Canadian bank stocks are down considerably in recent weeks after a nice rally to start the year. Contrarian investors seeking value are wondering if stocks like Bank of Montreal (TSX:BMO) and Bank of Nova Scotia (TSX:BNS) are undervalued and good to buy today.
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Bank of Montreal
Bank of Montreal used the large cash hoard it built up during to pandemic to make a major acquisition in the United States. The company paid US$16.3 billion to buy Bank of the West in a deal that closed on February 1, 2023.
Given the subsequent meltdown in the share prices of regional American banks, investors in BMO stock are wondering if BMO overpaid for the business. Bank of the West gets the majority of its deposits from clients in California. The failure of Silicon Valley Bank, also based in California, triggered the recent bank rout.
Bank of Montreal currently trades for close $116 per share and offers investors a dividend yield of about 4.9%. The stock is down more than 20% over the past year.
Bank of Montreal built up a large U.S. business through acquisitions over the past 40 years. Exposure to the American banking sector is currently viewed as a negative in the markets, but the long-term outlook should be positive for BMO investors, as the American economy grows.
Bank of Nova Scotia
Bank of Nova Scotia doesn’t have a high degree of direct exposure to the U.S. banking sector, but its large international business focused on the Pacific Alliance countries of Mexico, Peru, Chile, and Colombia carries a different set of risks.
Political instability and a reliance on commodity prices for revenue makes these economies riskier places to operate. Mexico and Colombia are oil producers, while Chile and Peru are the world’s largest suppliers of copper.
The pandemic hit the Pacific Alliance group hard. Bank of Nova Scotia’s profits from the region bounced back strongly last year, but there are concerns that a global economic slowdown due to rising interest rates and potential contagion form the recent banking crisis could send the international business back into a slump.
Bank of Nova Scotia has a new chief executive officer who could decide to shift the bank’s strategy in order to boost investor returns. The stock has underperformed the other large Canadian banks over the past five years.
Despite the uncertainty in the markets, Bank of Nova Scotia looks cheap today at $66 per share. It was above $90 at this time last year. Investors can get a dividend yield above 6% right now.
Is one a better buy?
Bank of Montreal and Bank of Nova Scotia both appear cheap right now for a buy-and-hold portfolio and offer attractive dividends that should be safe. That being said, investors should brace for additional volatility in the near term. More downside could be on the way as the recent banking crisis evolves.
If you only choose one, I would probably go with Bank of Nova Scotia as the first choice right now for the higher yield and lower U.S. regional banking exposure.
