Bank of Nova Scotia (TSX:BNS) and Canadian Imperial Bank of Commerce (TSX:CM) are down considerably from their highs of two years ago. Investors with a contrarian strategy are wondering if BNS stock or CM stock is oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Bank of Nova Scotia
Bank of Nova Scotia trades for close to $63 per share at the time of writing. This is actually up from $55 in late October but is still down from the $93 the stock reached at the peak of the rally that occurred after the pandemic crash.
The slide is largely due to the impact of rising interest rates in Canada and the United States. Investors exited bank stocks over the past two years on concerns that the Bank of Canada and the U.S. Federal Reserve would raise rates too high and keep them elevated for too long in their battles to get inflation back down to the 2% target. Inflation topped 8% in June 2022 and came in at 3.4% for December 2023, so there is still progress to make on that front.
The risk is that the central banks will have to drive the economy into a recession in order to tame inflation. Bank of Nova Scotia and its peers have increased provisions for credit losses (PCL) as borrowers with too much debt struggle to make the increased payments.
In the fiscal 2023 earnings statement, Bank of Nova Scotia reported that it set aside $3.4 billion for potential loan losses during the year compared to $1.4 billion in 2022. That sounds like a lot, but the bank finished last year with $751 billion in total loans, so the overall lending portfolio remains in good shape.
Bank of Nova Scotia had a common equity tier-one (CET1) ratio of 13% at the end of the fiscal fourth quarter (Q4) of 2023. This is well above the 11.5% required by the bank regulator and means Bank of Nova Scotia has ample excess capital to ride out some rough times.
The bank generated adjusted net income of $8.4 billion in 2023 and expects fiscal 2024 to be similar or slightly better, despite the challenging economic environment. Nearly half of the earnings, 49%, came from operations in Canada. The Pacific Alliance countries (Mexico, Peru, Colombia, and Chile) accounted for 28%, and the U.S. business contributed 11%. Operations in the Caribbean and Central America added 9%—other business filled in the rest.
The new chief executive officer intends to focus growth efforts in Canada, the U.S., and Mexico as part of a strategy shift. Bank of Nova Scotia also reduced staff by 3% in recent months to reduce expenses and streamline operations.
BNS stock has had a compound annual dividend-growth rate of more than 8% over the past 20 years. At the time of writing, the stock provides an annualized yield of 6.7%.
CIBC
CIBC trades near $61 compared to $48 at the 2023 low. The stock was as high as $83 in early 2022, so there is still decent upside potential.
CIBC’s share price tends to be more volatile than its larger peers. The reason likely lies in the fact that the company’s Canadian residential loan portfolio is big relative to the company’s size when compared to the other large Canadian banks. Aggressive residential mortgage sales over the past decade drove strong earnings, but the sharp rise in interest rates in Canada is putting pressure on households with excessive debt. As long as the jobs market holds up, there shouldn’t be a wave of mortgage defaults.
CIBC reported PCL of $2 billion for 2023 compared to $1 billion in 2022. As with Bank of Nova Scotia, this is a relatively small amount. CIBC’s total loan book at the end of fiscal 2023 was about $540 billion, of which residential mortgages accounted for more than half.
CIBC generated adjusted net income of $6.5 billion for fiscal 2023 compared to $6.6 billion in 2022. The bank ended fiscal 2023 with a CET1 ratio of 12.4%, so CIBC also has a good capital buffer.
CIBC increased the dividend twice in 2023. At the current share price, investors can get a 5.9% dividend yield.
Is one a better pick?
Bank of Nova Scotia and CIBC pay attractive dividends that should continue to grow, and both stocks are probably still undervalued. If you only buy one, I would go with Bank of Nova Scotia for the higher yield. The stock might also have better upside over the medium term if the new management team achieves its growth goals in the next few years.
