TD Bank (TSX:TD) and Bank of Nova Scotia (TSX:BNS) trade well below their 12-month highs. Contrarian investors are wondering if these Canadian bank stocks are now oversold and if one is good to buy today for a self-directed Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
TD Bank
TD is the second-largest Canadian bank with a current market capitalization of $144 billion. The stock price took a big hit in recent weeks, as investors bailed out of bank stocks after failures of banks in the United States and Europe.
TD has a large exposure to the U.S. banking sector. It already operates more branches south of the border than it does in Canada and is in the process of trying to close its US$13.4 billion acquisition of First Horizon, a regional bank with more than 400 branches primarily located in the southeastern states. If the First Horizon acquisition goes through, TD will become a top-six bank in the American market.
Short-sellers have ramped up bets against TD due to its American exposure as well as some concerns about its large Canadian residential mortgage portfolio. At the time of writing, the stock trades near $79 per share compared to $93 in February.
Management expects to get the First Horizon deal done and TD is projecting adjusted earnings growth in fiscal 2023 compared to last year, so the negative mood in the market might be overdone.
TD is one of Canada’s top dividend-growth stocks with a compound annual growth rate of better than 10% over the past 25 years. Investors should see the positive trend continue, even with the anticipated economic headwinds.
The stock looks cheap today at 9.6 times trailing 12-month earnings and provides a dividend yield of 4.8%.
Over the past five years, TD stock is up about 11%.
Bank of Nova Scotia
Bank of Nova Scotia is currently Canada’s fourth-largest bank with a market capitalization near $80 billion. The stock has underperformed the other four members of Canada’s club of Big Five banks since 2018. In fact, BNS stock is down about 12% over the past five years.
Decades of investments in building a large presence in Latin America have yet to deliver the returns investors expect relative to the perceived or real risk connected with doing business in the Pacific Alliance countries of Mexico, Peru, Chile, and Colombia. These markets are where Bank of Nova Scotia has the bulk of its international operations.
The other large Canadian banks have generally focused on the United States in search of growth outside the domestic market, with mixed results. However, investors typically see the U.S. market as a lower-risk bet.
On the positive side, Bank of Nova Scotia’s Latin American business generally delivers attractive margins in normal economic conditions and the group bounced back strongly in fiscal 2022 from the pandemic rout. There is arguably attractive growth potential in the Pacific Alliance countries that are home to more than 230 million people with much lower bank services penetration than is present in Canada or the United States.
Ongoing political uncertainty in the four countries and concerns about the threat of a potential global recession might still keep investors on the sidelines, even with the long-term upside opportunities.
Bank of Nova Scotia trades near 9.4 times trailing 12-month earnings and provides a 6.1% dividend yield.
Is one a better RRSP buy today?
Investors should expect more volatility in bank stocks over the coming 12 months and additional downside could be on the way for both TD and Bank of Nova Scotia. That being said, patient buy-and-hold investors have done well with these stocks over the long run. TD and Bank of Nova Scotia pay attractive dividends, and the share prices look undervalued right now.
If you only choose one, I would probably make TD the first pick. The dividend yield is lower, but the stock appears oversold. Clarity on the First Horizon deal or a soft landing for the economy could send the share price meaningfully higher, especially if the short positions unwind quickly.
