CIBC (TSX:CM) and Bank of Nova Scotia (TSX:BNS) saw their share prices slide considerably over the past 12 months. Contrarian investors are wondering if one of these TSX bank stocks is now undervalued and good to buy for a retirement portfolio.
CIBC
CIBC is Canada’s fifth-largest bank with a current market capitalization of about $52 billion. The stock trades near $58 at the time of writing compared to more than $70 a year ago.
Aggressive rate hikes by the Bank of Canada and U.S. Federal Reserve are expected to slow down the economy and balance out the jobs market in an effort to get inflation under control. Bank investors are concerned that the moves could tip the economy into a deep recession and lead to a surge in unemployment. In that scenario, the banks would likely see added pressure on profits.
Households are already struggling with higher costs of living and the sharp increase in borrowing expenses. Job losses could result in families being forced to default on their mortgage. Many people also own multiple properties and are not bringing in enough rent to cover the costs.
In the event there is a wave of panic selling in the property market as investors unload condos and homes, CIBC would likely be at risk of taking a bigger hit than its peers. The bank has a large Canadian residential mortgage portfolio relative to its size, so it would be more exposed if property prices crash.
For the moment, the Bank of Canada expects to see a soft landing in the economy. The jobs market remains strong and a surge in immigration should help support house prices. If a recession turns out to be mild, or is avoided, CIBC stock is probably cheap right now.
CIBC finished fiscal Q1 with a common equity tier one (CET1) ratio of 11.6%. This is above the 11% required by the government, so the bank has excess capital to ride out a downturn. Adjusted net income in fiscal Q1 2023 slipped 3% compared to last year, but revenue was up 8%, despite the slowdown in the housing market.
CIBC stock trades at 11.4 times trailing 12-month earnings and the dividend currently provides a 5.9% yield.
Bank of Nova Scotia
Bank of Nova Scotia is Canada’s fourth-largest bank with a market capitalization around $81 billion. The stock trades close to $68 per share. That’s down from $86 last June.
In the case of Scotiabank, investors are focused as much on the international business as they are the Canadian operations. Bank of Nova Scotia has a large presence in Mexico, Peru, Chile, and Colombia. These countries form the core of the Pacific Alliance trade bloc and are home to a combined population of more than 230 million.
Bank of Nova Scotia spent billions of dollars on acquisitions in these countries over the past 25 years. As the middle class expands, the bank should benefit from higher demand for loans and investment products. Political and economic uncertainty, however, are always a risk in these markets and investors are still waiting for these bets to deliver the expected returns.
Bank of Nova Scotia’s new CEO has indicated that changes are coming. The bank is going through a strategic review and while Mexico will likely remain a core focus, the bank might decide to monetize the assets in the other three markets and use the funds for other growth initiatives.
Bank of Nova Scotia finished fiscal Q1 2023 with a CET1 ratio of 11.5%. The bank’s adjusted earnings slipped to $2.4 billion from $2.8 billion in the same period last year. BNS stock trades at 9.5 times trailing 12-month earnings and provides a 6% dividend yield.
Is one a better pick?
Ongoing volatility should be expected in the bank sector and these stocks could retest their 12-month lows in the near term.
However, CIBC and Bank of Nova Scotia pay attractive dividends that should be safe. Investors seeking passive income might want to split a new investment between the two stocks. Bank of Nova Scotia appears more oversold right now and might be the better bet for contrarian investors interested in a turnaround play.
