry it forward.

In the Q3 2014 earnings statement, TD reported net income of $1.4 billion from its Canadian retail division, a 54% increase over Q3 2013. All areas of the operation performed well, including solid results from the Aeroplan credit card business and wealth management.

TD also has an extensive U.S. retail operation. The U.S. division enjoyed record net income of US$518 million, a 4% increase over Q3 2013.

The overall Q3 results were impressive, but the company also sent the market a warning. During the Q3 conference call, Bharat Masrani, TD’s COO, said he expects Q4 credit losses to be higher. He also expects pressure on net interest margins in the U.S. operations due to increased competition.

TD finished the third quarter with a Basel III Common Equity Tier 1 (CET1) capital ratio of 9.3%. The ratio is a measure of a bank’s financial stability.

The bank had a Canadian residential mortgage portfolio of $231 billion at the end of Q3. About 63% of the mortgages were insured and the loan-to-value (LTV) ratio on the uninsured portion was 61%.

TD pays a dividend of $1.88 per share that yields about 3.4%. Masrani told analysts that dividend increases depend on earnings, but he expects dividend growth will outpace the growth in earnings per share because the payout ratio is below the midpoint of TD’s target range.

Toronto-Dominion Bank is currently trading at 13.6 times earnings.

The Bank of Nova Scotia

Canada’s third-largest bank is betting on international growth to drive future earnings. The Bank of Nova Scotia has invested heavily in building a broad-based operation in four key Latin American countries: Mexico, Chile, Colombia, and Peru.

The combined population of these countries is greater than 200 million. Political stability and a growing middle class are driving economic growth in the region. Young people are earning more money and demand for car loans, credit cards, mortgages, insurance, and investment services is growing.

The four countries have merged their stock markets, and recently announced a trade agreement to eliminate 92% of tariffs. This bodes well for small and medium sized businesses looking to expand their operations. As this happens, The Bank of Nova Scotia should see strong growth in corporate services.

In the Q3 2014 earnings statement, The Bank of Nova Scotia reported net income of $565 million from Canadian banking, a 3% year-over-year increase. International banking delivered $410 million in earnings, also up 3%.

The Bank of Nova Scotia finished the quarter with a very strong Basel III CET1 ratio of 10.9%. The company held $189 billion in Canadian mortgages at the end of Q3. About 52% of the portfolio was insured and the average LTV on the uninsured portion was 55%.

It pays a dividend of $2.64 per share that yields about 3.8%, and trades at 11.8 times earnings.

The bottom line

Both banks are fantastic long-term holdings. At the moment, I would pick The Bank of Nova Scotia. It is less expensive, has a stronger capital position, and the international prospects are compelling.

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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.

Fool contributor Andrew Walker has no position in any stocks mentioned.

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