The Big Five banks hold anchor positions in many Canadian investment accounts.
Bank of Nova Scotia
Bank of Nova Scotia reported a 6% year-over-year gain in fiscal Q3 net income with strong results coming from both the Canadian and international divisions.
Economic headwinds might be on the horizon for the Canadian market, so the bank’s foreign operations are important to consider when evaluating the stock.
Bank of Nova Scotia is Canada’s most international bank, and the bulk of the company’s foreign investment is located in Latin America. The region has had its ups and downs, and investors wonder why the bank is betting so heavily on emerging markets.
There are risks, but the strategy has merit.
Mexico, Colombia, Peru, and Chile are the four primary international markets for the bank. These countries form the core of the Pacific Alliance, a trade bloc created to enable the free movement of products and capital among the member states. With more than 200 million consumers, the combined markets offer compelling long-term opportunities.
International banking operations generated a 9% gain in the bank’s fiscal Q3 net income compared with the same period last year. Latin America provided the best performance with loans rising 14% and deposits up 17%.
Back at home, investors are looking for risks in energy and housing loans.
Bank of Nova Scotia has $16.1 billion in drawn energy loans, representing about 3.4% of the total loan book. That’s more than its larger peers and is part of the reason the stock fell significantly through the worst days of the oil rout.
The bank’s housing portfolio holds $191 billion in Canadian residential mortgages with insured loans making up 59% of the portfolio. The loan-to-value ratio on the remainder is 50%.
Barring a severe crash in home prices, the mortgage risk should be very manageable.
Bank of Nova Scotia’s dividend provides a yield of 4.2%.
Bank of Montreal
Bank of Montreal also delivered solid fiscal Q3 numbers with adjusted net income up 5% compared with the same period last year.
Canada’s fourth-largest bank has focused its foreign investment on the United States. The company first entered the American market in the 1980s and has built a solid operation of more than 500 branches through organic growth and strategic acquisitions.
The U.S. division delivered an impressive fiscal third quarter with adjusted net income rising 22% compared with 2015. A strong U.S. dollar is part of the reason for the large gains, but the company also received a nice boost from its recent acquisition of GE Capital’s transport finance business.
Bank of Montreal’s direct oil and gas exposure runs about 2% of the total loan book.
On the housing front, 57% of the $101.2 billion in mortgages is insured, and the loan-to-value ratio on the uninsured component is 56%, so there isn’t much concern unless house prices fall off a cliff.
Bank of Montreal’s dividend currently yields 4.1%.
Which bank is a better bet?
Earlier this year I would have picked Bank of Nova Scotia, but the shares have rallied significantly, and that has pretty much wiped out the advantage.
Bank of Nova Scotia carries more risk, so it should offer a higher yield and trade at a lower multiple than Bank of Montreal. That’s not the case right now as the two companies currently trade at similar price-to-earnings multiples and offer comparable dividend yields.
As a result, Bank of Montreal is probably more attractive today.