Better Buy: BNS Stock or BMO Shares?

Bank of Montreal and Bank of Nova Scotia just reported fiscal Q2 2023 earnings.

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Bank of Nova Scotia (TSX:BNS) and Bank of Montreal (TSX:BMO) recently reported fiscal Q2 2023 results that give investors a glimpse of how the steep rise in interest rates is impacting different areas of their businesses. Investors who are looking for deals in the TSX bank sector are wondering which Canadian banks might be good to buy while the stocks are out of favour.

Bank of Nova Scotia

Bank of Nova Scotia is Canada’s fourth-largest bank with a market capitalization near $79 billion. At the time of writing the stock trades near $66.50, compared to $86 in early June last year.

The bank generated net income of $2.2 billion in fiscal Q2 2023 compared to $2.8 billion in the same quarter last year. Earnings per share came in at $1.70 compared to $2.18 in fiscal Q2 2022.

Higher provisions for credit losses (PCL) are the main reason for the difference in the results. Bank of Nova Scotia set aside $709 million in the three months for potential bad loans, compared to $219 million in fiscal Q2 last year.

The Canadian banking operations saw adjusted net income slip 10%. International banking operations, which are largely located in Mexico, Peru, Chile, and Colombia, actually delivered a 6% increase in adjusted net income.

Bank of Nova Scotia’s wealth management group saw adjusted earnings slide 13% in the quarter. Lower mutual fund fees and a drop in brokerage revenues contributed to the decline.

In the capital markets business, revenues rose and the division benefitted from positive moves in foreign currencies, but higher loss provisions led to a net income decrease of 18% in fiscal Q2.

Bank of Nova Scotia’s board announced a dividend increase when the results came out. The new quarterly distribution is $1.06 per share. That’s good for an annualized yield of about 6.4%.

Bank of Montreal

Bank of Montreal trades at a 12-month low after investors reacted negatively to the company’s fiscal Q2 2023 results. The stock sits near $112.50 at the time of writing compared to $136 in February.

The share price fell after the results came out, even though Bank of Montreal generated better profits in fiscal Q2 2023 than it did in the same period last year. Adjusted earnings for the three months came in at $2.216 billion compared to $2.187 billion in fiscal Q2 2022.

As with Bank of Nova Scotia, provisions for credit losses jumped in the quarter. Bank of Montreal reported an adjusted PCL of $535 million compared to a PCL recovery of $49 million in the same period last year.

Bank of Montreal closed a major acquisition in the United States in February. The US$16.3 billion purchase of Bank of the West added 500 branches and 1.8 million customers to the American subsidiary, BMO Harris Bank. Investors might be concerned Bank of Montreal overpaid. The bank announced the deal in late 2021 when bank stocks were close to their post-pandemic highs. A drop in valuations through the back half of last year and the latest plunge in the share prices of U.S. regional banks could have investors wondering what BMO might have paid if it had waited to do a big American deal.

Bank of Montreal announced a dividend increase of $0.04 per share when it released the Q2 results. The new quarterly payout of $1.47 per share provides an annualized yield of about 5.2% based on the share price at the time of writing.

Is one a better pick?

Bank of Nova Scotia and Bank of Montreal pay attractive dividends that should continue to grow. Income investors might want to make Bank of Nova Scotia the first choice for its higher yield. Bank of Montreal, however, might be more oversold right now and could deliver better upside torque on a rebound in the bank sector.

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.

The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned. 

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