Higher interest rates have been putting pressure on Canadian bank stocks since 2022. After the Bank of Canada started rapidly increasing rates in 2022, large banks witnessed a decline in their profits due mainly to an increase in their provisions for credit losses. This is one of the key reasons why shares of large banking institutions in Canada have been falling for over two years.
Nonetheless, as central banks in Canada and the United States are gearing up to slash interest rates in 2024, the financial performance of large banks is likely to improve. Given these hopes, I find most bank stocks undervalued after their recent big declines, which could be an opportunity for long-term investors to buy them at a bargain.
In this article, I’ll highlight two such no-brainer Canadian bank stocks you can buy right now for less than $500 based on their current share prices.
Bank of Nova Scotia stock
Bank of Nova Scotia (TSX:BNS), or Scotiabank, is Canada’s third-largest bank with a market capitalization of $76.3 billion. Since the end of 2021, BNS stock has lost nearly 30% of its value and is currently trading at $62.84 per share. These big declines, however, have made its annualized dividend yield look even more attractive, which presently stands at 6.6%. Besides core banking operations, the bank has a strong presence in the global wealth management business.
In its fiscal year 2023 (ended in October 2023), Scotiabank’s total revenue rose 2.8% YoY (year over year) to $32.3 billion with the help of continued strength in business banking loans. However, its adjusted net profit for the fiscal year dived by 23% from a year ago to $7.9 billion due mainly to higher provisions for credit losses. Besides that, challenging market conditions also led to a drop in its average assets under management, hurting its earnings from the global wealth management segment.
Nonetheless, Scotiabank’s long-term fundamentals are likely to remain largely unaffected by temporary challenges driven by the ongoing macroeconomic uncertainties. Its solid capital position and diverse international presence, especially in high-growth markets like Latin America, brightens its long-term growth outlook.
TD Bank stock
One of Scotiabank’s main competitors is Toronto-Dominion Bank (TSX:TD), which is also one of the most profitable banks in Canada. Based on its market cap of $141.6 billion, TD Bank is currently the second-largest Canadian bank after Royal Bank of Canada. After losing nearly 16% of its value in the last year, TD stock now trades at $78.60 per share and has an annualized dividend yield of 5.1%.
TD Bank’s revenue for fiscal year 2023 increased by 12.3% from a year ago to $51.8 billion, driven by strong growth in key segments like wealth management, insurance, and Canadian banking. However, its adjusted net income for the fiscal year slipped by 4.3% YoY to $8 billion. Several factors affected its bottom line during this period, including increased provisions for credit losses, higher non-interest expenses in the U.S. retail banking segment, and weakness in revenue from trading activities.
Going forward, expected interest rate cuts in 2024 could improve TD Bank’s financial performance, which should help its share prices recover. Moreover, its continued focus on diversification and maintaining a strong capital base makes its long-term growth outlook impressive.
