Canadian bank stocks are trailing the broader markets in recent months due to a challenging macro environment. In addition, the collapse of multiple banks south of the border has dragged valuations of TSX bank stocks lower in recent months.
But the conservative approach of Canadian banks has armed them with strong balance sheets, making them ideal bets for value and income-seeking investors. So, let’s see which between Bank of Montreal (TSX:BMO) and Canadian Imperial Bank of Commerce (TSX:CM) is a better buy right now.
The bull case for BMO stock
Valued at a market cap of $84 billion, Bank of Montreal stock is down 24% from all-time highs. The drawdown in share prices has increased its yield to 5%. In the fiscal second quarter (Q2) of 2023, BMO reported net income of $2.21 billion, or $2.93 per share. The company is on track to end fiscal 2023 (ending in October) with adjusted earnings of $12.6 per share, indicating a forward price-to-earnings multiple of 10, which is very cheap.
BMO emphasized its diversified business mix allowed the company to tide over a sluggish business environment. Its wealth and capital markets businesses were impacted by lower customer activity, which was offset by strong performance in the personal and commercial business banking segments.
It ended Q2 with a common equity tier-one (CET1) ratio of 12.2%. This ratio basically compares a bank’s capital against its assets and a higher multiple is favourable.
BMO also completed the acquisition of the Bank of West and its subsidiaries from BNP Paribas for US$13.8 billion. The acquisition should strengthen BMO’s position in North America, allowing it to pursue growth opportunities in new markets.
BMO increased its quarterly dividend payouts by 6% to $1.47 per share. These payouts have doubled in the last 10 years, showcasing the resiliency of BMO’s financials.
Analysts remain bullish and expect BMO stock to surge over 12% in the next year. After accounting for dividends, total returns may be closer to 17%.
The bull case for CIBC stock
Shares of Canadian Imperial Bank of Commerce are trading 32% below all-time highs. The company generates 75% of its earnings from Canada, which is a highly regulated market. But it is also a slower-growing market compared to the U.S. and Latin America.
Investors are also worried about CIBC’s exposure to the mortgage segment. As interest rates have risen in the last 12 months, mortgage payments have surged significantly higher. Experts have warned the economy might enter a recession in the second half of 2023, which is likely to push mortgage default rates higher as well.
Mortgage loans account for 55% of CIBC’s loan book. Additionally, almost 40% of these loans have variable interest rates.
Analysts expect CIBC stock to report adjusted earnings of $7 per share, indicating a forward yield of eight times which is cheaper compared to BMO. The company also pays investors a dividend yield of 6%.
The Foolish takeaway
While CIBC stock is trading at a much lower valuation, I believe BMO is a much better investment right now due to its diversified revenue streams and lower exposure to the mortgage segment.
