Bank of Montreal vs. The Bank of Nova Scotia: Which Is the Best Income Investment?

A Canadian bank is considered by many to be an essential part of every balanced income portfolio, but which bank should you buy?

Bank of Montreal (TSX: BMO)(NYSE: BMO) and The Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) are often overlooked in favour of their larger peers. Let’s take a look at both banks to see if one is a better investment right now.

Bank of Montreal

Canada’s oldest bank has made some bold purchases in recent years and is sending strong signals to both investors and the market about its take on where the best opportunities lie for long-term growth.

Bank of Montreal is betting big on the U.S. economic recovery, especially in the manufacturing-heavy midwest. The company has been building its brand in the region since the early 1980s, when it bought Harris Bankcorp. In 2011, BMO decided to go all-in when it spent $4.1 billion to buy Wisconsin-based Marshall and Ilsley Corp.

The deal has proven to be a wise one. In the company’s Q3 2014 earnings statement it said the BMO Harris Bank operations contributed $147 million in profits. The highlight was an 18% increase in loans at the division’s commercial banking unit. In the management report, BMO indicated that it sees growth opportunities in the region’s mid-cap sector despite margin pressure caused by stiff competition and low interest rates.

Bank of Montreal is also boosting the size of its wealth management division. In May 2014, the company purchased F&C Asset Management, a U.K.-based firm with strong operations in Europe. The $1.3 billion deal helps further diversify BMO’s cash flow and positions it well to capitalize on a European economic recovery.

BMO trades at 12.7 times earnings. The company’s dividend is $3.12 per share and yields about 3.8%.

The Bank of Nova Scotia

The Bank of Nova Scotia is targeting growth in Asia and Latin America. The company has done a good job of diversifying its revenues. In the Q3 2014 earnings period, the bank received 33% of its revenue from Canadian retail operations. Another 24% came from international banking. The company’s global banking and markets group added 24%, and the global wealth and insurance division contributed 19%.

The Latin American assets should be of particular interest to long-term investors. The Bank of Nova Scotia is investing heavily in Mexico, Peru, Colombia, and Chile. These four countries are in the process of harmonizing their economies. The four stock markets have already merged and a new trade deal to remove 92% of tariffs will encourage companies of all sizes to expand operations within the group. The Bank of Nova Scotia’s presence in all four countries will enable it to provide essential financial services to clients operating in the four markets.

There are also strong retail opportunities. In June 2014, The Bank of Nova Scotia paid $280 million to buy a 51% stake in the credit card business of Chile’s largest retailer, Cencosud SA. As economic development continues, the bank should benefit from increased demand for mortgages, lines of credit, credit cards, and investment products.

The Bank of Nova Scotia trades at 11.8 times earnings. The company pays a dividend of $2.64 that yields about 3.8%.

Which should you buy?

The Bank of Nova Scotia currently trades at a discount to Bank of Montreal. The two dividends are similar, so it all depends on whether you think the best long-term bet is on the U.S. or Latin America. Both companies have significant exposure to the Canadian housing market, and that could cause some grief if things unwind abruptly. The Bank of Nova Scotia has a higher CET1 ratio, meaning it is technically better positioned to absorb a severe financial shock.

If you already own bank shares or are seriously considering adding the banks to your portfolio, you might want to read the following report.

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

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