The Motley Fool

Which Is the Better Buy: Bank of Nova Scotia (TSX:BNS) or Laurentian Bank of Canada (TSX:LB)?

Image source: Getty Images.

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) and Laurentian Bank of Canada (TSX:LB) have been two of the weakest-performing Canadian bank stocks as of late. So far this year, Scotiabank stock has declined about 7%. Laurentian Bank stock has taken a huge beating — it has declined roughly 20% year to date.

Which bank should you consider today? Let’s compare the two banks.

Business overview

Scotiabank is Canada’s most international bank; it operates in almost 50 countries. It expects to experience higher growth in its international banking operations compared to its Canadian operations. However, its international banking operations are riskier.

In the last reported quarter, the provision for credit losses ratio for its international banking business was 1.22% versus 0.25% for its Canadian banking business.

Laurentian Bank was founded in 1846. It has $48 billion in balance sheet assets and $31 billion in assets under administration.

Why the stocks are down

Scotiabank stock has been weak lately because of recent acquisitions, which can cause dilution because it issued common stock.

The downtrend of Laurentian Bank stock began in December, at which time the bank announced that it had to buy back some mortgages that it sold to a third party. In combination with the update in May, the repurchases are estimated to make up less than 3.5% of its residential mortgages.

Valuation

At about $75 per share, Scotiabank trades at a price-to-earnings multiple of about 11, while it’s estimated to grow its earnings per share by at least 7% per year for the next three to five years. Its five-year normal multiple is about 11.7. A fair-value estimate based on this normal multiple implies about 10% upside.

At about $45.50 per share, Laurentian Bank trades at a multiple of about 7.7, while it’s estimated to grow its earnings per share by at least 4% per year for the next three to five years. Its five-year normal multiple is about 9.2. A fair-value estimate based on this normal multiple implies about 18% upside.

Dividend and dividend growth

At the recent quotation, Scotiabank offers a 4.3% yield, while Laurentian Bank offers a 5.6% yield. Both dividends are sustainable, and the banks should be able to grow their dividends at a rate of about 5% and 4%, respectively.

Which is the better buy?

Laurentian Bank is more undervalued. If the mortgage repurchase issue clears up, and investors regain confidence in the stock, the bank can deliver higher near-term total returns than Scotiabank.

Scotiabank is considered to be a core holding. It has a bigger scale and is more diversified. Investors can pretty much buy the stock on dips and hold on for stable growth and increasing income.

Investor takeaway

If you’re looking for short-term above-average gains, consider starting a position in Laurentian Bank today and buying more if it dips to the $41-42 level. If you’re looking for a long-term core bank holding, consider buying some Scotiabank stock today.

5 Canadian Growth Stocks Under $5

We are giving away a FREE copy of our "5 Small-Cap Canadian Growth Stocks Under $5" report. These are 5 Canadian stocks that we think are screaming buys today.

Get Your Free Report Today

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 Kay Ng owns shares of  Scotiabank.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.